Project Prioritization as a Key Element in IT Strategic Demand Management

Transcription

1 Project Prioritization as a Key Element in IT Strategic Demand Management Igor Aguilar Alonso School of Computer Science, Technical University of Madrid, Madrid, Spain iaguilar@zipi.fi.upm.es José Carrillo Verdún School of Computer Science, Technical University of Madrid, Madrid, Spain jcarrillo@fi.upm.es Edmundo Tovar Caro School of Computer Science, Technical University of Madrid, Madrid, Spain etovar@fi.upm.es Abstract. This paper describes demand management and its life cycle, taking into account the IT priorities model and project prioritization as a key demand management element. One of a company s main objectives is to get the maximum benefit from its businesses in the shortest possible time. To do this, it is necessary to properly manage customer demand and satisfy customer needs. Therefore, it has to properly prioritize projects in accordance with criteria established by the company or through the IT portfolio management office, giving priority to projects that will most benefit the company if run. To achieve these goals, liaison between senior business executives and the chief information officer responsible for managing IT should be good. business knowledge to implement and carry out very detailed planning. This paper presents project prioritization as a key element in IT demand management. Section (1) is an introduction setting out the importance of IT strategic demand management for achieving strategic business planning objectives. Section (2) defines strategic demand and the demand process life cycle. Section (3) presents the IT priorities model and alignment of IT with business objectives. Section (4) presents the key components for project prioritization and assessment. Section (5) presents the project prioritization, followed by the conclusions. I. INTRODUCTION II. STRATEGIC DEMAND The information technology (IT) strategy varies from one organization to another and must be applied to all IT departments. IT departments are managed by the chief information officer (CIO). The best CIOs use a set of sophisticated techniques to develop strategies to ensure that the basic IT operations work well at the lowest possible cost, giving added value to the enterprise. Released from basic operating problems, they are free to focus on maintaining effective working relationships and create thorough business knowledge, recruit the best talent for their teams, and maintain a clear vision of the industry and the evolution of technology to create added value for the enterprise. This ensures that the CIO is able to identify, promote and implement significant business change initiatives. The CIOs, the chief executive officer (CEO) and the board of directors are responsible for conducting strategic planning for the enterprise. The project prioritization is one of the key business stages, and is directly related to the stages of the demand process life cycle. The CIO will work actively with other senior executive members to develop the enterprise s project prioritization, thus ensuring that demand management is efficient. According to the demand classification [1] (1) strategic demand, (2) tactical demand and (3) operational demand, strategic demand is the most complex to manage. This is why the CIO and the board of directors should have thorough Strategic demand is managed through the project portfolio. This portfolio manages ideas spawning new businesses or project innovation. Strategic demand "represents the most significant opportunity to increase business value. [2]. Project portfolio management (PPM) is an event-based process that can evaluate, prioritize and monitor projects. Pressure to maximize profit can come from internal factors, i.e. business partners, board of directors or other business units, or from external factors, such as regulatory frameworks, market competition, etc. For this reason, there needs to be a very close link between strategic planning and project processes from the very start. Strategic demand management depends on (1) strategic planning units, (2) strategic process planning, (3) resource location, (4) budget location, (5) project selection and implementation and (6) project "post-mortem" metrics to improve good practice in the organization. By implementing these best practices, we can manage demand at a management process level, such as: Clearly identify strategic objectives: strategy development is highly collaborative, involving both IT and business executives [3] Use an event-based decision-making process: projects are evaluated, selected, prioritized, funded and reviewed based on their potential risk-adjusted value in the context of the organization s strategic objectives [4]

