From business strategy to IT action right decisions for a better bottom line

To access the website, go to www.wiley.com/go/ITAction.NOTES 1 IT and Economic Cycles 2 IT’s Value —A Definition 3 IT, Bottom-Line Impact, and Government 4 Tests for Connected Business a

From Business Strategy

to IT Action

Right Decisions for a Better Bottom Line

Praise for

From Business Strategy to IT Action

The authors provide us a most insightful approach to industry’s toughest problem: on what IT investments should we invest our scarceresources? More importantly, their framework can be applied to any and every discretionary corporate investment Linking corporateinvestments to strategic objectives is critical to remaining or becoming a viable and vital business — and this book gives us the roadmap for the journey Particularly helpful are the provocative sets of questions and helpful tools to address this complex issue

—Francisco A Figueroa, CFO and Vice President,

Sandia National Laboratories

This is a dynamite book of practical advice for companies that

do not fully understand IT, and should become required reading for both business and IT management It is a “gem” of disciplines and practices and of business-based ways to manage IT and to get the biggest and most important value from IT investments

—Cecil O Smith, Senior Vice President and CIO, Duke Energy

I’ve worked with Bob for several years This book, which outlines his practical yet elegant approach for aligning IT action plans with the overarching business strategy, is a must read for anyone who wants to get more impact from their IT dollar!

—Brian Gill, Vice President and CIO, Sunlife Canada

I like this book very much It offers an extraordinary set of insights

on how to take IT planning, innovation, and performance measurement to the bottom line For more than two decades

I struggled, as a CIO, to tie IT management decisions to business outcomes Finally, I found in this book a consistent framework for guiding IT and business leaders alike, in maximizing the business value of their IS capabilities and technology investments

—Doron J Cohen, Ph.D CIO, The BrassTacks

To bridge the chasm between business and IT, concise and clearly defined business and financial decision processes and metrics need to be created and articulated This book provides a precise and simple to follow methodology that IT executives can use

to better align themselves with CFOs and their business partners

—Mark Popolano, CIO, Vice President, AIG, Inc.

This book tells you all you need to know about strategy and execution related to developing IT strategies, making the right investment decisions, and implementing the strategies that will lead to creating greaterimpact to business performance A great insight shared by the authors for those who are concerned with IT investment and return

—Swee-Cheang Lim, Director, Institute of Systems Science, Singapore

In 1988, Information Economics proposed a way of thinking and

a method about the value of IT In this new book, based on their broadbusiness-based experience, the authors further develop the framework and process It is the combination that lays the foundation for increasing the bottom-line results of IT investments

—Prof dr Pieter Ribbers, Faculty of Economics,

Tilburg University, The Netherlands

Within ING there is continuous pressure to ascertain that all discretionary IT-related business investments generate a stable earnings stream that is significantly higher than the weighted average cost of capital Following on the valuable insights of Information Economics, this book may contribute to the firm’s ability to enhance IT’s contribution to its value creation process by

ameliorating project risk

—Dr John FA Spangenberg, Head of IT Performance &

Investment Management, ING Group

ROBERT J BENSON THOMAS L BUGNITZ WILLIAM B WALTON

John Wiley & Sons, Inc.

From Business Strategy

to IT Action

Right Decisions for a Better Bottom Line

This book is printed on acid-free paper.䡬⬁

Copyright © 2004 by John Wiley & Sons All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system, or transmitted

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Library of Congress Cataloging-in-Publication Data

Benson, Robert J.

From business strategy to IT action : right decisions for a better

bottom line / by Robert J Benson, Tom Bugnitz, William Walton

p cm.

Includes index.

ISBN 0-471-49191-8

1 Business planning 2 Business enterprises — Computer networks.

3 Information technology — Management 4 Information resources

management — Economic aspects I Bugnitz, Thomas L II Walton,

William, 1951– III Title.

HD30.28.B4533 2004

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

Bob Benson thanks his wife, Noreen Carrocci, for her continuous and constant support and dedicates this effort to her and our families.

Tom Bugnitz dedicates his work on this book to Diane Dimeff, who has supported, helped, encouraged, and most of all put up with him and his many idiosyncrasies for the last ten years.

Bill Walton dedicates his work to his wife Eliza and children, Mac, Jas, and Grace

Together, you are both my why and my how.

Miraculously, we have all three ended up with women

who are much better than we deserve.

Bob Benson is a Principal with The Beta Group He has served as CIO,

finan-cial executive, dean, professor, author, and consultant for over 40 years Hisconsulting and research deals with the business value of IT, business and ITstrategic planning, methodology and process development, IT governance, andfacilitation He has conducted executive seminars and performed and managedconsulting engagements on these subjects throughout the world (in 20 countriesand 40 states) and has taught graduate courses in schools of business and engi-neering in Europe and the United States For over 10 years, he has consulted fulltime in his areas of interest

He has keynoted numerous international conferences, created and managedacademic programs and organizations, developed large-scale computer systems,and consulted with a wide range of companies and government agencies Mr.Benson is coauthor of several books and numerous book chapters, articles, and

monographs, including Information Economics: Linking Information ogy and Business Performance (Prentice-Hall, 1988) and Information Strategy and Economics: Linking Information Systems Strategy to Business Performance

