Managing The IT Portfolio: Getting more value from IT Investments

Transcription

1 Microsoft Solutions Forum 2004 Managing The IT Portfolio: Getting more value from IT Investments Director, (CISR) MIT Sloan School of Management Phone: (617) , Fax: (617) MIT Sloan (CISR) CISR gratefully acknowledges the support and contributions of its Research Patrons and Sponsors CISR Research Patrons BT Group DiamondCluster International, Inc. Gartner Hewlett-Packard Co. IBM Corporation Microsoft Corporation Tata Consultancy Services America CISR Sponsors Aetna Inc. Intel Corp. Allmerica Financial Corp. International Finance Allstate Insurance Co. Corp. AstraZeneca Merck & Co., Inc. Pharmaceuticals, LP Merrill Lynch & Co., Inc. Banknorth, N.A. MetLife BiogenIdec Mohegan Sun Campbell Soup Co. Motorola, Inc. Care USA National Kidney Celanese Foundation (Singapore) ChevronTexacoCorp. Nomura Research Det Norske Veritas Institute, Ltd. (Japan) (Norway) Pasco County, Florida efundscorp. Pfizer Inc. EMC2 PFPC, Inc. Gillette Co. Qwest Communications Guardian Life Insurance Raytheon Company Co. of America State Street Corp. TRW Automotive, Inc. MISSION Founded in 1974; CISR has a strong track record of practice-based research on how firms manage & generate business value from IT Research is disseminated via electronic research briefings, working papers, research workshops & executive education programs including CISR Summer Session Current Issues in Managing IT TOPICS Effective IT Governance Architecture-Driven Business Strategies Infrastructure as Variable Cost The IT Portfolio Benchmarks & Performance NSF Project on IT Impacts Business Models & IT Investments Assessing IT Architecture Outcomes Managing IT-related Risk Contact Information: 3 Cambridge Center, NE Cambridge, MA Ph , Fax cisr@mit.edu; 2

2 Rethinking IT Investments as IT Portfolio Based on proven and familiar principles of financial portfolio management Four Management Objectives for Investing in IT Creates an IT portfolio with four asset classes Each asset class has different risk return profiles The role of senior management is to align the IT portfolio to strategy and balance for risk and return Top performing enterprises can get up to 40% more value IT Premium Diagnostic 3 What s in the IT Portfolio IT Portfolio Total IT investments including all technology, services, outsourcing and people dedicated to IT broken into asset classes. Can view as flow (i.e. annual spend) or stock (i.e. accumulated spend). IT Programs Groupings of projects linked to business goals. IT Projects Set of activities creating outcomes to a budget and timetable. IT Activities Core IT capabilities (e.g., specify, code, acquire, test, manage, design, integrate, negotiate, etc.) Source: drawn from Weill and Broadbent, SIM and CIO 4

3 Management Objectives for Investing in IT 1. Reduce cost of doing business - Transactional IT 2. Provide better information - Informational IT 3. Gain competitive advantage or major innovation - Strategic IT 4. Provide shared base IT capability - IT Infrastructure Any project may be a combination Source: Weill & Broadbent Leveraging the New Infrastructure: How market leaders capitalize on IT, Harvard Business School Press, Rethinking IT as an Investment Portfolio - asset class, risk and return, strategy Increased control Better information Better integration Improved quality Faster cycle time Cut costs Increase throughput ( ) = public sector 20% INFORMATIONAL STRATEGIC TRANSACTIONAL INFRASTRUCTURE (Innovation) (Major Change) (Facilitation) (High Value Added) (Interact with customers) Increased sales Competitive advantage Competitive necessity Market positioning Business integration Business flexibility Reduced marginal cost of BU s IT Reduced IT costs standardization Source: Weill & Broadbent Leveraging the New Infrastructure: How market leaders capitalize on IT, Harvard Business School Press, Percentages reflect data collected in 2001/02 from 140 firms. 6

4 The New Infrastructure has Multiple Layers Where to locate infrastructure & systems capabilities? Business Business Shared / Centrally Unit 1 Unit Coordinated 2 Firm-Wide Information Technology Infrastructure Publicly Available Infrastructure (e.g. Internet, Telcos, Industry Nets) Order processing Customer portals Product configuration Knowledge management G R A V I T Y Shared & standard Electronic mail applications Large scale processing Customer self serve Shared customer PC/LAN service database Vendors Telecommunications service providers Industry services Source: P. Weill, M. Subramani & M. Broadbent, Building IT Infrastructure for Strategic Agility, MIT Sloan Management Review, vol. 44, no.1, Fall Information (15) Strategic (5) IT Portfolios In Different Industries Transactional (40) Infrastructure (40) Financial Services Manufacturing Wholesale Retail, Transport Information & Services 4 All Firm-wide $IT as a Percent of Expenses 1 (Two year averages) (Number of Firms) 15.4 (40) 3.4 (53) Retail 2.5 Logistics 6.2 (8+10) Health Care 5.2 Professional Services 5.7 Telecomm 6.5 (5+18+6) Utilities(18) 6.1% Resources (3) 1.9% Gov t (73) 8.6% 12% 20% 21% 12% 17% 17% 26% 11% 20% IT Investment 2 14% 14% 18% 52% 45% (Number of Firms) % of Total IT Outsourced (7) 15 (98) 16 (21) 23 (14) 13 (140) 16 IT Investment (54 businesses over 5 years) 1 MIT CISR Survey of 256 enterprises for 2001/ MIT Sloan CISR study (Weill & Aral) based on a study of 140 firms in 2002 using data from previous 3 years. NSF Grant Number IIS % 14% 61% 12% 52% 16% 14% 57% 3 Source: Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology, Peter Weill & Marianne Broadbent, HBS Press, Services include Professional, Scientific and Technical Services, Health Care Services, Social Assistance, Accommodation and Food Services 8

