Sunday, April 15, 2012

Three-Step IT Investment Strategy

IT investments are more effective in improving profitability by increasing revenue than by decreasing operating expenses.

From the variety of IT industry surveys, the investments companies make in IT increase profitability more than investments in advertising or R&D do. IT investment now is a strategic imperative for a forward-looking business to pursue the growth, but how to do it wisely, what’s your holistic IT investment strategy?

1.    Diagnose the Pitfalls

The study found, “however, that there was significantly more variability in the effects of IT investments than in investments in advertising or R&D. Perhaps because IT involves novel technologies, IT investments offer more room for creativity and innovation. It may be that most businesses already know how to manage to advertise and R&D to their best advantage, but only some have mastered managing IT.”
  • Not Focus on the Most Critical Project: At many organizations today, IT spends most of their resources and budget on operational projects which do not provide differentiates business capabilities to compete for the future. Therefore, to avoid such pitfalls, IT strategy needs to become a significant component of business strategy, co-developing strategy from both business and technology will make all projects essentially a business investment, to focus on business growth or cost optimization, the study also found that in general, IT investments were more effective in improving profitability by increasing revenue than by decreasing operating expenses. In fact, IT investments had a marked positive effect on revenue growth.
  • Higher IT Project Failure Rate: In the United States, we spend more than $250 billion each year on IT application development, statistically, 31% of projects will be canceled before they ever get completed., 53% of projects will cost twice as of their original estimates, overall, the success rate is less than 30%, you may read more details from  Five Ponderings why IT Project fails. 
Such statistics may present another red light for organizations to invest large scale IT projects. Therefore, top management needs to understand that project and portfolio management are key to drive many business initiatives such as strategic planning, investment priority, capital budgeting, new product development, organizational changes, M&A, etc, the businesses understand the vital importance of project management will outperform the competitors and reap the business benefits for the long term.

2.     IT Project Investment Prioritization with Guiding Policy

  • Use EA as a Guide for IT Investment and Portfolio Balancing: In enterprise/business architecture, start with a high-level capability model that describes the summary about what the company does, then business and IT leaders/ strategists should use it as an effective communication tool to identify the strategic capabilities (two or three) that differentiate their company from competitors. It will show the gaps and overlaps, then you may question whether the new initiative can help fill up the gap or reduce the waste for the overlaps. Leveraging technology to improve these key areas will likely to have the greatest business impact
  • Project Prioritization Criteria: A long-term roadmap that shows where we want to be and why is needed. We need to ensure we're investing in the right projects. This focus will free up money in every facet of IT and create headroom for IT innovation and business growth. Work to simplify your existing technical debt using the capability model and roadmap as a guide. Primarily there are five critical factors that would help rank each project in the portfolio;
 A> Alignment (with company strategy) score based on the balanced scorecard: Strategic Fit Importance.

B> Market and/or Revenue Growth: Potential growth opportunity or market entry

C> Operational Efficiency: Process standardization/improvement, Business agility improvement (supports the new product, price changes, scale, acquisition, etc), improved reliability by mitigating business risk.

D> Risk score based on risk factors such as potential project risk & its mitigation costs: Governance Risk/Compliance area on the level of risk and ability to address risks, HR (of Business/IT) capability to deliver, the ability of the business to manage change

E> ROI factors: Reward to Company: cost/benefit, payback period.

  • Simplicity is the Key: For non-strategic, generic capabilities, the focus should be on simplification to remove complexity and cost. For technology, that means removing custom applications and processes wherever possible.

3.    Best Practices to Prioritize & Rationalize IT Project

 The prioritization of the portfolio is an ongoing process. Decisions must be reevaluated periodically (6~12 months or shorter) in order to confirm the assumptions we used to prioritize our projects.  Be careful to distinguish between best practices and the prioritization

The prioritization roadmap is a methodology that every CIO or IT organization needs to create according to their own realities and capacities. A good practice, for example, involves the participation of users, to have related experience, or have a scientific methodology to standardize corporate financial analysis as "investment, profit, and rate of return of the projects”, and to have vision and strategy deployed in short-term and long-term defined including its level of importance among them, to have a minimum IT budget for "investments" (politics related about the investment), etc. Some variables used to prioritize the projects are:

1) The risk involved: Identify risks that deadlines are not met, the issue related if the project cannot be easily accepted by staff, flow cash capacity from the corporate capacity or level of trust with suppliers to provide the service. This will require that each organization believes or create its own risk matrix
2) Conductor: Mandatory, critical, optional. A measure of whether you should do it without looking at the costs.
3) Size of the cost ($): not only the amount but the flow at the time of disbursement
4) Size of profit ($): not only the amount but the flow at the time or the cost ($) if we do not do it (such as meeting regulatory actions)
5) Return of investment
6) Approved budget ($).
7) The time to complete the Implementation (post-training and post-adjustment period)
8) Time to reach equilibrium (cost = benefit)
9) The time required by users to implement the project
10) Alignment of the project with the vision and strategies. A precise identification of objectives that the project will support
11) Staff needed to implement the project (numbers, skills, timeframe, outsourcing)
12) Staff impacted: (in IT and in the user area)
13) Customers Impacted (in numbers, sales amount and the so on)
14) Opportunity/Innovation: Sometimes it could be the project that seeks to "evaluate" a potential product or a technology solution to a problem (prototype). These are usually projects that seek to place the business into a new vantage point (looking for the “jump”).
15) Suppliers (skills and resources to execute)
16) Each variable must have a scale and weight. So a project is reflected in a number that will facilitate prioritization. If a project does not have the "priority" we expected may be due to an error in processing or failing to consider a new variable or because our feeling was not right.
17) Evaluate each of the variables from the perspective of the original value (the value that was assumed when the project was prioritized), current value (the value that considers the current scenario with the current costs) projected value (the value considering a conservative scenario according we expect in the future –as an example, changes of prices-). The comparisons help to review progress, deviations and make new decisions.

 One of the many questions that arise is, what percentage of the overall IT spend should be spent on operations and what percent should be spent on development. The research shows a mixed bag of results, but the more sophisticated and mature IT shops tend to spend about 65% on operations. Some of the more advanced IT-focused companies have the ops portion down to 40%.


Those are really need to consider.Those three steps is very useful on IT investing.Strategy is always very helpful specially to us as an beginner in world of business and investing.

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