Technol-(Prentice-Hall, 1989)

Mr Benson is an affiliate professor of computer science at Washington versity in St Louis, where he also served as senior executive for computing andcommunications, institutional financial planning, and professor, dean, and cen-ter director He is currently a professor of information management (part-time),Faculty of Economics, Tilburg University, The Netherlands He served as found-ing managing director of the E-Business Forum

Uni-Tom Bugnitz has been the President of The Beta Group, a consulting firm he

cofounded with Bob Benson, for the past 15 years Mr Bugnitz has consultedand lectured widely in the United States on the subject of the business-IT con-nection, and has codeveloped a number of consulting methodologies forimproving IT management In addition, he is closely associated with Washing-ton University in St Louis as an adjunct professor of computer science and par-ticipates actively in the development and execution of research in the field ofinformation management He is coauthor of several books on systems and com-puter programming Mr Bugnitz brings practical experience to bear on his con-sulting and teaching assignments, having worked at all levels of informationsystems organizations, including 10 years managing large data centers and tele-communications operations

about the authors

Bill Walton is a Principal with The Beta Group His areas of special interest and

expertise include Performance Measurement, Alignment, Integrated StrategicPlanning, IT/Business Value, Organizational Change Management, and Tech-nology-Driven Change

Before joining The Beta Group Mr Walton was with Gartner and Real sions for 17 years He spent his final 5 years at Gartner as the Vice-President ofR&D for Gartner Measurement where he was directly responsible for the devel-opment of numerous innovative benchmarking and IT performance measure-ment services and their associated analytical methods These included the use

Deci-of organizational and technical complexity as IT cost drivers, the application Deci-ofthe Balanced Scorecard to IT, and the development of IT management processmodels Most recently, with The Beta Group Mr Walton has been responsiblefor the development of a set of management frameworks and tools that support

IT strategic alignment and planning processes

Mr Walton has been active in the information and technology managementfield since 1977 He has worked with a large number of clients in the USA,Canada and Europe on critical IT measurement and management issues Mr.Walton applies a combination of active research and practical experience to each

of his consulting engagements

The Beta Group consults to Fortune 500 companies and government agencies

in North America and Europe, focusing on improving IT’s bottom-lineimpact and controlling IT spending Beta Group consulting practices cover the

IT planning-to-execution cycle, starting with strategic planning and budgetingthrough investment prioritization, alignment, performance measurement, andportfolio management For more information on the company or its methods,

visit www.the-beta-group.com or www.beta-books.com.

about the beta group

back-Assessment To access the website, go to www.wiley.com/go/ITAction.

NOTES

1 IT and Economic Cycles

2 IT’s Value —A Definition

3 IT, Bottom-Line Impact, and Government

4 Tests for Connected Business and IT

5 Modern Portfolio Management

6 One Company’s View of Portfolio Management

7 Constructing Portfolios

8 Gap Analysis: Closing Disconnects between Business and IT

9 Building an IT Profit Model

10 Stage Theory and Management Culture

11 Right and Wrong in Management Culture

12 Value and Values

13 Our Use of Shareholder Value

14 Scoring for Portfolio Assessment

15 The CFO’s Role

16 What about IT’s Performance

17 Other Portfolio Classifications

18 ROI and the IT Value Life Cycle

about the website

Completing the Picture: The New Information Economics Practices 8

The Right Questions Focus on Affordability and Impact 18Affordability Questions: The Starting Point for the Right Actions 20Impact Questions: The Roadmap for the Right Actions 22

The Contexts for Management Questions Are Planning and

xv

Cause and Effect Is Based on Management’s Intentions 36

Introduction 47

Practical Problems in Applying Portfolio Management 62Summing Up Portfolios and Portfolio Management

Understand Costs and Resources: Management Agenda 70

The Goals and Principles for Right Decisions/Right Results 74Goal 1: Actionable, Commonly Understood Strategic Intentions 74

Goal 3: The Right Management Culture and Management Roles 81

Summary of Right Decisions/Right Results — Goals and Principles 85Goals and Principles Applied to the Strategy-to-Bottom-Line

Summing Up New Information Economics Practices 106

Summing Up: Adopt Effective Process to Produce Action 107Adopt Effective Process to Produce Action: Management Agenda 109

Addressing Practical Problems: IT Impact Management 113Practical Problems Getting from Strategy to

Tackle the Practical Problems: Management Agenda 127

The Management Context for “Make the Right Decisions” 130

Make the Right Decisions with Prioritization

Critical Success Factors: Right Decisions/Right Results

Summary: Performance Measurement Practice 210

Introduction to the Business Value Maturity Model姠 235

Embedding NIE Practices into Management Processes 240

Chapter 12 Appendix A: Details of the Business Value

Chapter 12 Appendix B: The Development of

Three Methods to Establish Right Decisions/

Setting Goals from a Corporate Governance and

The IT Impact Management Program to Implement

Right Decisions/Right Results and NIE Practices 263

The “So What?” for Line of Business Management 274

Appendix A The Role of Enterprise Architecture in

Appendix B Management Team Roles in Right Decisions/

Almost 20 years ago, Bob Benson of Washington University and Marilyn Parker

of IBM, with the help of Ed Trainor, broke new ground in understandingthe value relationship between IT and business As co-principal investigators in

a research project sponsored by the IBM Los Angeles Scientific Center andWashington University in St Louis, Bob and Marilyn described a process andframework for assessing the business value of IT investments in any company