5 Synchronize Information Technology Portfolios to Strategy Average Firm Business Strategy Cost Focus Balance Cost & Agility Agility Focused IT Portfolio Mix of Investments 20% 5% 40% 42% 20% 15% 15% 50% 14% 17% 11% 58% $IT compared to industry avg. as % of expenses or revenues Average % of Revenues & Expenses IT is 10-20% lower than industry average IT is around industry average IT is 10-25% higher than industry average leaders capitalize on IT, Harvard Business School Press, June (Based on a study of 54 businesses in 7 countries over five years and 140 firms studied in 2001/02.) 9 Information Technology Portfolio & - performance of the 4 asset classes Shorter Time To Market Premium Pricing Superior Quality Faster Cycle Time Larger Margins Cut costs Increase throughput 25-40% Return Higher ROA Low Risk Increased control Better information Better integration Improved quality 20% 20% Increased sales Competitive advantage Competitive necessity Market positioning INFORMATIONAL STRATEGIC INFORMATIONAL / STRATEGIC TRANSACTIONAL INFRASTRUCTURE More Infra Higher Growth Less Infra Higher ROA leaders capitalize on IT, Harvard Business School Press, June 1998 and analysis of 147 firms using data from All relationships are statistically significant. 50% Fail Some Spectacular Successes 2-3 Year Lead Premium Pricing Higher Revenue Per Employee More Sales From Customized Products Business integration Business flexibility Reduced marginal cost of BU s IT Reduced IT costs Standardization 10

6 How Some Firms Get 40% More Value These firms have: More top management commitment More integrated business and IT planning Less political turbulence IT Premium Higher user satisfaction (e.g., IT Portfolio Health) More management experience with IT (e.g., reengineering) And thus an above industry average IT Premium* *IT Premium = enterprise s ability to gain above industry average returns from IT by better management. leaders capitalize on IT, Harvard Business School Press, June $IT Value Why Some Firms Achieve More Top Management Commitment to Information Technology Attend information technology council meetings themselves and don't send a nominee. Work with the information technology group to specify the required infrastructure in business terms. Require carefully considered business cases for investments with measures and responsibilities identified. Support the strategic uses of information technology by providing seed funding not requiring traditional net present value financial al justifications. Encourage post implementation reviews which are not witch-hunts hunts and facilitate the gathering and dissemination of the lessons learned. Encourage, fund and actively support training in the use of information technology. leaders capitalize on IT, Harvard Business School Press, June

7 Why Some Firms Achieve More Integrating Information Technology with Business Planning 2. Executive management consideration of the information and technology implications of their business strategies. Regular high level briefings on the implication of information technology industry developments. Accountabilities for achieving strategies which were clear and documented. Articulation of the respective roles and responsibilities of business and information technology management in achieving effective and efficient systems and delivering business benefits. Managers were named and held accountable. leaders capitalize on IT, Harvard Business School Press, June Why Some Firms Achieve More The Role of Organizational Politics & Political Turbulence 3. Exhibit a strong sense of community, a feeling of shared interests ts and purpose and cooperation, amongst managers.this is reinforced with reward systems and incentives that are based on a balance of firm-wide and local measures. Capture relevant data in one business area and willingly shared it across the firm. Cross functional and business opportunities are actively sought to improve service and reduce costs. Encourage cooperation via cross functional teams, secondments and movement of personnel. leaders capitalize on IT, Harvard Business School Press, June

8 Why Some Firms Achieve More The Role of User Satisfaction Symptoms of problems are: Lack of confidence in the reliability and completeness of information in the systems. Lack of a sense of relevance and accuracy of the information in the systems by the systems users. A poor level of support provided to those using the systems. Particular problem areas are often slow or less than helpful help desks and slow or ill-prepared visits from technical personnel. Limited user understanding often stemming from inadequate or poor quality training. Users feeling that the attitude and responsiveness of those who provide support for systems is begrudging and unprofessional. leaders capitalize on IT, Harvard Business School Press, June Why Some Firms Achieve More The Role of Experience 5. Redesign, simplification or reengineering of business processes before a cent is spent on information systems. Maximize the reuse of business process and information systems components. Every new information technology project that is not infrastructure ure has a business person as champion with clearly identified deliverables and responsibilities of the business and technology provider. Infrastructure investments are treated separately from investments ts in applications to take account of their shared nature and long life. Innovative use of information technology in the business units is i encouraged by the information systems group even if firm-wide standards are not always followed. Integration can be achieved later if successful. leaders capitalize on IT, Harvard Business School Press, June