2 Take a life cycle approach to investment and profit realization: portfolio investments are managed through their entire economic life cycle to deliver the optimal value through implementation, adoption, and eventual retirement [5]. A. Demand Process Life Cycle The demand management is a cyclical process that begins with strategic planning and goes through a number of different stages, ending with value management, as shown in Figure 1. Fig. 2. IT Priority levels It is necessary to take into account IT demand management as well as the IT priorities model to achieve business objectives. Both play a very important role in IT governance. Fig. 1. Demand process life cycle. This process takes place within the disciplined process of IT governance and is more often applied when the enterprise implements best management process practices and the company has reached an advanced level of maturity. The demand management life cycle [6] has the following stages: (1) strategic planning, (2) portfolio management, (3) delegation of authority, (4) financial planning, (5) prioritization and funding, and (6) value management. Now that we know what the demand process life cycle is, we need to find out how mature the enterprise is with a view to carrying out these projects. A mature enterprise manages demand efficiently by delivering quality products on schedule and within budget, using the planned financial resources. III. IT PRIORITIES MODEL The alignment of IT goals with an enterprise s business is one of the priorities of IT and is located at level IV within the IT priorities. Fig. 2 shows an organization s priority levels for IT use, according to a hierarchy that is comparable to Maslow s human needs [7]. Levels I, II and III have an internal target, based on operations, infrastructure and applications. Levels IV and V are geared to IT governance and have an external target. Business-IT alignment, strategic planning, project prioritization and business decision-making by the board of directors fall at level IV. A. Business IT Objectives Alignment The alignment of corporate strategic plans with business unit strategic plans is a key requirement for business executives. At this level, all decisions are made in keeping with the business priorities. This is reflected at all levels through staffing, budget, projects and applications architecture. The business priorities should provide a standpoint for answering the following questions: What hardware should be purchased? What staff should be hired? What are the staffing levels for different tasks and activities? What vendors are our partners? How is capital allocated and how are budgets drafted? What projects are going to be run? What projects can be carried out simultaneously? After analyzing each of these questions, it is necessary to prioritize projects and implement the projects that more beneficial for the enterprise. IV. KEY COMPONENTS FOR PROJECT PRIORITIZATION There are four key components [8] to be taken into account to complete a preliminary assessment of the projects and continue with other work, as shown in Fig. 3. Each of the key components is described in more detail in the following. The projects are then assessed, which would be equivalent to a preliminary prioritization. The prioritization process incorporates the best thinking of the IT and business leaders.

3 To measure project value a simple measure of costs and benefits is preferable, and the key cost and benefit parameters should be clearly documented. We can summarize the financial value of a project in mathematical terms, represented by the net present value (NPV) of a product in the equation (1). NPV = (DP + CP) - (DC + CC) (1) Fig. 3. Project prioritization process. A. Project Financial Assessment The financial value is measured as the flow of benefits that a project delivers or can offer compared with the cost of generating those profits. Fig. 4 shows a framework for assessing the value of the project based on its associated financial value. Currently, there are many methods to calculate the financial value of a given project, including return on investment (ROI), investment value, project amortization period, project net present value (NPV) and internal rate of return (IRR). All the individual methods for measuring project return use the same inputs to understand the value of the project costs and benefits. Project costs usually come in two categories: time-mediated project costs and changemediated project costs (e.g., changes in the underlying operating model). Similarly, profits have deferred and immediate components. Usually, most costs come under the time category, whereas benefits tend to come in the shape of savings or income. Fig. 4. Project financial value. where DP are deferred profits; CP are current profits, DC are deferred costs and CC are current costs. Companies engaged in projects to develop new technological products employ the following financial methods to calculate the financial value of a project. One is the expected commercial value (ECV) of a project [9]. This method seeks to maximize the value of a business portfolio, subject to certain budget constraints, introducing the notion of risk and probability, as shown in equation (2). ECV = [(PV*PCS-C)*PTS-D] (2) Also used is the productivity index (PI) [10]. This is similar to the method in equation (2), which shares many strengths and weaknesses. This method is applied to maximize the financial value of a portfolio for certain resource constraints. PI = ECV*PTS/R&D] (3) where PV is the present value, PTS is the probability of technical success, PCS is the probability of commercial success, D are the development costs, C are the commercialization costs (C) (launch), PV is the present value of future project earnings (at today s discounted prices) and R&D are dollar resources. Also note that the estimated financial value should be based on cash flow, whereas the accounting rules include investment in hardware and software in the project. The chief financial officer (CFO) and BU managers generally need to know how the project will affect the budget for the current fiscal year. They can then prepare for changes that are being developed as part of the project. In some cases, as long as the project costs can be capitalized, the impact on annual budget flow should be minimal. The CFO needs to know the project cash layout schedule to effectively manage the corporate reserves, ensuring that cash flow is available when required for resources outside the project (hardware and software). B. Project Risk Valuation The next critical step in the process of prioritizing projects is the valuation of the impact of risk on company priorities. The risk in delivering the total project has a great impact on organizations ability to realize the benefits of the project. Some IT project risk categories include project complexity, user training and technology to be used. Fig. 5 shows the risk factors to be assessed when determining the project value.