Their first book, Information Economics: Linking Business Performance and Information Technology,1established the view that, to be effective and valuable

to the enterprise, IT has to fundamentally improve how a business2performs; to

do this, business management must be directly involved in IT decision-making This insight defined performance improvement in strategic and operationalterms, in the areas strategically relevant to the company and not merely as meas-ured in traditional bottom line or ROI terms Their book established a prac-tical methodology for prioritizing IT investments, and it demonstrated thatfocusing new investment on achieving explicit business strategies and opera-tional excellence helped maximize the bottom line impact of new investmentsfor the business

Over the past two decades, Information Economics has served as the dation for consulting by The Beta Group3 and research and teaching by BobBenson, Tom Bugnitz, and Bill Walton (Beta Group Principals) Through theseexperiences, the authors have extended the original Information Economicsconcepts and gained a number of key insights that form the foundation for thisnew book

foun-This new book, From Business Strategy to IT Action, applies the original

Information Economics philosophy to all of the activities in which business and

IT management are engaged together — planning, innovation, prioritization,alignment, performance measurement, and portfolio and culture management

The concepts around IT action are a crucial enhancement to the original ideas.

xxi

1Marilyn M Parker and Robert J Benson, with E.H Trainor, Information Economics: Linking

Busi-ness Performance to Information Technology (Prentice-Hall, 1988).

2 While the terminology here and throughout the book is presented in “business” terms, the cepts and practices apply with equal force to government and nonprofit organizations While busi- ness is concerned with competitive strategy and financial outcomes, government is just as concerned with strategy and performance to organizational mission.

con-This addition takes the philosophy of IT/business connection from a passive prioritization to an active let’s-get-the-job-done viewpoint Without action thatproduces bottom-line impact, nothing else matters But even that isn’t sufficient;the action must produce business results in line with business strategies That’sthe message of “Right Decisions for a Better Bottom Line.”

However, “action” also requires that we address issues of culture, processmaturity, and disconnects between business and IT Toward this end, we intro-duce the Strategy-to-Bottom-Line Value Chain, a framework that integrates thefive NIE practices and three support areas In this framework, Culture Man-agement provides tools for understanding and changing a company’s currentculture with respect to business and IT cooperation Portfolio Managementestablishes information and analysis tools for prioritizing, aligning, and assess-ing the company’s entire IT investment IT Impact Management establishes the

IT culture and performance models for the IT/Business connection

We use the expression “Right Decisions/ Right Results” throughout thebook as a shorthand expression to convey all of this The five NIE practices lead

to the best decisions about the company’s IT investments; the Line Value Chain leads to the necessary actions Taken together, the companyachieves the right results: a powerful impact on its bottom-line

Strategy-to-Bottom-The original Information Economics concepts applied in the first book represented only one of the five NIE practices described in this book By sur-rounding those concepts with a complete planning and management framework,

we are again establishing a new way for business and IT managers to understandand use IT to produce better bottom-line results

CONTINUING DEVELOPMENT

This book is a work in progress Further research and experience in companies

in the United States and Europe will continue to develop these ideas We expect

to update chapter information on a regular basis

Our websites, www.NewInformationEconomics.com and www.beta-books com, contain directions on how to obtain future updates We can be reached

individually by e-mail at:

Bob Benson bbenson@aismail.wustl.edu

Tom Bugnitz tbugnitz@aismail.wustl.edu

Bill Walton wwalton@lincoln.midcoast.com

BOB BENSON

TOMBUGNITZ

BILL WALTON

March 2004

We have benefited from the advice and suggestions of a number of people

We are grateful that Jon Shapiro, Rodney Alsup, Cecil Smith, FrancoisWouters, Larissa Moss, Dennis Smith, Camille Appledorn, Ed Curvey, DavidReo, Tony Salvati, and Nicholas Nash gave us the benefit of their thoughts andreviews of early drafts We are especially grateful for the work we have donewith Joe Barkley and Bruce Schneider of AIG and the many insights they gave

us in the course of writing this book

We recognize the many people who have influenced our professional livesand our thinking over the last twenty years and more These include: Bill Smithand the late Hardy Fuchs at Washington University, the best “IT guys” we’ve

ever known; Marilyn Parker, Bob’s coauthor of Information Economics and a prime influence; Ed Trainor, who contributed the practical foundation for Infor- mation Economics; Piet Ribbers of Tilburg University, with whom we always

have great ideas; Ken Orr, who always inspires; John Zachman and Dick Nolan,who set the standard for what we try to do; Mike Nicholson, our first clientand a faithful supporter, and Bob Rouse, associates in the Beta Group; LindaBastoni of Gartner and Regina Paolillo of Creditek, always encouraging betterfrom us; Chuck Lybrook, who has supported us all these years; Greg Sullivan,whose constant friendship and good humor means so much; Mary Ann Gibson,whose business sense, intelligence, and support have pointed the way in build-ing our business; Mike Luby, who possesses a first-rate executive mind connected

