Aligning IT and Business Through Value Management

1
Aligning IT and Business Through Value Management
Dale Kutnick Chairman and Co-Research
Director dale.kutnick_at_metagroup.com
2
The IT Spending Roller Coaster
Enterprise IT Expenditures

• IT costs as a percentage of revenue decline
• More business functions externalized
• Vendor consolidation accelerates
• Shift in IT spending patterns and drivers
• Cost reduction valued vs. revenue generation
• Variable vs. fixed costs
• Measurable productivity gains required
• Budget reductions will be common in 2003
• The do more with less mindset dominates

Cross-Industry IT Spending as of Revenue
4.00
3.68
3.55
3.41
3.16
2.68
3.00
2.48
2.00
1.00
0.00
02
01
00
99
98
97
Change in IT Budget
40
30
20
10
0
96-97
97-98
98-99
99-00
00-01
01-02
-5
IT and business operations are becoming
inextricably linked
2
3
The IT Portfolio
IT Expenditures Portfolio

• The pressure is increasing on IT for
• Cost management
• Risk management
• Value management
• Global technology management
• Performance management
• Human capital management
• The tempo of alignment is extreme
• Budget cycles going from yearly to quarterly to
  monthly
• Investment patterns and spending plans must be
  adjusted to market conditions down to daily
• The IT portfolio must stay in dynamic alignment
  with business needs

The structure of the costs (fixed or variable)
will become important, as within all LOBs in the
enterprise
4
Assessing Budget Goals

• Organizations have focused on IT budgeting in
  terms of IT as a of revenue, IT spend per
  employee, or IT annual budget growth rate
• Today, organizations need to go beyond basic
  ratios and benchmark
• IT cost of goods
• IT cost structure
• IT portfolio alignment
• IT fixed cost vs. variable cost
• IT spend agility

Multivariate Management
Mode
Mission
Industry Sector
Products
Value Discipline
Organization Type
Capability
Size
Cultural Style
Performance
Metric
Maturity
5
Investing Based on Character of Organization

• Organizational structure
• Autonomous Stewardship investment strategy
• Centralized Dictatorial investment strategy
• Risk acceptance
• Averse/medium/inclined
• IT value creation strategy
• Value creation
• Value optimization
• Value preservation
• Identify technical silo budget requirements
• Critical vs. discretionary
• Third party vs. in-house
• Costs vs. quality vs. speed
• CAPEX vs. OPEX

Managing Asset Life Cycle
To sustain value creation, IT organizations MUST
be able to continually calibrate their
performance against competitors and market
opportunities
6
The IT Portfolio and Its Associated Programs

• Bottom Line

• Introduce speed and flexibility in the core
  budgeting processes
• Adopt an investment mindset and discipline
• Introduce a new funding model for IT as an
  investment portfolio manager
• Adjust budget cycles to be a forecasting process
  and not a backward-looking adjustment process
• Transition IT from cost center to value center
• Shift more toward variable costs
• Consider outsourcing as a strategic initiative

Business Impact Technology is fundamental to
modern business IT organizations must integrate
with the business
7
Calculating and Communicating ITO Value

• ITO value is a balance of net profit versus risk
  change
• Systemic risk management is required for both
  operational and project risk
• Risk costs must be reduced through mitigation
• Product pricing (value) is directly proportional
  to the risk taken

Sustainable Value/Risk Balance
1,000
800
600
400
200
0
-200
-400
-600
-800
-1,000
Q1
Q3
Q5
Q7
Q9
Q11
Operational Risk
Project Cost
Project Risk
Value
The objective is to balance value/risk/change
over time
8
The Value of the Product Is Reflective of the
Risk Assumed

• Typical ITOs are
• Positioned as cost centers
• Risk averse or risk victims
• Perceived to add little or no business value
• Leading ITOs
• Are profit centers
• Assume risk within IT scope
• Price products at market value, not cost
• Contribute to the business bottom line
• Product price is proportionate to the risk level
  assumed

Market Pricing IT Products
Time Materials
Business Risk
Cost- Based
Service Levels
Market- Based
Value- Based
of Revenue
ITO Risk
Pricing Model
Risk Ownership
Leading ITOs calculate the value of the ITO as
its net profit contribution to the business
bottom line
9
Techtonics and Technomics