4 Fig. 5. Project risk valuation. Depending on the specific project type under examination, different factors may be appropriate for assessing project risks. It is very important to take risk assessment into account, covering internal IT department as well as external risks that could harm the business. Because risk is an element that will always be present in the business, the board and IT strategy steering committee must adopt the measures necessary to manage risk by establishing appropriate policies to detect threats, vulnerabilities, etc., and react quickly and promptly mitigate and prevent harm to the business. C. Strategic Valuation of a Project The strategic value of a project is defined as the impact that a project is to have on external entities, particularly customers and suppliers. The project s strategic value gives a better idea of what new capabilities the projects has to offer the company to improve its competence and for it to work more effectively with project customers and suppliers. The strategic value should be estimated according to the BU user inputs as well as the viewpoints of the senior management. Fig. 6 shows a scorecard used to assess the strategic value of a business project. To develop correct strategies, the board of directors should take into account new products being developed, new markets, the economy, technology to be used and take into account the new potential business risks, such as increased competition and other factors. The development of appropriate strategies will enable the business IT objectives alignment, and thus create added value for the business. Senior executives must have the right tools, like reporting, dashboards, scorecards, etc., to make this strategic valuation, thereby assuring that decision-making meets the business needs.. The results of the analysis should rank the project according to its strategic value in relation to the most and least competitive projects. Fig. 6. Strategic project value. D. Valuation of Current Systems Adequacy The adequacy of current systems is also a critical factor to take into account when determining the project value. Fig. 7 shows a system / process scorecard for several levels of adequacy. This card can be used to judge the current system s level of competence coverage. Where there are already systems in place, they can provide appropriate competence for the organization, minimizing, or at least reducing, the benefits of increased investment and effort. A trend has been observed within IT teams to seek incremental improvements on existing systems rather than undertaking new expensive (and potentially high-risk or effort-intensive) initiatives. Fig. 7. Current systems adequacy.

5 The adequacy of current systems is therefore a good metric for understanding the overall priorities of a project. Overall competence can be divided into two categories for measurement: systems technology and system support processes and procedures. The second project evaluation, shown in Fig. 9, takes place after the low-value projects have been rejected. V. PRIORITIZING PROJECTS The project prioritization is the process by which the IT department determines, jointly with the CIO, the board and IT strategy steering committee, which projects will generate the highest value for the company and how many can be run simultaneously, considering the organization s IT capacity. The project prioritization process is a key element for effective IT demand management, enabling the IT department to succeed and overcome many difficulties. Project prioritization generates the following benefits for the IT department and provides added value to businesses. The IT department will always implement the highest value projects and invest adequate resources to develop the project. The IT department s capacity analysis ensures that the permitted number of simultaneous projects will be manageable for the IT department and the organization s ability to absorb change. Project prioritization ensures that project goals and scope are clearly defined; assigning responsibilities for the success of the project. After assessing the four key project elements financial value, risk, strategic value and systems adequacy the projects are prioritized overall based on the preliminary valuations. The approved projects can be arranged in a 2 x 2 matrix. The first assessment is based on a comparison between the strategic and financial value of a project. Fig. 8 shows an assorted project classification. The comparisons between these values indicate the high value projects, i.e. which projects will most benefit the organization. Projects with relatively low financial and strategic values are in the bottom left cell. These projects probably should not be considered in the list of high priority projects and should possibly be reworked. Fig. 9. Evaluation of systems adequacy versus financial value. The assessment will be based on the financial value and the adequacy of current systems, Each cell in Fig. 9 suggests a series of actions for the project classed in that cell. Projects that are assessed and are located in the top left cell are high-value projects and are considered to be high priority projects that have inadequate systems support capabilities. They should be further focalized by the organization. The third evaluation should be of future projects that need to increase the focus and be classified based on "executability" (cost, speed, risk) versus financial value. Fig. 10 shows this analysis. The purpose of this classification is to ensure that easy-to-develop high value projects are ranked highest. This ensures that the company will reap the benefits of projects at the earliest possible time. Projects that are classed in the top right cell are considered "treasures. These projects are easy to develop and guarantee a high financial value. This is where the important projects are classed. These are projects to which the IT department should give top priority. Many projects that are classed in this phase of the analysis are probably major projects, as shown in Fig. 10 of the dashboard, in the top right cell. Fig. 8. Financial versus strategic valuation. Fig. 10. Workability versus financial value.