to an exquisite sense of humor; Phil Andrews, Swami Viswanathan, Jason Grant,and the rest of our other clients and good friends (many of whom are both).Students in our Washington University and Tilburg University courses also havehad a considerable impact on our thinking, as they have often heard our ideasfirst and served as a valuable crucible in improving how we express them

acknowledgments

Define the Goals

This book is based on a very simple idea: A company should only spend money

on IT1that directly supports its business strategy and its operational ness, and should not spend money on IT that doesn’t The management team cancontrol IT budgets and investments,

effective-and at the same time improve IT’s

bottom-line impact, by consistently

and persistently selecting the best IT

investments, and eliminating

under-performing existing IT activities This

book shows how to do that.2

Right Results: The “right results” we

want are controlled IT costs and at

the same time improved bottom-line

impact

Right Decisions: The “right decisions”

lead to the management actions needed

to produce the right results These right

decisions lead to:

䡲 Creating better investment

alterna-tives—or, in IT terms, creating ter ideas for development projects

bet-䡲 Choosing the right investments and projects from the alternatives

䡲 Eliminating nonperforming and poorly performing existing IT resources fromcurrent spending

䡲 Improving the performance of the remaining existing IT resources

䡲 Implementing and following through on the right investments and ance improvements

perform-Our Right Results goals of controlled IT costs and improved bottom-lineimpact work together As new projects enable the business to improve its products,

Control Spending and Maximize Impact on the Bottom Line

1 Define the Goals

2 Ask the Right Questions

3 Connect to the Bottom Line

4 Understand Costs and Resources

5 Focus on the Right Things

6 Adopt Effective Process to Produce Action

7 Tackle the Practical Problems

8 Make the Right Decisions

9 Plan for the Right Results

10 Keep Score

11 Deal with Culture

12 Char t the Path to Implementation

13 Define What’s Next

14 Answer the “So What?” Question

➤

1

services, and quality, and at the same time reduce operating costs, higher impact

on the company’s bottom line will result As management focuses on ling ongoing operational costs, overall costs may decline This combinationallows the company to move from today’s cost and bottom-line position to afuture controlled-cost and improved bottom-line impact position

control-To accomplish this, business executives and IT managers balance new ITinvestments with the ongoing assessment of the performance of committed

IT resources Money saved in one area can be applied to the other From ior management’s perspective, this all adds up to the “IT spend.” From IT man-agement’s perspective, this all represents the resources that must be managedeffectively Working together, the goals of controlled IT costs and improved bottom-line impact can be realized

sen-This is the goal of this book, as illustrated in Exhibit 1.1 Companies canwork toward goals in the IT Improvement Zone by examining and improvingboth new project impact and ongoing costs

TODAY’S REALITY

Companies spend as little as 2 percent and as much as 10 to 15 percent of enue on IT, including the ongoing cost of keeping the existing IT operationalactivities going as well as new investment in development and enhancementprojects As shorthand, we call the first the “lights-on” budget,3and the second,the “projects” budget

rev-We are interested in the entire IT spend, the sum of lights-on and ect budgets Most of the spending is connected to ongoing operational costs,often 70 or 80 percent of the total To be serious about controlling cost

proj-Higher Cost

Lower Cost

Higher Impact Lower

Impact

Cost

Today’s Cost and

Improvement Zone

Achievable Cost and Impact

Impact Increase from New Projects

Cost Reduction from Operational (“Lights-On” ) Improvement

}

Bottom-Line Impact

EXHIBIT 1.1 Our Goal Is the IT Improvement Zone

and increasing IT’s impact on the bottom line, we have to address the entirespend.

However, with IT as in many other parts of the business, simply reducing

IT costs does not by itself improve the bottom line But with the right ment frameworks and management practices, companies can successfully controlthe growth of IT costs and at the same time improve the business bottom-lineimpact of those costs and investments

manage-Historically, company executives have spent a great deal of time evaluatingand prioritizing new IT projects and investments Considerable managementenergy is spent prioritizing and dealing with the politics of project selection.However, this effort applies to perhaps 20 or 30 percent of the overall IT spend.The other 70 or 80 percent, the lights-on budget, is larger but attracts almost

no attention from management In many ways, the lights-on budget is a blackbox with no visibility to management

An “entitlement” mentality tends to apply to the lights-on budget, whereeach business manager expects that the information systems now in place willcontinue with current or improved levels of support, and the CIO tends toexpect that the base budget for current applications support, including infra-structure, will continue at current or increased levels This entitlement mental-ity also affects project prioritization (managers fight for “their” projects to bedone by “their” project people) as well as the ongoing costs of supporting eachmanager’s applications It can be very difficult to reduce support for existingindividual applications, making it difficult to control and possibly reduce thelights-on budget over time

As a result, rather than pursuing the goals of both reduced cost and

im-proved bottom-line impact, managers focus on one or the other This leads toone of several unfortunate scenarios, as shown in Exhibit 1.2