9 Why Some Firms Achieve More IT Premium Count Recommendations for Action Top Ten Leadership Principles 1. Integrate the information technology portfolio with strategy process. 2. Take a portfolio approach to information technology and balance risk vs. return. 3. Determine the required service levels and outsource commodity services to save costs while retaining architecture responsibility. 4. Appraise, justify and manage infrastructure separately. 5. Actively manage IT Premium. 6. Start with lower risk transactional systems. 7. Agree on indicators of business value and responsibilities for costs c and benefits. 8. Do post implementation assessments to track costs and benefits. 9. Understand and manage information politics. 10. Implement transparent governance processes. * Source: P. Weill & M. Broadbent Leveraging the New Infrastructure: How market leaders capitalize on IT, Harvard Business School Press, June

10 Supplementary Slides 19 Tracking the Impact of Information Technology Investments Dilution of IT Impacts Impact Sought Time to bring new product to mkt. Sales from new products Product or service quality Time to implement a new application Cost to implement a new application Information Technology $ Sample Value Measures Infrastructure availability FIRM-WIDE Cost per transaction IT INFRASTRUCTURE BV Cost per workstation Information Technology $ Time Revenue growth BUSINESS Return on assets UNIT FINANCIAL BV Revenue per employee BUSINESS UNIT OPERATIONAL BV BUSINESS UNIT IT APPLICATIONS BV Dilution of Impact Dilution of Impact Responsibilities Business Management IT Management leaders capitalize on IT, Harvard Business School Press, June A B C Dilution of Impact BV = BUSINESS VALUE

11 Portfolios of Top Performers are Different 1 Information Strategic Transactional Infrastructure Finance, Insurance Manufacturing Wholesale Retail, Transport Information & Services All 2 All Firms [N=140] 12% 20% 14% 21% 12% 17% 17% 14% 52% 25% 11% 17% 47% 20% Top Performers [N=49] 11% 19% 12% 58% 25% 11% 51% 18% 56% 27% 9% 17% 47% 20% 3 Year Relative IT Spend 3-10% +3% +7% +11% +4% 1 MIT Sloan CISR study (Weill & Aral) based on a study of 140 firms in 2002 using data from previous 3 years. NSF Grant Number IIS Average industry adjusted portfolios of the top 1/3 performers on ROA, % Margin & Revenue Growth. 3 IT as % of Net Sales (3 year average)/industry average IT as % of Net Sales (3 year average). 21 Risk-Return Return Profiles in the IT Portfolio Type of IT Risk Return Characteristics Ability to reduce risk & increase return through better IT premium (ITP) Strategic High risk, huge potential upside and 50% failure rate Strong ITP significantly reduces risk of failure Increasing Risk Infrastructure Moderate risk due to long life and business and technical uncertainty Strong ITP increases infrastructure capability and flexibility for a given cost Informational Moderate risk due to difficulty of acting on information to create business value Strong ITP provides management process to capitalize on the information Transactional Lowest risk with solid return of 25-40% Strong ITP marginally reduces risk IT Premium = enterprise s ability to gain above industry average returns from IT by better management Source: P. Weill & M. Broadbent Leverage the New Infrastructure: How market leaders capitalize on IT, 22 Harvard Business School Press, June 1998.

12 MIT Sloan (CISR) CISR gratefully acknowledges the support and contributions of its Research Patrons and Sponsors CISR Research Patrons BT Group DiamondCluster International, Inc. Gartner Hewlett-Packard Co. IBM Corporation Microsoft Corporation Tata Consultancy Services America CISR Sponsors Aetna Inc. Intel Corp. Allmerica Financial Corp. International Finance Allstate Insurance Co. Corp. AstraZeneca Merck & Co., Inc. Pharmaceuticals, LP Merrill Lynch & Co., Inc. Banknorth, N.A. MetLife BiogenIdec Mohegan Sun Campbell Soup Co. Motorola, Inc. Care USA National Kidney Celanese Foundation (Singapore) ChevronTexacoCorp. Nomura Research Det Norske Veritas Institute, Ltd. (Japan) (Norway) Pasco County, Florida efundscorp. Pfizer Inc. EMC2 PFPC, Inc. Gillette Co. Qwest Communications Guardian Life Insurance Raytheon Company Co. of America State Street Corp. TRW Automotive, Inc. MISSION Founded in 1974; CISR has a strong track record of practice-based research on how firms manage & generate business value from IT Research is disseminated via electronic research briefings, working papers, research workshops & executive education programs including CISR Summer Session Current Issues in Managing IT TOPICS Effective IT Governance Architecture-Driven Business Strategies Infrastructure as Variable Cost The IT Portfolio Benchmarks & Performance NSF Project on IT Impacts Business Models & IT Investments Assessing IT Architecture Outcomes Managing IT-related Risk Contact Information: 3 Cambridge Center, NE Cambridge, MA Ph , Fax cisr@mit.edu; 23