"Which IT Investment Should I Make?"
How Executives Can Balance Risk and Return For Long-term Strategic Results
By Mark Jeffery
Clinical Assistant Professor of Technology
Center for Research in Technology and Innovation
Kellogg School of Management at Northwestern University
Every decade is ultimately summed up with its own designation - and I
firmly believe that the last decade will be remembered as The Roaring '90s of
Information Technology. During that era, companies acquired new technology almost
with abandon, thanks to new technological developments and the soaring economy
of the times.
In today's economy, this attitude is too costly and risky. Many
companies are still experiencing the fallout of the Roaring '90s of Information
Technology - a sense of being overwhelmed by the technology
they already have, even an inability to precisely articulate just what technologies
they've invested in, a hesitancy to answer "what's next?" as we look
to the future of business.
Yet, now is the perfect time for companies to assess not only
the current state of their IT investments, but also just what they should
do next, technologically speaking. To avoid the pitfalls of the past
era - and to step forward boldly into the future - companies need
to adopt a rigorous methodology for aligning IT investments with business goals
and strategy.
In my teachings, research, and discussions with executives across multiple
industries, I have found that Information Technology Portfolio Management
(ITPM) is just
such a strategy, one that empowers Fortune 100-1000 companies to systematically
unlock the value from IT investments that they have already made. ITPM provides
a way for companies to look at their IT investments in a similar way that they
would look at stock investments (See FIGURE 1). This empowers companies
to create an IT portfolio that maximizes the value that companies
are receiving from their IT investments, while balancing risk and
return in a manner that is strategically beneficial for that particular
company.
The importance of finding that balance cannot be underestimated, but in today's
economic environment, it is often overlooked, as increasing ROI is top-of-mind
for most executives. Understandable, yes - yet, ironically, looking at
ROI alone can end up costing a company its bottom-line dollars, because often,
looking at ROI alone justifies spending but does not track results.
For example, let's say a company finds it can increase ROI through new direct
mail software. That's fine - unless, of course, by focusing on only that
initiative, the company misses the opportunity to realize the investment's
full value throughout its life cycle, and the investment's potential
return to the whole enterprise. That is, it is important to consider how individual
IT investments fit into the bigger picture. A company that dismisses an IT investment
out-of-hand as too expensive - again, without analyzing that investment
within the context of the company's overall IT portfolio and strategy -
may in fact miss an opportunity to generate long-term ROI, perhaps through increased
customer loyalty or streamlined processes.
The other half of our balancing act is, of course, looking at risks in IT investments.
We recently interviewed CIOs from world-class enterprises about their views
of risk. In aggregate, the 130 respondents are responsible for more than $30
billion in IT spending. Over 90% of the respondents identified their role as
CIO or CTO and 78% had 15+ years of technology management experience. We discovered
that for all respondents, risk is a critical consideration whenever they make
any technological or management decision. In truth, risk for an
IT project is really the potential for missing out on the full value of the
project. (See FIGURE 2.) A risk management strategy for IT is
essential: Once potential risks are identified, Quadrant Risk Mapping can be
used to assess those risks by the probability of the risk event actually occurring
and by the severity of consequences. The quadrant risk map is a valuable tool
for designing a risk mitigation strategy.
By helping companies find the right balance between risk and return, ITPM gives
companies a much more holistic approach to making decisions about
what should - and what should not - go into their IT portfolios,
as well as to making decisions about how to manage that portfolio through its
life-cycle. That is, as needs, goals, and strategies change and develop, ITPM
streamlines, prioritizes, and creates an important discipline for IT investment
decision making that will realize the greatest return on value throughout the
investment's life cycle - yielding increased focus, efficiency, customer
understanding, and more.
How is the IT Portfolio defined? There are various ways to dice the IT portfolio.
One approach is reflected in the IT pyramid, which is a hierarchy for all
IT
investments. The foundation, or base, of the pyramid are infrastructure IT
investments
- or those which are necessary to uphold all other IT programs and strategies.
Built on top of the infrastructure should be transactional IT investments
- those
that enable the sharing of information and data throughout the company. And
at the top of the pyramid should be both informational and strategic IT investments
- those programs which enable top-down as well as enterprise-wide decision
making. (See FIGURE 3.) In reviewing this pyramid, it's important to keep
in
mind that some types of IT investments, such as an Enterprise Data Warehouse
(EDW), not only embrace all areas of a company, but also impact all components
of the IT portfolio.
Finding the critical balance between risk and return is so essential that
in our Kellogg executive program, we offer several take-away ideas on how
to adapt
the key principles of ITPM into a firm-wide business process. Specifically,
the program teaches executives:
 |
Frameworks for aligning your IT investment portfolio with
your business strategy |
|
Ways to improve the dialogue between business unit sponsors
and IT executives |
|
How to interpret financial metrics and quantify the value
of IT investments |
|
Best practices for balancing risks and rewards of your IT
investment portfolio |
|
How to mitigate risks of technology projects |
|
How to make strategic outsourcing decisions for IT |
|
Change management strategies for successful IT initiatives
|
|
Executive oversight tools for monitoring large technology
programs |
In fact, my associates and I have developed twelve case studies that demonstrate
the value of these ITPM principles. These case studies can be reviewed at www.kellogg.northwestern.edu/IT/research.
One of those case studies, developed in partnership with Teradata, looks at
the impact of consolidating data marts at an actual company -
which for the sake of corporate confidentiality has been renamed in the case
study - and converting to an EDW. The case study goes into great detail
about the benefits of consolidation in terms of enhanced efficiency, improved
information, and increased ROI. This case study is really about mitigating risks
in data mart consolidation projects and understanding the long-term benefits
of such projects in terms of how they can support a company's strategy. Both
fascinating - and revealing - is how very comprehensively EDW fits
into the overall ITPM discipline process.
Through ITPM principles, a company ultimately adds to its ROI while mitigating
risk. With that said, ITPM should support a company through whatever the as-yet-to-be-labeled
future decades have to offer.
Mark Jeffery is a clinical assistant professor at the Kellogg School of
Management. His research expertise is in technology portfolio management, Real
Options applied to technology projects, and quantifying the business value of
information technology initiatives. He has 30 publications in scientific and
technology journals, and has developed 14 case studies that are used in the
Kellogg MBA course he teaches on Technology Portfolio and Program Management.
Mark is also the academic director of Kellogg's new executive Technology
Management Program: "Driving Strategic Results through IT Portfolio Management,". The program offers an intense immersion
in IT executive management and decision making best practices. To learn more,
go to www.kellogg.northwestern.edu/DrivingResults
Since October 2002, Mark has provided exclusive interviews with Teradata.com's
Executive Center about the value of ITPM, the research behind the methodology,
and real-world applications. These interviews may be accessed at: http://www.teradata.com/t/go.aspx/?id=13.