1 Lower lights-on cost and reduced bottom-line impact, where companies

focus solely on cost reduction, without considering the specific impact thecost reduction has on IT’s contribution to the bottom line A typical out-sourcing arrangement fits this scenario

2 Higher lights-on cost combined with no improvement in bottom-line impact.

This is the entitlement situation, where managers assume that lights-onbudgets will regularly increase and new projects are chosen that do not pro-duce enough bottom-line impact to overcome increased costs Companiesthat rely on traditional budget methods and traditional business-case andprioritization methodologies often end up here

3 Higher lights-on cost and higher bottom-line impact This scenario is

com-mon where business conditions are improving or where the business is idly growing Business growth obscures the fact that better managementscrutiny of both projects and the lights-on budgets can make the result evenbetter, and perhaps even move the scenario into the sweet spot of both lowercosts and higher bottom-line impact In times of rapid growth, higher costmay be unavoidable, but it does not have to be uncontrolled or unreasonable

THE ENTIRE IT SPEND: REDUCING COST AND

IMPROVING BOTTOM-LINE IMPACT

We want to be very clear on this: Getting the Right Decisions /Right Results meansdealing with both IT’s cost and IT’s impact on the bottom line Of course, if wereduce IT’s cost, then some of that cost reduction will filter down to the bot-tom line But that is not what we mean when we talk about IT’s impact on thebottom line Bottom-line impact, both short- and long-term, comes from thecost reductions, quality improvements, and so forth that IT enables in the rest

of the company, and from making sure that these IT business impacts flow to

the bottom line Over time, we want management teams to be able to

dramati-cally improve both cost and bottom-line impact.

To accomplish this, we propose three possible objectives, shown in Exhibit1.3, that a company may pursue, depending on its current circumstances:

1 A Reduced Cost Objective4— By applying the frameworks and five agement practices, company management can reduce IT costs and retain thecontribution that IT makes to the bottom line IT can perform just as well

man-as before, but at reduced cost

2 A Stable Cost Objective — Company management can continue to grow IT

use and keep up with the growth of the business, and yet control the overall

IT spend IT can increase its support of the business and its impact on thebottom line, but at current cost levels

Lower Cost

Higher Cost

Higher Impact

Lower Impact Bottom-Line

Impact

Cost Situation Today’s

Typically Undesirable:

Lower Cost Lower Impact

Higher Growth:

Higher Cost Higher Impact

All too common:

Higher Cost

No Change of Impact

IT Improvement

ZoneEXHIBIT 1.2 Current Patterns for Many Companies

3 A “Sweet Spot” Objective —This combines cost reductions with better

bottom-line impact IT can both lower its cost and also improve its formance in terms of bottom-line impact

per-A fourth “Higher Growth” Objective (mentioned in the previous section)may apply to companies experiencing rapid change and/or growth In this case,the higher IT costs, though controlled, are justified because they produce evengreater bottom-line impact Even in these cases, we can reduce the overall costincreases, thus increasing the bottom-line impact even further

THE STRATEGY-TO-BOTTOM-LINE VALUE CHAIN

What does it take to control IT costs and produce higher bottom-line impact?Simply, we need effective planning processes, appropriate resource decisions,and workable budgets and plans We need them to work together consistently.But companies already do this, managers may say They work to improvethe bottom-line performance of their company.5 From year to year, they setbudgets for ongoing operations and invest in projects or initiatives to change oradd to the business Managers then expect that new budgets will support betterbottom-line performance than prior-year budgets, and that investments in proj-ects or initiatives will produce better bottom-line performance (see Exhibit 1.4) The practical problem is that most companies carry out planning, prioriti-zation/resource decisions, budgets, performance measurement, and so forth, insilos or stovepipes We mean this in two ways First, in management processterms, business planning, IT planning, prioritization, budgets, and performance

IT Improvement Zone

Higher Cost

Lower Cost

Higher Impact Lower

Impact

Cost

Today’s Situation

Reduced Cost:

Lower Cost Same (current) Impact

Higher Growth:

Higher Cost Higher Impact

Sweet Spot:

Lower Cost Higher Impact

measurement are poorly connected For example, a company may have gies, but its management performance measurement is not consistent with thosestrategies Similarly, business and IT planning may not be coordinated Thesemanagement processes operate, but not consistently or from a common base ofinformation, and are disconnected Second, many companies are organized insilos or stovepipes, and the various management activities — such as planning,prioritization, budgets, and so forth — do not take an enterprise perspective nor

strate-do they coordinate across the barriers between silos or stovepipes The businessunits are disconnected

Yet, IT has many aspects that, to control costs and assure IT’s bottom-lineimpact, have to operate across silos or stovepipes IT’s infrastructure is a sim-ple example, but the idea extends to the coordination/integration of informa-tion systems across silos and to the exchange and integration of informationacross silos Certainly, planning, prioritization, budgeting, and so forth have toconnect across these silos to be effective

DISCONNECTS

Although we need effective planning, appropriate resource decisions, workablebudgets, and so on, whether we get them depends on how well the managementprocesses work across silos, both process silos and organizational silos Opera-tional budgets and future projects result in an improved bottom line only whenmanagers and staff perform budget-setting and project selection well Budgetsand projects themselves are only as good as the planning that produces them.Budgets and projects produce results only when managers and organizationsperform effectively, without silos and disconnects getting in the way

