ISM 6367 Strategic Information Systems IT Portfolio Management

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ISM 6367Strategic Information SystemsIT
Portfolio Management
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IT Portfolio Management

• IT investments should be managed as any other
  investment would be managed by an organization.
• IT Portfolio Management
• The process of evaluating and approving IT
  investments as they relate to other current and
  potential IT investments.
• Often involves picking the right mix of
  investments.
• Goal is to invest in most valuable IT initiatives.

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Key Aspect of IT Portfolio Management

• What asset classes are there in an IT portfolio?
• How are IT costs and budgets best allocated among
  these asset classes across an organization?
• How do companies determine the real costs of IT
  investments? What is TCO (Total Cost of
  Ownership)?
• What metrics (ROI, NPV, etc.) should be used to
  evaluate IT investments?
• How do you monitor IT investments?
• How do you manage IT projects?
• How do you mitigate associated risks?

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Asset Classes

• According to Weill and Aral, there are four asset
  classes of IT investments
• Transactional systems systems that streamline
  or cut costs on business operations.
• Informational systems any system that provides
  information used to control, manage, communicate,
  analyze or collaborate.
• Strategic systems any system used to gain
  competitive advantage in the marketplace.
• Infrastructure systems the base foundation or
  shared IT services used for multiple applications.

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Average Companys IT Portfolio Profile
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IT Investment strategies compared
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Avon Products Example

• The CIO of Avon Products Inc. relies heavily on
  hard-dollar metrics like NPV, and IRR to
  demonstrate business value in IT investments.
• Although not the typical IT metrics they are what
  business understands.
• Avon uses payback, NPV, IRR and risk analysis for
  every investment.
• Business side of IT is similar to the business
  itself.

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Funding the IT department

• How are costs associated with designing,
  developing, delivering and maintaining IT systems
  recovered?
• There are three main funding methods
• Chargeback/Transfer Pricing
• Allocation
• Corporate budget
• The first two are done for management reasons,
  while the latter recovers costs using corporate
  coffers

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Chargeback/Transfer Pricing

• IT costs are recovered by charging individuals,
  departments, or business units
• Rates for usage are calculated based on the
  actual cost to the IT group to run the system and
  billed out on a regular basis
• They are popular because they are viewed as the
  most equitable way to recover IT costs
• However, creating and managing a chargeback
  system is a costly endeavor

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Allocation

• Recovers costs based on something other than
  usage, such as revenues, log-in accounts, or
  number of employees
• Its primary advantage is that it is simpler to
  implement and apply
• True-up process is needed where total IT expenses
  are compared to total IT funds recovered from the
  business units.
• There are two major problems
• The 'free rider' problem
• Deciding the basis for charging out the costs

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Corporate Budget

• Here the costs fall to the corporate PL, rather
  than levying charges on specific users or
  business units
• In this case there is no requirement to calculate
  prices of the IT systems and hence no financial
  concern raised monthly by the business managers
• However, there are drawbacks, as shown in the
  next slide (Figure 10.1).

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Comparison of IT funding methods
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Determining IT Costs

• The most basic method of determining costs is to
  add up all of the hardware, software, network,
  and people involved in IS.
• Real cost is not as easy to determine.
• Most companies continue to use the
  over-simplistic view of determining cost and
  never really know the real cost.

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Activity Based Costing

• Activity Based Costing (ABC) counts the actual
  activities that go into making a specific product
  or delivering a specific service.
• Activities are processes, functions, or tasks
  that occur over time and have recognized results.
  They consume assigned resources to produce
  products and services.
• Activities are useful in costing because they are
  the common denominator between business process
  improvement and information improvement across
  departments

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Total Cost of Ownership

• Total Cost of Ownership (TCO) is fast becoming
  the industry standard
• It looks beyond initial capital investments to
  include costs associated with technical support,
  administration, and training.
• This technique estimates annual costs per user
  for each potential infrastructure choice these
  costs are then totaled.
• Careful estimates of TCO provide the best
  investment numbers to compare with financial
  return numbers when analyzing the net returns on
  various IT options

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TCO Component Breakdown

• For shared components like servers and printers,
  TCO estimates should be computed per component
  and then divided among all users who access them
• For more complex situations, such as when only
  certain groups of users possess certain
  components, it is wise to segment the hardware
  analysis by platform
• Soft costs, such as technical support,
  administration, and training are easier to
  estimate than they may first appear

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TCO as a Management Tool

• TCO also can help managers understand how
  infrastructure costs break down
• It provides the fullest picture of where managers
  spend their IT dollars as TCO results can be
  evaluated over time against industry standards
• Even without comparison data, the numbers that
  emerge from TCO studies assist in decisions about
  budgeting, resource allocation, and
  organizational structure

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Valuing IT Investments

• Soft benefits, such as the ability to make future
  decisions, make it difficult to measure the
  payback of IT investment
• First, IT can be a significant part of the annual
  budget, thus under close scrutiny.
• Second, the systems themselves are complex, and
  calculating the costs is an art, not a science.
• Third, because many IT investments are for
  infrastructure, the payback period is much longer
  than other types of capital investments.
• Fourth, many times the payback cannot be
  calculated because the investment is a necessity
  rather than a choice, and there is no tangible
  payback

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Valuation Methods
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IT Investment Monitoring

• If you cant measure it, you cant manage it.
• Management needs to make sure that money spent on
  IT results in organizational benefit.
• Must agree upon a set of metrics for monitoring
  IT investments.
• Often financial in nature (ROI, NPV, etc.).
• Alternate is the Balanced Scorecard
• Attention is on the organizations value drivers
  to assess the full impact of corporate strategies
• Allows managers to analyze their decisions on
  four business perspectives customer, internal
  business, innovation/learning, and financial

