Adding Value Through IT Investments (2)

January 20, 2003 by admin

A comprehensive concept is the prerequisite for well-founded IT decision-making. How else can a company determine whether planned — and limited — funds for IT infrastructure improvements are well-spent in a customer relationship management system? Or whether it might be better to invest in a system that optimizes employee productivity, or one that supports resource and program management? To be able to identify gaps from a strategic perspective, as well as the measures that promise the greatest benefit, a company must consider the entire portfolio of information capital, including current and planned IT projects. Only in this way can the overall effectiveness of the information capital portfolio be optimized.
This is the mission of the Information Capital Portfolio Steering Board, which is usually led by a company’s chief information officer (CIO). It adopts strategic IT objectives and measures derived from the corporate strategy and the Information Capital Strategic Readiness Map and those recommended by the Strategic Information Capital Council. Moreover, it makes decisions regarding IT projects prepared by the Productivity Council (see Part 1 of this article). Primarily, however, it continually optimizes the entire portfolio of information capital from an economic perspective, the short-term-oriented business division perspective, the long-term strategy perspective, and the technological perspective.

Maximize Added Value, Minimize Resources

The tasks of the Information Capital Portfolio Steering Board are organized within the framework of an Information Capital Management System divided into four main processes: strategy management, productivity management, information capital and project portfolio management, and operative project management.
The strategy management process is concerned with defining the status of the IT infrastructure from a strategic perspective with the help of the Information Capital Strategic Readiness Map, developing recommendations for adapting the IT strategy and related projects, and monitoring approved measures. In addition, objectives, priorities, and general conditions for the Productivity Council are specified. The productivity management process organizes the regular analysis of existing business processes with regard to possible productivity improvements, documents the analyses, and develops project recommendations accordingly. Moreover, it monitors progress towards achieving the productivity goals.

In turn, information capital and project portfolio management administers, controls, and optimizes the project portfolio while taking into consideration the existing information capital. This includes assessing suggested new projects according to strategic and financial aspects as well as by risk and resource criteria, and deciding whether to approve them (see illustration). Information capital and project portfolio management also administers the portfolio of all projects throughout their life cycle, with the aim of maximizing the added value of IT and minimizing the resources spent. This requires a measuring system at the project level that delineates the resources used and planned at a specific time, as well as the already realized or projected benefit.
The actual value and projected measurements should be updated two to four times per year. Techniques such as Discounted Cash Flow Valuation (DCF Valuation), possibly complemented by a Real Option Valuation (ROV), enable assignment of financial performance figures to individual measures and projects and the entire portfolio. Information about resources deployed and the progress and effects of the projects, which is regularly monitored via consistent measurements, also supports continual optimization of the portfolio. Unsuccessful projects should be terminated as quickly as possible to make resources available for more promising plans.
Lastly, the mission of operative project management is to control projects with the help of classic project management techniques, for example upon the basis of defined milestones or by identifying the critical path. This process is usually developed to the greatest extent and generally sufficiently implemented.

The Future of the IT Infrastructure Is at Stake

In managing the project portfolio, time is a crucial factor. The more quickly a project is completed, the faster its resources are available for a new measure. This aspect is frequently overlooked. It is not uncommon for companies to free up resources for new measures by cutting back other currently running projects. However, this delays the completion of these projects; anticipated value propositions are deferred or lost altogether, and the original business case is jeopardized.
Because different IT components often depend and built on each other, this can also jeopardize subsequent projects, and even the future viability of the entire IT infrastructure. In such cases, either/or decisions — continue the project as planned, or end it — might be the better alternative. If redistribution of resources is unavoidable, the costs triggered by pulling out of an earlier project should be taken into account for the business case of the new measure.

The Time Is Ripe for IT Portfolio Management

Companies are increasingly moving towards long-term IT portfolio management that supports them in optimizing IT projects and associated investments with respect to strategic, business-related, economic, and technological aspects. The objective is to maximize the value added by individual measures as well as the entire portfolio.

Often, the biggest initial problem is defining the relevant control measures and key performance indicators. However, companies shouldn’t invest too much time there; it makes more sense to start with a preliminary solution and continually improve it. Of greater importance is the organizational framework in the form of regular reviews in which all stakeholders of the IT area can participate. Companies should implement this framework one step at a time, perhaps starting with a value and user-oriented strategy management process (see illustration).

Projects Put to the Test

Since executive management today places a significant emphasis on the profitability, productivity, and ROI of investments, numerous initiatives have been developed to control IT projects as has long been customary in other areas with high-volume investments, high risk, and long-term project run times. One example is research and development in pharmaceutical companies. The control tools developed in that industry are now being used in IT management as well: portfolio management, DCF and ROV, and portfolio boards.
An important aspect of this is continual monitoring of individual projects from a wider perspective, and making continual controlling adjustments. It has become apparent that IT projects create lasting value only when companies continually update the originally stated business case during the run of the project, and check it against the overall portfolio. This puts the project to the test, time and again. If the business scenario changes, then decisions must be made about any required adjustments, such as termination or modification.

The Outlook: Demand for New Business Processes

Since competitive advantages are increasingly based more upon innovation and less on cost leadership, the focus is shifting for IT management as well. Instead of merely improving existing business processes with information technology, the task is becoming more focused on inventing new business processes while considering the technological possibilities. IT managers aren’t responsible solely for ensuring that their technology supports new business processes and increases the company’s efficiency. Their mission is also actively to participate in invention and business design. However, information technology considerations must also become an integral part of strategy work at the executive level. It is in the interest of IT managers to see to it that this occurs.

Jürgen H. Daum

Jürgen H. Daum


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