Most companies and organizations have a loose collection of disconnectedmanagement processes around IT For example, in a large consumer productscompany, business planning does not directly connect to IT planning, whichdoes not connect to company budget processes and management performanceassessments The consequence is that the company’s IT investments and ongo-ing expenditures do not clearly support business strategies; the CEO cannot tellwhat the company is getting for its investment; and IT managers are frustrated

at their inability to communicate what IT is up to and why, to business managers

Effective Planning Processes Appropriate Resource Decisions Workable Budgets, Projects, and Operational Plans

Business Strategies

IT Actions

Line Results

Bottom-Performance Measurement Metrics

EXHIBIT 1.4 Strategy-to-Bottom-Line Value Chain

and the CEO These disconnects are the problems we need to solve in order toput the necessary management practices into action.6

As it has been more than three decades since these problems first becameapparent, there must be more to the problem than management process dis-connects We often find:

䡲 Business plans do not drive IT plans

䡲 IT plans focus on technology rather than directly addressing business egies

strat-䡲 Business managers do not see IT as supporting their strategies

䡲 IT projects do not support business strategies IT spending on ture and application maintenance does not support strategy

infrastruc-䡲 Company budgets do not reflect the results of IT planning

䡲 IT plans are shelfware that does not guide management decisions, projects,

or budgets

䡲 IT governance practices do not direct IT from a business perspective

These symptoms are characteristic of companies with disconnects What gets

in the way, fundamentally, is different views among business and IT managersabout the role that IT plays in the business, the value that IT can bring, and themanagement practices that are needed to effectively bring IT to bear on businessstrategies These different views result from, and in, the failure to plan, align,prioritize, innovate, and measure performance for IT consistently from a businessstrategy perspective This failure results from management cultures in businessand IT that are incompatible with using a business perspective to manage IT.Companies need their own version of a Strategy-to-Bottom-Line ValueChain Readers may recall Michael Porter’s work on competitive analysis.7He

proposed that enterprises have a value chain of connected, coordinated

activi-ties that individually and in concert add value to the products and services that

an enterprise produces We take that basic idea and apply it to the managementprocesses that connect the company’s planning and strategies to IT planning,budgets, and actions, and to performance management that tracks the results.This is a Strategy-to-Bottom-Line Value Chain where, as in Porter’s model, eachindividual management process both adds value and, working consistently withthe other processes, works in concert to reduce or control IT costs and simul-taneously improve IT’s contributions to the company’s bottom line By exam-ining each management process and applying the tools and practices contained

in this book to those processes, a company can “connect the dots” in terms ofits processes and optimize its Strategy-to-Bottom-Line Value Chain

CRITICAL SUCCESS FACTORS

Effective planning processes, appropriate resource decisions, and workable ets, projects, and plans are the foundation, working consistently across process

and organizational silos Based on these, we can produce the right IT actions tocontrol costs and, in turn, impact the bottom line We can control costs at thesame time as improving IT’s contributions The problem is, these three elementsare bound up in the existing management culture and processes

We can tell how well a company does in producing our five outcomes ter projects, right project choices, reduced nonperforming spending, improvedperformance of existing spending, and right management actions) by examin-ing whether:

(bet-䡲 Business and IT planning processes are fully connected and integrated

䡲 IT-enabled innovations impact business planning and result in new businessstrategies and improved ways to implement current business strategies

䡲 IT investments are prioritized against business strategy

䡲 The entire IT spend — including development, operations, maintenance,and services — is aligned with business strategy

䡲 IT business and technical performance is tracked

䡲 Business and IT management teams consistently execute the managementprocesses that improve IT’s contribution to the business’s bottom-line per-formance

䡲 Planning and management processes focus on the entire IT investment,including both Lights-On and Projects

䡲 IT and business managers participate effectively in these managementprocesses

To the extent that the above statements are not true in a company, its tive planning processes, appropriate resource decisions, and workable plans sim-ply will not be effective, appropriate, and workable The IT actions will not beconnected to business strategy, and costs will not be controlled, nor will the rightresults be produced

effec-These are the Critical Success Factors8 for getting Right Decisions/RightResults We want better projects, we want to choose the best projects, we want

to eliminate nonperforming and poorly performing assets and resources, and wewant to improve the performance of existing assets and resources Overall, wewant to reduce costs and, at the same time, improve IT’s contribution to bottom-line performance To do this requires attention to these critical success factors

COMPLETING THE PICTURE: THE NEW INFORMATION

ECONOMICS PRACTICES

We have developed five basic management practices that flesh out the to-Bottom-Line Value Chain More specifically, these practices create “yes”answers to the eight CSF questions stated above These five practices, shown inExhibit 1.5, are the basis for connecting strategy and results

