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Aligning IT and Business Through Value Management. Dale Kutnick Chairman and Co-Research Director dale.kutnick@metagroup.com. The IT Spending Roller Coaster. Enterprise IT Expenditures. IT costs as a percentage of revenue decline More business functions externalized
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Aligning IT and Business Through Value Management Dale Kutnick Chairman and Co-Research Director dale.kutnick@metagroup.com
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% ’97 ’98 ’99 ’00 ’01 ’02 % 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
TTB Venture Discretionary Projects Growth Value/Timing Risks GTB Discretionary Enhancements Risk Non- Discretionary Non-Discretionary Costs Core RTB 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
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
Year 4 ... Year 3 Year 2 Excellent Low Re-Evaluate/Reposition Asset ProjectSource Maintain/Evolve Asset EA LOB Technology Costs Technical Condition Re-Engineer/Modernize Asset Retire/Consolidate Asset Poor High Low High Investing Based on Character of Organization Managing Asset Life Cycle • 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 To sustain value creation, IT organizations MUST be able to continually calibrate their performance against competitors and market opportunities
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
Calculating and Communicating ITO Value Sustainable Value/Risk Balance • 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 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
The Value of the Product Is Reflective of the Risk Assumed Market Pricing IT Products • 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 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
Techtonics and Technomics Wireless Evolution of Mobile Computing • 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 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
Technomics for 2003/04 Benchmark Business Value • 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 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
Techtonics for 2003/04 It’s Coming ... • Security • Strong authentication • VPN maturation • Wireless computing • Fixed wireless, not 2.5G or 3G • Maturation of Web services for integration • User identity • Portals Consistent understanding of techtonics is critical to establishing technological adoption road map
Year 4 ... Year 3 Year 2 Excellent Low Re-Evaluate/Reposition Asset ProjectSource Maintain/Evolve Asset EA LOB Technology Costs Technical Condition Re-Engineer/Modernize Asset Retire/Consolidate Asset Poor High Low High Economic Tradeoffs:Area 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
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
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
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
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
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