IT Portfolio Analysis and Management Goes Beyond Project ROI
Most of us will look back on 2002 as another year of tight budgets and doing more with less. Unfortunately, our fine-tuned expense control skills, while key to survival, won't help our companies prosper in the long run. As a CIO, how do you continue delivering real business value in the face of flat or shrinking IT budgets? Understandably, interest in ROI is increasing and much has been written lately about its good and bad sides. On the one hand, increased financial responsibility is an imperative. On the other, a singular focus on ROI to drive IT costs down, at the expense of business performance, is not a sustainable long-term strategy. Hence the pervasive situation: Proponents of a project play games to make the ROI look as good as possible; and the 'wallets' at the company nix anything intangible with a payback period of less than eleven months. The good news is ROI and business value are not necessarily in conflict if you're measuring all the assets in your portfolio and applying measurements in a constructive manner. Consider, for example that much of the ROI effort is used to decide which new projects get funding. But most IT spending is geared to managing ongoing operations. For example, even in the go-go times of early 2000, Charles Popper, former CIO at Merck & Co. wrote, " In reality, however, in most enterprises the budget for IT projects represents only 25 to 35 percent of the total IT budget."1 Today, I'd bet this figure is probably more like 10-20%. The point is there's more in your portfolio than just projects. Existing applications, infrastructure and processes make up the bulk of your IT value, so start the analysis by looking at these assets and setting a baseline before doing anything else. As sensible as this seems, I find it's typically the exception, not the rule. How to Assess IT Value The IT value debate has continued for decades. Methods of assessing IT value range from developing complex, scientific statistics to "Return on Instinct.” Probably the most common approach is straightforward scoring. Scoring is attractive because it's simple, effective and easy to implement. Personally, however, I'm a proponent of going a bit further and turning the scores into money, the language of business. Specifically, placing a dollar value on assets and linking them to known corporate financials (e.g. revenue) brings three key benefits. First, it enables comparisons with other companies. It's difficult to benchmark yourself against competitors on IT value delivery using purely scores because what one company considers excellent performance could be another firm's disaster. Second, monetizing assets makes portfolio measurements organic; as the business metrics change, the IT metrics change with them. Finally, and probably most vital, “dollarizing” allows apples-to-apples comparisons across assets in the portfolio (existing applications, infrastructure, processes and planned projects). Regardless of the method used, it's important to be consistent, comprehensive and coherent. I prefer to link IT value to revenue (or other top line metric). Consider two meaningful types of value defined by the users of IT applications: Internal Value: The proportion of revenue per employee (productivity per employee) that can be attributed to IT usage by employees. External Value: The revenue generated from external users of IT and the importance of external applications to that revenue creation. Focusing on Internal and External IT Value, the Net Business Contribution of IT can be calculated as follows:
Net Business Contribution represents the net dollar contribution of IT to revenue creation, reflecting the true costs of IT deployment and usage. It can be applied to applications, projects and other assets in the portfolio and analyzed to determine what business impacts IT changes will produce. Unlike traditional ROI benefit calculations, or even scores, it is not a snapshot in time approach, rather a continuous reflection of IT's contribution to the business. Implications to the IT Portfolio Hence, an IT portfolio, like a stock portfolio is a collection of IT assets, organized by type of investment with each asset expressing a dollar value. Applications, projects, infrastructure, data, people, processes and even discretionary cash, can be analyzed and valued with specific growth targets, objectives, guidelines and allocation thresholds. The portfolio can be evaluated against business objectives and realigned as necessary. A common issue addressed by IT portfolio analysis is which assets to shed and which to keep. It seems that while new projects continue to come on line, retiring existing applications is never as easy. A disciplined approach to analyzing the IT portfolio exposes those existing systems that need remedial attention and those projects that are less desirable. Consider, for example, plotting assets on a quadrant chart using the following categories: Optimized (upper right) - Assets demonstrating high IT efficiency and high business value contribution Tactical (lower right) - Assets demonstrating good cost efficiency but small business contribution Strategic (upper left) - Assets contributing high business value that are not cost efficient Questionable (lower left) - Assets delivering low business contribution that are not cost efficient This type of analysis exposes components of the portfolio that are not cost effective, delivering low business value or both. Action is not always necessary (e.g. a system in pilot might not need attention) but ensuing discussions are based on objective, structured information. Considering both the IT and business benefit dimensions of applications, infrastructure, projects and other portfolio assets will result in better IT decision making, more effective communication and increased business value. When it comes to getting the most out of your IT portfolio, my advice is the following:
And the next time someone says
that you spend too much on IT, explain that it's not about
the costs; it's about value. 1 Program on Information
Resources Policy, Harvard University, Center for Information Policy
Research, “Holistic Framework for IT Governance,” Charles
Popper, January 2000 |