Strategy-We call this set of five practices “New Information Economics” (NIE) to

reflect that they are outgrowths of the original Information Economics work

described in our first two books Briefly, we have had almost two decades ofexperience in applying Information Economics in companies in the UnitedStates, Europe, and the Pacific Rim This experience and our research has led

to the five practices, which have been applied in business and government ronments

envi-The five practices in NIE make up a set of tools for IT and business agers to use, embedded in management processes, to translate a company’s busi-ness strategies into programs and initiatives that IT can implement This bookdescribes each of these practices in detail, and gives the reader complete detailsabout what is needed to implement these practices, in whole or in part, in thereader’s company The five practices are briefly defined as:

man-NIE Practice 1: Strategic Demand/Supply Planning —Translates business

strategies into terms that give IT clear direction on what the company intends

to do (the company’s “strategic intentions”) Business and IT managers achieveconsensus on where the company is going and what IT can do to help They dothis by establishing the business drivers as expressed through management’sstrategic intentions, and translating them into the strategic IT requirementsneeded to fulfill the strategic intentions Management’s strategic intentionsestablish the drivers for IT; the strategic IT requirements establish the business’sstrategic “demand” for IT, for which IT strategic planning must deliver tech-nology solutions as the strategic “supply.” The result is a strategic agenda for theuse of IT in the business that can be translated into IT plans and, ultimately,action

Completing the Picture: The New Information Economics Practices 9

— Business Results

Business Strategies

Portfolio Management

IT Impact Management Culture Management

Supporting Practices

4: Alignment

Plans:

and IT Solutions

Operationalizing: Establish Budgets, Plans,

and Metrics based on business strategy

Resource Decisions: Justify and prioritize Programs

and Projects

Establish Business Requirements based on business strategy

based on business strategy

EXHIBIT 1.5 New Information Economics Practices

NIE Practice 2: Innovation — Changes the business strategies through IT

capabilities IT usually responds to business needs Less frequently, businesschanges its directions based on the things that IT makes possible This practiceexplicitly drives business management to uncover the business opportunities that IT makes possible and also provides a way to feed those opportunities intobusiness strategic and tactical planning The result is a more robust and com-petitive set of business opportunities

NIE Practice 3: Prioritization — Assesses the business impact of proposed

IT initiatives, prioritizes those projects, and assigns resources to the highestvalue projects The company should spend money only on projects that directlyrelate to its strategic intentions This practice tells managers which IT projectsstrongly support strategic intentions, ranking them by future business impact

As a result, money is spent in the right places, for the right reasons, with ness and IT managers agreeing on the decisions

busi-NIE Practice 4: Alignment — Assesses the business impact of existing IT

activities A dollar spent on maintaining existing systems is a dollar not spent

on new development This practice lets business and IT managers togetherdecide which existing IT initiatives should get resources, rather than assumingthat everything currently operating is critical for the business and should be sup-ported at existing levels The result is a more reasoned approach to spendingmoney for existing activities, which often results in money made available fornew development

NIE Practice 5: Performance Measurement — Measures IT performance

in ways that relate to the business It is easy to measure IT’s performance inoperational and tactical terms It is hard to measure IT’s impact on the busi-ness This practice blends the two and allows IT to determine what to meas-ure, how to manage IT based on those measures, and how to communicate its performance to business managers in ways that they can understand Theresult is improved IT performance and improved communication with businessmanagement

Practice Support: IT Impact, Portfolio, and Culture Management

The five practices are supported through value, portfolio, and culture ment concepts IT Impact Management deals with one part of the company’smanagement culture and offers a framework and vocabulary to state what isimportant to the company Portfolio Management makes it possible to considerthe entire IT spend, providing an holistic framework for making priority andinvestment management decisions Culture Management enables the company

manage-to deal with its existing culture in the company in order manage-to remove barriers manage-tomanagement process change

Business Value Maturity Model姠

Company management culture, along with limitations on the company’s ability

to execute NIE practices, are significant constraints on management’s success inadopting new management processes based on NIE practices The BusinessValue Maturity Model姠 helps a company to identify and overcome the two fac-tors of culture and limitations on the company’s ability to execute We describedesired business outcomes for each NIE practice area and we use “maturity” asthe measure of whether the company can produce the outcomes based on acombination of culture barriers and company capability to act on the results

Strategy-to-Bottom-Line Value Chain

Each NIE practice creates outcomes that help a company better connect its IT

investments to its business strategies For example, the prioritization practice connects IT investments to business strategic intentions; the performance meas- urement practice tracks progress in producing the desired business results Get-

ting these outcomes from NIE practices is half the battle The other half is tofollow through with the right actions in the business and IT organizations toactually produce the desired business results This requires an unbroken string

of company business and IT management processes that consistently apply theoutcomes of NIE practices NIE practices may be embedded in the company’sexisting management processes, and practice outcomes should result in chang-ing how those processes operate

Exhibit 1.6 expresses this embedding as a value chain of connected agement processes leading from business strategy to action The value chain isexpressed as 12 specific deliverables produced from the management processes.Each process adds value to the overall Strategy-to-Bottom-Line chain by means

man-of these deliverables, ensuring that the following processes and their deliverablesare consistent and remain focused on business strategy The connections anddeliverables ensure that the necessary IT and business actions become part ofbusiness and IT organization annual plans, and that those actions will occur.Moreover, if relevant performance measurement metrics are established, man-agement can track the actions and their results The connection to the annualplan, and to the performance measurement metrics, is critical to assuring thatthe right action occurs and the right results are produced

