Have you taken a look at the portfolio of project plans queued up for next year in your organization?
Most of the organizations where I’ve reviewed this, this year and for many years back, have had a preponderance of projects designed to make things even more efficient.
In other words, they are focused on what the enterprise already does.
These are the easiest to prioritize, of course, as they lend themselves to an internal rate of return (IRR) or return on investment (ROI) type of calculation with apparently reasonable assurance that the numbers are “correct”.
Cost reduction — and that’s what almost all of these are concerned with — also “fits” with more business uncertainty or a slowing public sector.
Yet all of these, as well, are “one time wins”.
Once you’ve reduced the cost of, say, paying a vendor, by 20% you’ve done it: there isn’t usually another 20%, and another, and still another, waiting in the wings.
You therefore get much more value for the enterprise if the investments you make contain a healthy share directed toward new products, new services, new lines of business and new revenue sources, each of which not only will produce results year after year, but also come with the possibility of further growth.
There’s more uncertainty there, and they’re often harder to defend when resources are tight. But they are essential to the future.
The problem with these, of course, is that the priority scheme painstakingly built out of financial tools such as ROI or IRR doesn’t lend itself easily to these types of efforts.
Not only are the numbers uncertain — everything comes with a probability attached — but often, especially with new ventures or innovations, they’re laden with guesswork. This means traditional financial return stack-ranking pushes them to the bottom.
But there is always (once you allow yourself to consider these) a much larger pool of potential opportunities here, than in the cost reduction arena.
What’s happening in those organizations that are growing organically and frequently creating new revenue streams is that their IT Governing Board starts by setting aside money by categories, thus separating the evaluation mechanisms involved.
For enterprises in low growth or public sector work, we find 10% of available funds being set aside for “something new”. The other 90% is split 2/3 (60% of the total) for serious portfolio renewal and its attendant process redesign to make significant gains in operating budgets, and 1/3 into compliance, maintenance, mandated activities — and all other business cases.
Enterprises with a high potential for new growth set aside 35-45% for new innovative systems; paradoxically, most of the remaining money goes into just matching moves made by competitors, with little for massive redesigns of either the portfolio or the business. The goal, in other words, is to focus on generating that growth.
Periodically the high growers do have to drop into a year or two of asset portfolio cleanup — something the best of them do when they’ve just realised a major jump on their competitors and can ride the “S-curve” of that success for the time necessary to do the renovation work behind the scenes.
In other words, the business cycle drops out of the picture; when to act depends on how the company is succeeding.
Two other signs of note that differ from the classical “project proposal” and “prioritization” cycles that occur in most enterprises.
The innovation block is composed of a number of smaller investments.
It is managed as a venture firm might manage its investment portfolio: one or two out of ten might be a smashing success; four or so might go nowhere; the rest deliver, but not in a dramatic way.
Each year failing initiatives are peeled off and shut down; new ideas enter the pool, and the effort goes into creating another winner from the pool that are performing, but not dramatically.
It’s a form of “safe-to-fail” experimentation and lies at the heart of sustained innovation efforts.
All this creates an innovation sub-portfolio managed not by ROI or IRR calculations (at least, in the first two years) but one by risk assessment and venture investment criteria.
Needless to say, the growth this can unlock produces more than adequate funds in future years for core business renovation and portfolio cleanups.
If you’re not creating a large enough innovation pool, perhaps it’s time to rethink how you judge these things — and, if you are in a slow/no-growth organization, ensure that dramatic moves are made on the cost reduction front to counterbalance the limits on growth that you face.
Finally, a word about outsourcing.
Many times, those “dramatic moves on the cost reduction front” turn into outsourcing agreements. This is generally getting the cart before the horse.
There’s nothing wrong with deciding to oursource. But an enterprise should make sure they have reduced it to its “final form” before turning it over to someone else.
That means that, before calling for bids, you clean it up yourself.
If you’ve got enterprise software that’s heavily modified, you undo the mods and make it dead easy to maintain.
If you’ve got older applications written in out-of-the-market technologies, you replace them.
Before calling in the sourcing partner, you rationalise the infrastructure, virtualise it, make it run as cheaply as possible.
You make all technology decisions based on total cost to own and operate, not on what’s new, trendy, or familiar. (That z/OS mainframe you own would make a lovely Linux server, for instance, getting another decade out of the hardware and operating it at far less software and services expense.)
Only after you have done this should you outsource. Outsourcing’s economics work best (for the vendor) when it’s a business-as-usual contract, not one where they must constantly reskill, redeploy, etc.
You’ll get a better price by not having to design in major changes. They’ll make better profits at that price, making them easier to deal with.
Plus, the contract will be for less, since you’ve already captured efficiencies.
I hope this has shown you how vital executive-level decision-making that goes beyond prioritization and budgets is in capturing value from IT.
That, in turn, is why the IT Governing Board is such an essential lynch-pin in accomplishing the apparently impossible: IT flexibility, innovation and efficiency simultaneously.