Aligning IT and Business Through Value Management

META GroupMETA Group

Aligning IT and Business Through Value Management

Aligning IT and Business Through Value Management

Dale KutnickChairman andCo-Research Director

[email protected]

© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.

The IT Spending Roller Coaster

IT 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 dominates

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

Enterprise IT Expenditures

-5%

0%

10%

20%

30%

40%

’96-’97 ’97-’98 ’98-’99 ’99-’00 ’00-’01 ’01-’02

3.41%3.55%3.68%3.16%

2.68%2.48%

0.00%

1.00%

2.00%

3.00%

4.00%

’02’01’00’99’98’97

Cross-Industry: IT Spending as % of Revenue

% Change in IT Budget

2


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 needs

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

IT Expenditures Portfolio

No

n-D

iscr

etio

nar

y C

ost

s

Risk

Dis

cre

tio

na

ry P

roje

cts

Ris

ks

Val

ue/

Tim

ing

VentureVenture

GrowthGrowth

DiscretionaryDiscretionaryEnhancementsEnhancements

Non-Non-DiscretionaryDiscretionary

CoreCoreRTBRTB

TTBTTB

GTBGTB

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

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

CulturalCulturalStyleStyle

IndustryIndustrySectorSector

ValueValueDisciplineDiscipline

PerformancePerformance

ProductsProducts

Metric

Mode Mission

Maturity

SizeSize CapabilityCapability

OrganizationOrganizationTypeType

Multivariate ManagementMultivariate Management


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. OPEX

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

Managing Asset Life CycleManaging Asset Life Cycle

ProjectSource

EA

LOB

HighT

ec

hn

ica

l C

on

dit

ion

Re-Evaluate/Reposition

Asset

Maintain/Evolve Asset

Retire/Consolidate

Asset

Re-Engineer/

Modernize Asset

Low

Poor

Year 2Year 3

Year 4 ...

Excellent Low

Te

ch

no

log

y

Co

sts

High


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 initiative

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

Bottom Line


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 taken

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

Sustainable Value/Risk Balance

The objective is to balance value/risk/change over time

-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 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 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 assumed

BusinessBusinessRiskRisk

ITOITORiskRisk

Co

st-

Co

st-

Ba

sed

Ba

sed

Co

st-

Co

st-

Ba

sed

Ba

sed

Ma

rke

tM

ark

et

- - B

as

edB

as

ed

Ma

rke

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ark

et

- - B

as

edB

as

ed

Va

lue

- V

alu

e-

Ba

sed

Ba

sed

Va

lue

- V

alu

e-

Ba

sed

Ba

sed

Time &Time &MaterialsMaterials

Time &Time &MaterialsMaterials

ServiceServiceLevelsLevels

ServiceServiceLevelsLevels

% of % of RevenuRevenu

ee

% of % of RevenuRevenu

ee

Pricing ModelPricing Model Risk OwnershipRisk Ownership

Market Pricing IT Products

Leading ITOs calculate the value of the ITO as its net profit contribution to the business bottom line


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 changing

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

Wireless Evolution ofMobile Computing

’99 ’00 ’01 ’02 ’03 ’04 ’05

Sweet SpotCo

st

Consistent understanding is critical to establish value cases of IT opportunities

2002: Bandwidth (BW) Explosion2003+: Handheld Device & P/P Improvement2003/04: Mobile Middleware Maturity2004/05: Better BW Pricing & Wireless Coverage

Time


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 value

7. Too many technologies are driving management and people costs up

1. Communication prices up2. Data center consolidation3. Third-party sourcing4. Storage explosion 5. Licensing price structure6. Benchmark to reduce

costs, increase SLA, and demonstrate value

7. Too many technologies are driving management and people costs up

Consistent understanding of technomics is critical to establishing value of technology

Cost

Static

Dynamic

Single Dimension

Multiple Dimensions

Benchmark Business Value

Dimensionality

Frequency

Cost

Price

Performance

Process

Value

Value-Value-ConstrainedConstrained

Value-Value-MinimizedMinimized

Value-Value-CreatingCreating

Value-Value-ConstrainedConstrained


Techtonics for 2003/04

1. Security Strong authentication

2. VPN maturation

3. Wireless computing Fixed wireless, not 2.5G

or 3G

4. Maturation of Web services for integration

5. User identity

6. Portals

1. Security Strong authentication

2. VPN maturation

3. Wireless computing Fixed wireless, not 2.5G

or 3G

4. Maturation of Web services for integration

5. User identity

6. Portals

Consistent understanding of techtonics is critical to establishing technological adoption road map

It’s Coming ... It’s Coming ...


Economic Tradeoffs:Area of Non-Investments in 2003

PKI projects Strategic EAI Massive convergence

initiative Mobile infrastructure Ubiquitous CRM with

channels synchronization

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 CycleManaging Product Life Cycle

ProjectSource

EA

LOB

HighT

ec

hn

ica

l C

on

dit

ion

Re-Evaluate/Reposition

Asset

Maintain/Evolve Asset

Retire/Consolidate

Asset

Re-Engineer/

Modernize Asset

Low

Poor

Year 2Year 3

Year 4 ...

Excellent Low

Te

ch

no

log

y

Co

sts

High


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

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


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 measurements

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

Complement the internally focused processes with sourcing alternatives

PlanPlanPlanPlan BuildBuildBuildBuild RunRunRunRun

PlanPlanPlanPlan ProcureProcureProcureProcure ManageManageManageManage

OrganizationalOrganizational

StructureStructure

EvolutionEvolution

OrganizationalOrganizational

StructureStructure

EvolutionEvolution

Balanced ApproachBalanced Approach


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 indicators

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

Integration of third parties into the IT road map will represent the major challenge in the coming years

Val

ue/

Ris

k P

rofi

leV

alu

e/R

isk

Pro

file

Capability/FocusCapability/Focus

ManagedManaged

DesktopDesktop

NetworkNetwork

Mgmt.Mgmt.

DataData

CenterCenter

ServerServer

Mgmt.Mgmt.

AppApp

Maint.Maint.

AppApp

Implement.Implement.

HelpHelp

DeskDesk

AppApp

on Demandon Demand

Sourcing Strategy ImplementationSourcing Strategy Implementation


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

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 mind

Outsourcing Value ContinuumOutsourcing Value Continuum

Co

ntr

ibu

tio

nCapability

Cost ReductionCost Reduction& Avoidance& Avoidance

Service QualityService Quality& Customer Sat.& Customer Sat.

Value CreationValue Creation

IT DEMANDIT DEMAND

IT GOVERNANCEIT GOVERNANCE

IT SUPPLYIT SUPPLY

Value

Proposi

tion

Value

Proposi

tion


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

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

Aligning IT and Business Through Value Management

Documents

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