Twelve elements make up the Strategy-to-Bottom-Line Value Chain.9Theystart with the company’s strategic intentions (Strategic Business Plan) and con-tinue up to the Operational Plans covering the actions of each business unit,both business and IT Exhibit 1.6 symbolizes the goal for Right Decisions/RightResults in terms of the NIE practices providing the foundation and connectionsfor producing the elements in the Strategy-to-Bottom-Line Value Chain The keypoint, however, is that most of the underlying management processes or deliv-erables will already exist in a company The trick is to coordinate and connectthem using the NIE practices

Completing the Picture: The New Information Economics Practices 11

The value chain is a management process view of how things need to work.There is a lot more to it than just getting the management processes right.Specifically, a company’s existing management culture determines whether ornot such a value chain can be successful Whether the company’s leadershipteams can play the roles, and support and carry out the results, is critical This book outlines how all elements of the company’s activities, includingmanagement culture, can consistently apply the concepts and principles of RightDecisions/Right Results and New Information Economics practices Our goal

is to enable a company to achieve an effective Strategy-to-Bottom-Line ValueChain We describe the five key New Information Economics practices and therole they play in management processes We outline the value chain in the com-pany’s management processes, and the roles that the company’s senior, business,and IT leadership teams play in it We examine management culture and howmanagement culture supports each practice We introduce the Business ValueMaturity Model姠 as a tool for assessing where the company currently stands inits Strategy-to-Bottom-Line Value Chain Through Culture and IT Impact Man-agement, assisted by the Business Value Maturity Model姠, we address processand culture change issues

Right Decisions/Right Results: Getting to the Right Actions Is the Key

Too often, we find companies that do have good planning practices, do ment and prioritization well, and employ good enterprise architecture practices,

Strategic IT Agenda

Effective Planning Appropriate Resource Decisions Workable Budgets, Projects, and Operational Plans

Performance Measurement Metrics

Deliverables

in the Strategy-to- Bottom-Line Value Chain

Performance Measurement Metrics

The IT Enterprise: Four “Lights-On” Asset Pools The Business Enterprise: Lines of Business, DepartmentsEXHIBIT 1.6 Strategy-to-Bottom-Line Value Chain

yet fail to get it all together in the form of action Action, after all, is what duces results In our view, action that produces the right results is all that reallymatters.

pro-What do we mean by “right action”? An easy way to think of it is: For everybusiness strategy, whether corporate, line of business, or functional, IT should

have a clear idea of exactly what it is doing to further the strategy IT should

also have a clear idea that those things it is doing that do not connect to

strat-egy should not be done This is the basis, ultimately, for controlling cost at the

same time as improving bottom-line impact

SUMMARY OF THE BOOK

This book is about controlling spending and choosing the right things on which

to spend This problem applies to every part of the business In every case, agers need to control spending, choose the right things to invest in, and therebycontrol costs and improve impact

man-Controlling spending means controlling the total of all spending, the gate of all IT spend for a company This includes everything from operationalcosts to project costs It includes expense and capital, as well as depreciationand amortization The goal is to understand what the company spends and thenkeep that total spend within parameters established by management

aggre-Choosing the right spend means, within the total of all spending, makingthe best choices about the detailed expenditures While “controlling spending”means keeping the total within the desired parameters, “choosing the rightspend” focuses on each line item, determining its performance and contribution

to the bottom line

You are likely to be reading this book because you believe your tion must improve how it directs and applies IT You believe that IT should pro-duce greater value and have a greater impact on organizational performance.You want to know that you are spending IT resources on the right problems,and you need assurance that the IT resources produce value You want to getaction and produce the right results from IT

organiza-Further, you are interested in understating how your company can get RightDecisions and Right Results, as shown in Exhibit 1.7 Ideally, you want toachieve the “sweet spot.”

This book describes the framework, the NIE principles and managementpractices for applying them, and the changes in management culture that result.The book is the outcome of the authors’ consulting, research, and teachingengagements over the past 20 years

Beyond merely describing these elements, this book explains in practicalterms what it takes to implement the principles and practices in the businessenvironment Using a Business Value Maturity Model姠 framework, the bookalso addresses ways to assess an organization’s readiness for implementing andutilizing the tools, and gives practical advice for implementing the cultural andprocess changes required The book also explains the “takeaways” for business

IT Improvement Zone

Impact

Cost

Today’s Situation

Reduced Cost:

Lower Cost Same (current) Impact

Higher Growth:

Higher Cost Higher Impact

Sweet Spot:

Lower Cost Higher Impact

Are business and IT planning processes fully connected and

integrated?

Do IT-enabled innovations impact business planning and offer

new business strategies?

Are IT investments prioritized against business strategy?

Does the entire IT spend, including development, operations,

maintenance, and services, align with business strategy?

Is IT business and technical performance tracked?

Do business and IT management teams consistently execute

the management processes that improve IT’s contribution to

business bottom-line performance?

and IT management, detailing the overall benefits that the management teamwill realize from adopting these frameworks

DEFINE THE GOALS: MANAGEMENT AGENDA

The following is a self-examination for the critical success factors for Right sions/Right Results