Aligning IT and Business Through Value Management

METAGroupAligning IT and Business Through Value ManagementDale KutnickChairman andCo-Research Directordale.kutnick@metagroup.com© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. The IT Spending Roller CoasterIT and business operations are becoming inextricably linked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 dominatesEnterprise IT Expenditures-5%0%10%20%30%40%’96-’97’97-’98’98-’99’99-’00’00-’01’01-’023.41%3.55%3.68%3.16%2.68%2.48%0.00%1.00%2.00%3.00%4.00%’02’01’00’99’98’97Cross-Industry: IT Spending as % of Revenue% Change in IT Budget2© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. The IT 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 needsIT Expenditures PortfolioNon-Discretionary CostsRiskDiscretionary Projects RisksValue/TimingVentureGrowthDiscretionaryEnhancementsNon-DiscretionaryCoreRTBTTBGTBThe structure of the costs (fixed or variable) will become important, as within all LOBs in the enterprise© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. 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 agilityCulturalStyleIndustrySectorValueDisciplinePerformanceProductsMetricModeMissionMaturitySizeCapabilityOrganizationTypeMultivariate Management© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. 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. OPEXTo sustain value creation, IT organizations MUST be able to continually calibrate their performance against competitors and market opportunitiesManaging Asset Life CycleProjectSourceEALOBHighTechnical ConditionRe-Evaluate/RepositionAssetMaintain/Evolve Asset Retire/ConsolidateAssetRe-Engineer/Modernize AssetLowPoorYear 2Year 3Year 4 ... ExcellentLowTechnology CostsHigh© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. The IT Portfolio and Its Associated Programs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 initiativeBusiness Impact: Technology is fundamental to modern business —IT organizations must integrate with the businessBottom Line© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. 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 takenSustainable Value/Risk Balance The objective is to balance value/risk/change over time-1,000-800-600-400-20002004006008001,000Q1Q3Q5Q7Q9Q11Operational RiskProject CostProject RiskValue © 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. 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 assumedBusinessRiskITORiskCost-BasedMarket-BasedValue-BasedTime &MaterialsServiceLevels% of RevenuePricing ModelRisk OwnershipMarket Pricing IT ProductsLeading ITOs calculate the value of the ITO as its net profit contribution to the business bottom line© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. 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 changingWireless Evolution ofMobile Computing’99’00’01’02’03’04’05Sweet SpotCostConsistent understanding is critical to establish value cases of IT opportunities2002: Bandwidth (BW) Explosion2003+: Handheld Device & P/P Improvement2003/04: Mobile Middleware Maturity2004/05: Better BW Pricing & Wireless Coverage Time© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. Technomics for 2003/041.Communication prices up2.Data center consolidation3.Third-party sourcing4.Storage explosion 5.Licensing price structure6.Benchmark to reduce costs, increase SLA, and demonstrate value7.Too many technologies are driving management and people costs upConsistent understanding of technomics is critical to establishing value of technologyCostStaticDynamicSingle DimensionMultiple DimensionsBenchmark Business ValueDimensionalityFrequencyCostPricePerformanceProcessValueValue-ConstrainedValue-MinimizedValue-CreatingValue-Constrained© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. Techtonics for 2003/041.Security Strong authentication2.VPN maturation3.Wireless computingFixed wireless, not 2.5G or 3G4.Maturation of Web services for integration5.User identity 6.PortalsConsistent understanding of techtonics is critical to establishing technological adoption road mapIt’s Coming ... © 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. Economic Tradeoffs:Area of Non-Investments in 2003PKI projectsStrategic EAIMassive convergence initiativeMobile infrastructureUbiquitous CRM with channels synchronization Align techtonics and technomics with business value creation Managing Product Life CycleProjectSourceEALOBHighTechnical ConditionRe-Evaluate/RepositionAssetMaintain/Evolve Asset Retire/ConsolidateAssetRe-Engineer/Modernize AssetLowPoorYear 2Year 3Year 4 ... ExcellentLowTechnology CostsHigh© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. Key Initiatives in 2003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 Bottom Line© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. The Make-vs.-Buy Paradigm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 measurementsComplement the internally focused processes with sourcing alternativesPlanBuildRunPlanProcureManageOrganizationalStructureEvolutionBalanced Approach© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. Outsourcing as Strategic Alternative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 indicatorsIntegration of third parties into the IT road map will represent the major challenge in the coming yearsValue/Risk ProfileCapability/FocusManagedDesktopNetworkMgmt.DataCenterServerMgmt.AppMaint.AppImplement.HelpDeskAppon DemandSourcing Strategy Implementation© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. Defining Goals and Measurements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 Users pursuing outsourcing often explore sourcing options with cost cutting only in mindOutsourcing Value ContinuumContributionCapabilityCost Reduction& AvoidanceService Quality& Customer Sat.Value CreationIT DEMANDIT GOVERNANCEIT SUPPLYValue Proposition© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary. What Are the First Steps on the “Road to Alignment”?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Transformation Steps