• Must understand the key technology trends
  techtonics
• Develop common vision of technomics
• Changing economics of technology that may impact
  its application
• IT must provide full range of economic tradeoffs
• Constantly changing

Wireless Evolution of Mobile Computing
Cost
Sweet Spot
99
00
01
02
03
04
05
Time
2002 Bandwidth (BW) Explosion 2003 Handheld
Device P/P Improvement 2003/04 Mobile
Middleware Maturity 2004/05 Better BW Pricing
Wireless Coverage
Consistent understanding is critical to establish
value cases of IT opportunities
10
Technomics for 2003/04

• Communication prices up
• Data center consolidation
• Third-party sourcing
• Storage explosion
• Licensing price structure
• Benchmark to reduce costs, increase SLA, and
  demonstrate value
• Too many technologies are driving management and
  people costs up

Benchmark Business Value
Dynamic
Value-Constrained
Value-Creating
Frequency
Value-Minimized
Value-Constrained
Static
Single Dimension
Multiple Dimensions
Dimensionality
Cost
Cost Price Performance Process Value
Consistent understanding of technomics is
critical to establishing value of technology
11
Techtonics for 2003/04

• Security
• Strong authentication
• VPN maturation
• Wireless computing
• Fixed wireless, not 2.5G or 3G
• Maturation of Web services for integration
• User identity
• Portals

Its Coming ...
Consistent understanding of techtonics is
critical to establishing technological adoption
road map
12
Economic TradeoffsArea of Non-Investments in
2003
Managing Product Life Cycle

• PKI projects
• Strategic EAI
• Massive convergence initiative
• Mobile infrastructure
• Ubiquitous CRM with channels synchronization

Align techtonics and technomics with business
value creation
13
Key Initiatives in 2003

• Bottom Line

• Establish a road map for technology exit and
  adoption
• Introduce vendor management as a key IT
  initiative in 1Q03
• Eventually distribute infrastructure and
  applications, but centralize management and
  operations
• Design and validate security governance and
  policies by 2Q03
• Manage storage and communications demand and
  costs
• Re-evaluate all vendor contracts (first half of
  2003) on yearly basis

14
The Make-vs.-Buy Paradigm
Balanced Approach

• Consider sourcing as a strategic alternative in
  your portfolio
• Make sure the house is in order before
  embarking on sourcing strategies
• Determine the goals to achieve and the
  measurements

Plan
Build
Run
Organizational Structure Evolution
Plan
Procure
Manage
Complement the internally focused processes with
sourcing alternatives
15
Outsourcing as Strategic Alternative
Sourcing Strategy Implementation

• Select the right area to be managed by a third
  party
• Explore market evolution for this area
• Sort out sourcing options
• Assess vendor capabilities
• Define the type of contract and the pricing
  options YOU want
• Determine the performance indicators

App Implement.
App on Demand
App Maint.
Server Mgmt.
Value/Risk Profile
Help Desk
Network Mgmt.
Managed Desktop
Data Center
Capability/Focus
Integration of third parties into the IT road map
will represent the major challenge in the coming
years
16
Defining Goals and Measurements
Outsourcing Value Continuum

• Define goals upfront
• Cost cutting for commodity types of services
• Cost avoidance for immature or obsolete
  technologies
• Value creation for business process outsourcing
• Define rules for accountability and performance
  reviews
• Monitor performance daily
• Measure quality monthly
• Assess relationship quarterly
• Dynamically benchmark

Value Creation
IT GOVERNANCE
Value Proposition
Service Quality Customer Sat.
Contribution
IT DEMAND
Cost Reduction Avoidance
IT SUPPLY
Capability
Users pursuing outsourcing often explore sourcing
options with cost cutting only in mind
17
What Are the First Steps on the Road to
Alignment?

• Transformation Steps

• Value-align
• Determine the elements of IT value for your
  business
• Develop value categories, link to assets,
  programs, projects
• Investment-align
• Institute IT portfolio management
• Analyze level and type of costs as well as
  measurement indicators
• Create your portfolio management scorecard or
  dashboard
• Process-align
• Determine the necessary processes that balance
  reactivity with proactivity and allow
  flexibility
• Technology-align
• Determine which technologies must be embraced or
  retired, which ones will be insourced, and which
  ones will be outsourced
• People-align
• Develop a plan to transform the IT organization,
  based on the technology road map