6 This simple prioritization is useful for the final ranking of projects. In each case, the result of the prioritization must pass a "rigorous" control. If the analysis produces bias or nonessential results, and a careful verification of the cases yields no change in the outcome, common sense should always prevail over the priorities generated by the methodology. Note that at present there are many project prioritization models and models used by technological development projects that prioritize projects according the following criteria [11]: Strategic alignment Strategic leverage Technical success probability Technical feasibility Commercial success probability Product/competitive advantage Market appeal Reward Synergies (leveraging core competencies) Risk vs. return After each project has been evaluated, the results of each variable should be recorded in a form used to prioritize projects. The inventory of approved projects must be updated with the results of each element. The total score for each project can be calculated and sorted from highest to lowest priority. The priorities listing and ranking are added to periodically and reassessed as new projects are added or when projects have been completed. After project prioritization, the results must be delivered to the board of directors for final approval. The CIO must take into account the capacity of the IT department, if it has the necessary means to implement the project, taking into account human resources, appropriate technology (hardware and software), and the necessary infrastructure. If the IT department does not have all these resources, it will have to come up with an alternative solution to remedy these deficiencies, e.g. sign up infrastructures or specialized staff. The CFO must see to it that the company has enough financial resources to implement the project or otherwise provide adequate alternatives to prevent the project from being held up after it has started. After the prioritized projects have been approved by the board of directors, the CEO will give his approval. These projects will then be ready for implementation, and project managers will be given the responsibility to execute them VI. CONCLUSIONS The conclusions from this work are as follows: Project prioritization as part of the demand management life cycle is regarded as one of the keys to an enterprise s business success. It is very important for the strategic planning committee to meet regularly to evaluate company performance and be able to make the necessary adjustments to strategies for ongoing projects. It is very hard to speak of IT successes and failures if projects were not prioritized, aligning the objectives of the projects portfolio with business objectives. If this condition is not met, an organization is unlikely to be able to find out whether the projects it develops maximize the profit shareholders expect from IT investments. At present, the challenge is to build a business model for which the CIO, the senior executives and the business line managers are responsible. The IT Portfolio Management Office plays an important role within the enterprise and is responsible for the prioritizing projects, deciding which will most benefit the enterprise, which projects will be implemented first, tracking ongoing projects, making necessary corrections to projects, constantly managing the projects awaiting implementation and new projects that are added to the portfolio. It is very important for project prioritization to take into account the four key project elements: financial value, the risks of the project, the project strategy and the adequacy of current systems. First the value of each element should be determined. Then the project should be assessed as a whole. Other project-dependent factors can then be added to arrive at the final prioritization of the projects. REFERENCES [1]. S. Cray, How it must shape and manage demand, Forrester, Cambridge, June 15, [2]. B. Andrew, Defining the MOOSE in the it room, Forrester, Cambridge, October 18, [3]. S. Cray, Relationship managers: Focal points for innovation, Forrester, Cambridge, June 15, [4]. V. Margo, What successful organizations know about project management, Forrester, Cambridge, May 26, [5]. G. Chip, V. Margo, Moving up the portfolio management ladder, Forrester, Cambridge, March 22, [6]. C. Susan, Maturing your demand management practices, Valuedance Counting on Technology, Publisher Compuware, January [7]. I. Aguilar, J. Carrillo, E. Tovar, The importance of IT strategic demand management in achieving the objectives of the strategic business planning, 2008 International Conference on Computer Science and Software Engineering (CSSE 2008), in press. [8]. John, B., Jon P., Nicholas G. C., The executive's guide to information technology, Second Edition, Publisher: John Wiley & Sons Pub, March 23, 2007, pp [9]. G. Cooper, R., Scott, Edgett, J.: Stage-Gate Inc.: Portfolio Management for New Products, Picking the Winners [10]. G. Cooper, R., Scott, Edgett, J.: Stage-Gate Inc.: Portfolio Management for New Products, Fundamental for New Products Success [11]. G. Cooper.: Stage-Gate Inc.: Managing Technology Development Projects IEEE Engineering management review, Vol.35, Nº 1, First quarter 2007