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The Balanced Scorecard perspectives
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Balanced Scorecard applied to IT departments
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The IT Balanced Scorecard

• A scorecard used within the IT department helps
  senior IS managers
• Understand IT departments performance
• Ensure the compliance of the IT department goals
  with the corporate goals
• IT Dashboard
• Summarize key metrics for senior managers in a
  way that provides quick identification of the
  status of the organization. The data tends to
  focus on project status or operational systems
  status.
• Provide frequently-updated information on areas
  of interest within the IT department.
• Help identify and handle problems without waiting
  for the monthly CIO meeting

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Project Definition

• A project is a temporary endeavor undertaken
  to create a unique product or service. Temporary
  means that every project has a definite beginning
  and a definite end. Unique means that the product
  or service is different in some distinguishing
  way from all similar products or services.
• -Project Management Institute (1996)

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Characteristics of operational and project work
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Project Management

• Project management is the application of
  knowledge, skills, tools, and techniques to
  project activities in order to meet or exceed
  stakeholder needs and expectation from a project.
• Involves continual trade-offs
• Managers job to manage these trade-offs.

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Typical Project Management trade-offs

• Scope vs. Time
• Product and project scope.
• Scope creep can occur.
• Cost vs. Quality
• The quality of a system will normally impact its
  cost.
• Identified requirements vs. Unidentified
  requirements
• User needs vs. User expectations
• Differing needs and expectations vs. diverse
  stakeholders

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Project Management Activities

• The project manager will typically be involved
  in
• Ensuring progress of the project according to
  defined metrics..
• Identifying risks.
• Ensuring progress toward deliverables within time
  and resource constraints.
• Running coordination meetings.
• Negotiating for resources on behalf of the
  project.

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Project Cycle Plan

• The project cycle plan organizes discrete project
  activities, sequencing them into steps along a
  time line.
• Identifies critical beginning and ending dates
  and breaks the work spanning these dates into
  phases
• The three most common approaches are
• Project Evaluation and Review Technique (PERT)
  (Figure 11.3)
• Critical Path Method
• Gantt chart (Figure 11.4)
• Figure 11.5 provides detail on the project cycle
  template.

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Figure 11.3 PERT Chart
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Figure 11.4 GANTT Chart
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Project cycle template
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Risk and Opportunity Management

• Critical task of the team is to manage risks and
  opportunities.
• Steps include
• Identification and assessment
• Outcome predictions
• Development of strategies
• By comparing costs and benefits of various
  courses of action, the team can select which
  sequence of actions to take and obtain agreement
  from necessary parties

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Project Risk Exponentiality
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Risk and Return Distribution
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Project Complexity

• Factors influencing a projects complexity
  include
• How many products will this website sell?
• Will this site support global, national,
  regional, or local sales?
• How will this sales process interface with the
  existing customer fulfillment process?
• Does the company possess the technical expertise
  in-house to build the site?
• What other corporate systems and processes does
  this project impact?
• How and when will these other systems be
  coordinated?

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Clarity

• Clarity is concerned with the ability to define
  the requirements of the system.
• A project has low clarity if the users cannot
  easily state their needs or define what they want
  from the system.
• A project with high clarity is one in which the
  systems requirements can be easily documented and
  which do not change
• The use of new technology reduces clarity due to
  general lack of detailed information about the
  technology, its problems and its application.

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Size

• Plays a big role in project risk
• A project can be considered big if it has
• A big budget relative to other budgets in the
  organization
• A large number of team members ( number of man
  months)
• A large number of organizational units involved
  in the project
• A large number of programs/components
• A large number of function points or lines of
  code

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High Risk Level

• Large, highly complex projects that are usually
  low in clarity are very risky
• Small projects that are low in complexity and
  high in clarity are usually low risk
• Everything else is somewhere in between
• The level of risk determines how formal the
  project management system and detailed the
  planning should be
• When it is hard to estimate how long or how much
  a project will cost because it is so
  complex/clarity is so low, formal management
  practices or planning may be inappropriate

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Managing the Complexity Aspects of Project Risk

• Strategies that may be adopted in dealing with
  complexity are
• Leveraging the Technical Skills of the Team such
  as having a leader or team members who have had
  significant work experience
• Relying on Consultants and Vendors as their
  work is primarily project based, they usually
  possess the crucial IT knowledge and skills
• Integrating Within the Organization such as
  having frequent team meetings, documenting,
  critical project decisions and holding regular
  technical status reviews

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Managing Clarity Aspects of Project Risk

• When a project has low clarity, project managers
  need to rely more heavily upon the users to
  define system requirements
• Managing stakeholders managers must balance the
  goals of the various stakeholders, such as
  customers, performing organizations and sponsors,
  to achieve desired project outcomes
• Sustaining Project Commitment there are four
  primary types of determinants of commitment to
  projects

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Pulling the Plug

• Often projects in trouble persist long after they
  should have been abandoned
• The amount of money already spent on a project
  biases managers towards continuing to fund the
  project even if its prospects for success are
  questionable
• When the penalties for failure within an
  organization are also high, project teams are
  often willing to go to great lengths to insure
  that their project persists
• Or if there is an emotional attachment to the
  project by powerful individuals within the
  organization

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Measuring Success

• It is important that the goals be measurable so
  that they can be used throughout the project to
  provide the project manager with feedback. Care
  is needed to prevent a too narrow or too broad
  set of goals.
• According to Shenhar, Dvir and Levy (1998) there
  a four dimensions of success
• Resource constraints does the project meet the
  time and budget criteria?
• Impact on customers how much benefit does the
  customer receive from the project?
• Business success how high and long are the
  profits produced by the project?
• Prepare the future has the project altered the
  infrastructure of the org. so future business
  success and customer impact are more likely?