Discussion on Outsourcing/Offshoring; IT Portfolio Management
Chapter Twenty-Four: Information Technology Portfolio Management
Louis Carr, Jr.
OVERVIEW
One of the most common dilemmas of information technology management is properly and adequately measuring the value of IT for an organization. In years past, many IT departments were considered cost centers. That is to say, many in management believed that funding IT was a necessary expense that had some operational (and nonstrategic) benefit. Many managers believed IT was similar to a utility—for example, water or electrical service: It was necessary but did not really offer any strategic value.
Today, most would agree that a certain portion of an IT department's service catalog is operational, but there is a portion of the department that must be strategic and align itself with the business objectives and strategies of the organization. At the highest level, IT governance is the broad discipline and framework that can help integrate business decisions and strategy with IT decisions and strategy. One of the concepts supporting IT governance is IT portfolio management.
Most technology managers and directors would define IT portfolio management as "the management of IT projects where all IT project resources, funding and tasks are managed in a prioritized, systematic manner across the enterprise." Although portfolio management of software applications can be construed as IT portfolio management, it is more common for IT projects to be the object of portfolio management. It is more common because IT projects can include more than just software application projects. IT projects include hardware projects such as server upgrades, telephone/VoIP (Voice over Internet Protocol) initiatives, and so on—not just software applications.
WHY IS IT PORTFOLIO MANAGEMENT NECESSARY?
IT departments receive requests for projects and services daily. Unless an IT department has unlimited resources and unlimited budget, choices have to be made as to which projects will be placed on hold or in a queue and which projects will be implemented right away. If an organization is facing challenges, such as having limited IT resources that need to be managed, wanting to ensure IT's alignment with business priorities, or wanting to maximize the IT investment, IT portfolio management is one methodology that will pay tremendous dividends when implemented properly. One function of IT portfolio management is to establish an objective method for scoring or rating projects. From this scoring process, a priority can be established that will help the CIO better understand which projects should be implemented and which should be placed in the queue.
IT portfolio management is necessary because IT departments have limited resources that need to be managed. In most IT organizations, those resources are in high demand; establishing which IT project will receive which services is key to delivering services to customers in a consistent and timely manner. For example, a database administrator may be needed for three different projects at the same time. IT portfolio management helps determine a priority for each project and therefore can determine which project would receive the database administrator's time now and which projects would receive the database administrator's time later.
IT portfolio management can be used to show the need for additional resources too. Using the previous example about a database administrator needed for three different projects at the same time, the IT department could solicit the sponsors of the lower-ranked projects for additional funding for contract resources in order to get those projects completed in a shorter time frame. Good CIOs will give their clients options, not edicts. Giving the sponsor the option of providing more funding to accelerate a project's timeline or allowing the project to fall in the queue based on an agreed-on calculation/formula puts the control partially in the sponsor's hands, which is a good thing.
IT portfolio management can also help ensure IT's alignment with business priorities. If the scoring/rating of projects includes questions such as "Does this project support a council or commission priority?" or "How many council or commission priorities does this project support?" one can see how higher-scoring projects should reflect stronger alignment with city council or county commission priorities. The real value of IT is shown when it can not only support a business's operational objectives as a "utility service" but when it can be a driver and a change agent for strategic objectives.
Another benefit of an organization having an IT portfolio management strategy is that the organization can better maximize its IT investment. Companies typically spend anywhere from 3 percent to 8 percent of their budget on IT. For large companies, that can be tens of millions of dollars. It obviously makes sense to spend those dollars as wisely as possible. The concept of maximizing one's IT investment is simple in principle but more difficult in practice. An organization can spend its IT dollars on any number of technology initiatives, but selecting which projects provide the most value to the organization is tricky. To start, "value" has to be defined by the business units. IT systems that lower the cost of producing widgets might be considered valuable; IT systems that improve communications might be considered valuable; IT systems that increase the reliability and consistency of providing emergency services might be considered valuable. As mentioned before, a scoring system is one way of objectively separating the value of IT projects. Scoring questions that inquire about proposed systems' ability to integrate to existing systems or proposed systems that build on existing technologies (like enterprise resource planning [ERP]) help maximize IT investment by providing new capability for a fraction of the staff training and ongoing operation and maintenance (O&M) costs as compared to a stand-alone system.
Other criteria to show the value of an IT project might be how much this proposed IT project transforms the organization. Here the definition of transforming technology is a technology that forever changes the way a business process works. For example, in the 1990s, e-mail and the World Wide Web forever changed the way businesses communicate. In the twenty-first century, a transforming technology might be social networks that increase corporate presence, brand recognition, and ultimately sales or leveraging mobile computing (over commercial carrier's infrastructure) to drive service delivery costs down and efficiency up. A project like that may be a better investment of IT staff time and budget than other proposed projects in the portfolio. One of the scoring questions could address the likelihood of this project transforming the organization. Depending on the type of organization, this criterion could be very important. A high-tech company might find this criterion very important; a city or county government agency might find this criterion less important because government agencies typically adopt transforming technology, not create it.
The other "consequence" of using IT portfolio management is that business units are forced to think more about corporate goals and less about individual department goals. Addressing this concern may be one of the biggest hurdles a CIO will have to face. Each department head has a set of goals or performance metrics to meet. If IT resources are limited, how can everyone get everything they want? The answer is that they cannot. Using a portfolio strategy forces each department head to examine what his priority and focus should be as it relates to the corporate goals and priorities and compare that to other departments' goals and priorities. Using an objective scoring model, it may be that one department has more priority-1 IT projects than another department. It is likely that each department will not get an equal share of the IT resource pool for its projects.
However, this can present an opportunity for departments that may not have aligned their projects to corporate goals and priorities in the past to do so with the help of a project scoring system. For example, in local government, agencies such as parks and library departments have to compete for funding and IT resources along with police and fire departments. Since citizens almost always list personal and property safety as one of their primary needs from local government, parks and library departments tend not to get the lion's share of resources (money, IT resources, or people). If these departments can focus on closely aligning their IT needs to corporate goals—leverage existing IT systems, such as geographic information systems and ERP, have funding for acquisition and O&M, document their existing business processes so that upgrading or converting to new systems is less time consuming, and have a resource (business analyst or application administrator) outside of IT to help manage the daily operation of the system—it is highly likely that such a project could rank higher than one from the police or fire department whose scope, budget, and resource needs are not well defined.
IMPLEMENTING IT PORTFOLIO MANAGEMENT
Implementing and maintaining an IT portfolio management program is one of the key indicators of success for a CIO. As discussed in the previous section, some sort of methodology must exist for prioritizing IT projects and the resources that support those projects because IT resources and money are both finite. If a CIO wants to implement IT portfolio management, four steps must be taken:
1 Review and document strategic business objectives.
2 Develop a scoring system to rank each project.
3 Conduct an inventory of all IT projects.
4 Apply the ranking formula to those projects.
The purpose of reviewing and documenting strategic business objectives is to fully understand the focus of the organization and to help establish what questions will be most appropriate in order to rank the IT projects according to that focus. If there are multiple strategic goals or objectives, projects that meet or support all those goals should generally be more appealing than projects that support none of those goals. Also, knowing those strategic goals will help a CIO align internal projects (like server upgrades or UPS replacement) to those strategic goals, since internal projects compete for IT resources too.
For the twenty-first-century CIO, understanding business objectives is even more important than understanding network protocols and C++ code snippets. Forward-looking organizations can leverage technology to improve delivery of services or improve the overall experience of customers when interacting through web sites or telephone. Unlike other department heads, CIOs must know a lot about technology, but they must also learn a lot about every other business unit. For example, the director of marketing does not have to understand network protocols or active directory security schemes, but the CIO should understand concepts such as branding, marketing mix, and the fit of one's product in the marketplace. CIOs must have a broad understanding of business in general so that as they review and document strategic business objectives, they understand those objectives and create synergy between them and the technology projects.
The next step in implementing IT portfolio management is to develop a scoring system to rank each project. Every organization will have different criteria, but most can start with a basic set of criteria that transcends organizational size and corporate construct (i.e., government versus for profit versus nonprofit). Those criteria are strategic alignment, business process impact, technical architecture, direct payback, risk, and mandatory changes. Those criteria are defined as described next.
· Alignment to corporate strategy: The alignment of IT investment strategy with the organization's business goals and objectives
· Business process and cultural impact: The impact on the requirement for the company to redesign business processes and culture (too much change too quickly is very difficult)
· Technical architecture: The integration, scalability, and reliability of system components (databases, operating systems, applications, and/or networks) for the project
· Direct payback: The financial benefits that a project can deliver, such as cost savings and better information
· Risk: The identification of the proposed investment's exposure to failure or underachievement
· Mandatory changes: The determination of the necessity to change because of a change in law, rules, or regulations
A spreadsheet can store and sum each criterion and the scores for the supporting questions. Tables 24.1, 24.2, 24.3, and 24.4 show how the supporting questions could look and total possible scores. For the "strategic alignment" criterion, projects that support multiple strategic objectives would naturally receive a higher score than projects that support none or one strategic objective. This technique would be used for each subsequent criterion.
Table 24.1: Alignment to Corporate Strategy
|
0–5 |
This project supports one strategic objective |
|
0–5 |
This project supports two strategic objectives |
|
0–5 |
This project supports three strategic objectives |
|
0–5 |
… |
|
0–20 |
TOTAL |
Table 24.2: Business Process and Cultural Impact
|
0–5 |
Ability of technology to cope with changing business processes |
|
0–5 |
Support for industry best practices |
|
0–5 |
Ability of technology to measure process performance |
|
0–5 |
… |
|
0–20 |
TOTAL |
Table 24.3: Technical Architecture
|
0–5 |
Level of compatibility with preferred server environment |
|
0–5 |
Level of compatibility with preferred database standard |
|
0–5 |
Level of compatibility with preferred networking standard |
|
0–5 |
… |
|
0–20 |
TOTAL |
Table 24.4: Project's Weighted Score
|
Raw Score |
Weighting Factor |
Criterion |
|
20 |
2.0 |
Alignment to corporate strategy |
|
20 |
1.0 |
Business process and cultural impact |
|
20 |
0.7 |
Technical architecture |
|
|
64.0 |
TOTAL |
Naturally, the supporting questions and the range of scores for each question can be customized based on the organization's needs. The range of scores, 0 up to 5 or higher, will be based on the importance of each question relative to that criterion. Optionally, a weighting factor can be added to each criterion.
Weighting factors are a good way to allow the organization's IT steering committee to help determine which criterion is most important to the organization. An IT steering committee should be formed of department heads of various backgrounds and responsibilities. A credible IT steering committee represents a cross section of the business and has the influence and authority to affirm or deny the CIO's decisions on the strategic direction of IT.
In government, "direct payback" probably would not receive the highest weighting factor. It would probably receive 0.5 or 0.6. That would place less emphasis on IT projects that focus on direct payback. By its very nature, government initiates many programs that do not make money. Maintaining public parks or public streets in neighborhoods are not revenue-generating programs but are high on the list of government programs in many cities.
After the scoring sheets have been developed, the next step is for the IT department to conduct an inventory of all IT projects and apply the ranking/scoring formulas to all those projects. This will give the CIO a good picture of the relative importance of each project. The list of projects can be sorted and distributed to the organization's IT steering committee for review and discussion. Depending on the complexity of each criterion and the supporting questions, completing the rating spreadsheet for one project may take only 30 minutes. However, questions should be developed in most criteria that require some input from the business units. IT can answer the technical architectural questions, but the business unit should have supporting questions that give them input into rating the importance of the project from its perspective.
MEASURING EFFECTIVENESS OF IT PORTFOLIO MANAGEMENT
For any program to be considered a success, there must be a way to measure it and objectively define what constitutes success. CIOs who embark on this type of initiative should define clear parameters and metrics for what constitutes success or at least what constitutes acceptable effectiveness.
One metric that can be used to determine the effectiveness of an organization's IT portfolio management program is on-time and on-budget percentages of projects. Another measure is the project management office's ability to match documented requirements to actual functionality in systems it has deployed. The CIO suggests to the IT steering committee an acceptable percentage of on-time and on-budget projects, say 80 percent. This would mean that if at least 80 percent of the projects in the portfolio are completed on time and on budget, the CIO would meet the measure of effectiveness. The CIO could also suggest that at least 85 percent of documented requirements match actual functionality from each priority-1 project. This measure is especially useful at determining how well IT (and the business unit) did in terms of implementing a solution that closely matched the requirements gathered during the initiation and planning phases of the project.
CONCLUSION
In summary, IT portfolio management is one of several tools CIOs can use to track internal performance measures of the project management office and, to some degree, the entire IT organization. Techniques such as measuring effectiveness of an organization's IT portfolio management program using on-time and on-budget percentages of projects or the project management office's ability to match documented requirements to actual functionality can be good performance measures. The other more strategic use of IT portfolio management is to help the organization prioritize IT projects so that limited resources can be managed, ensuring IT's alignment with business priorities and maximizing IT investment.