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Xcel Energy *

Ray Gogel starts his mornings with a close look at his dashboard. Not the one in his car, the one on his office desktop. The Chief Information Officer of Xcel Energy is setting his daily agenda by reviewing the status of his company’s IT projects. He speeds through the projects marked with green lights, slows down to scrutinize those marked yellow, and stops to focus on those in red. The portfolio management system instituted by Gogel and his team has already winnowed out low-value or redundant projects, so everything on Gogel’s dashboard is critical to Xcel’s business. The stark clarity of his dashboard display focuses his attention on projects that aren’t currently making their metrics—projects that are falling behind schedule or deviating from budget, in addition to recognizing the improvement of projects that have moved back to a green healthy status. Gogel sees an important part of his CIO’s job as getting those yellow and red projects back to green, as they not only are an indicator of his group’s delivery levels but are also key value drivers for the organization. As the majority of his portfolio generates a positive return on investment, any delay or problem in delivering the project also means a reduced return to the company and its shareholders.

OLD INDUSTRY, NEW APPROACH

A decade ago, it might have been uncommon to see this kind of innovative information technology in the utility industry. Gas and electric utilities in the United States were almost all regulated by government, commonly guaranteeing the utilities a specified rate of return after covering approved costs. This regulatory structure did not generally encourage cutting-edge approaches to cost reduction or service delivery, since the perceived risk usually exceeded the likely reward.

“My goal when I arrived at Xcel Energy was to apply commercial rigor and accountability to IT to gain credibility with the corporate and business unit leadership. This in turn provides a solid foundation for evolving IT into a transformational agent and value driver for the business.”

Ray Gogel, CIO, Xcel Energy

But the wave of deregulation that swept the industry in the late 1990s changed that picture forever. Utilities sought ways to improve efficiency as they were freed to reap the benefits of those efficiencies. Scale became more important, spawning a wave of mergers and acquisitions. The 21st century seemed to promise a much different utility.

As it turned out, this rapid deregulation spawned some excesses and exploitation, such as the Enron experience. Yet beyond the headlines, mainline utilities were making big strides towards innovation and agility—changes for the better, changes that would endure.

Xcel Energy provides an excellent example of a “transformed utility.” Formed in 1999 by the merger of New Century Energies of Denver and Northern States Power of Minneapolis, it is the fourth-largest combination electricity and natural gas company in the United States, with 5 million customers in 11 states, 11,000 employees, and annual revenue of $9.5 billion.

When the merger closed, Xcel found itself with two, sometimes three, of every system and application a utility would need. Beyond the disparate systems stood different ways of managing and approaching IT. At first, this wasn’t necessarily seen as a problem, since the trend toward deregulation led management to believe they would end up with a group of autonomous business units anyway, each with its own systems. But as the deregulation trend waned, IT strategy shifted toward consolidating these disparate IT systems and functions. Why? Xcel Energy’s leadership found that distributed IT made it essentially impossible to get a consolidated picture of overall IT demand, to control aggregate IT spend, or to create technology synergy across the company. Beyond that, the multiple IT organizations were contributing to a technology footprint that was already out of control and getting worse. To cap it all, delayed and over-budget projects had become too common.

ORGANIZING FOR CHANGE

The business and IT leadership of Xcel Energy had a good handle on their business goals. They already had a set of key performance indicators (KPIs) to evaluate business performance. They also believed with a single system and consolidated, reliable, real-time data, they could deliver far more IT value to the business.

But they were keenly aware that the existing business units were accustomed to running their own chunks of IT relatively autonomously. A centralized IT would need authority and standing in the corporate structure to succeed. So a new business unit was established to house IT—Business Systems—with 950 employees including business analysts. The new CIO, Ray Gogel, who arrived in April 2002, would report directly to the chief operating officer. This replaced the old structure, where corporate IT was part of the Shared Services organization reporting to the Chief Financial Office (CFO).

Xcel Energy delivers IT services in close partnership with IBM Global Services. Xcel characterizes this as a “third generation” relationship because of its maturity. IBM is a full partner, sharing the same scorecard for success. The same indicators drive the behaviors of both partners. In the past the relationship was traditional vendor–client with discernible walls between the two. Now, work is seamlessly performed in an integrated team; it’s hard to tell who gets a paycheck from which company.

Working with IBM, Xcel Energy’s Business Systems unit set out to govern and run IT as a business, with clear processes, accountability, and commercial rigor. The goal: deliver higher value to the business at lower cost. The primary focus: shift the balance of IT spending away from routine “keep-the-lights-on” activities and toward more strategic IT projects that improve business performance and competitiveness. The means: effective governance to provide IT services more efficiently and deliver strategic projects to market more efficiently by improving the decision-making and delivery processes. This focus on project delivery is also a key component in Gogel’s efforts to drive business transformation, with his stated mission to “Drive business transformation that results in an extraordinary difference at Xcel Energy.”

INVOLVING THE BUSINESS IN IT

Gogel knew he couldn’t reach his goal without full participation by the company’s business units. As the company recentralized IT, he felt it was essential that the business unit leaders develop trust in the new structure. He worked closely with them to translate their strategic and operating requirements into an enterprise-wide technology strategy.

“When we designed our IT governance structure, the first thing we did was reach out to the business units to understand their strategic and operating requirements. We then translated these into an enterprise-wide technology strategy, and put in place a structure that kept the business side involved by giving them real-time visibility and control over the IT initiatives and operations important to them. Our partnership with the business side is so much stronger as a result, because they can see the value we deliver every day.”

Ray Gogel, CIO, Xcel Energy

The strategy calls for keeping the business side involved in IT programs and projects to maintain alignment with evolving business goals and priorities. “We want to demonstrate value and resolve problems,” said Mike Carlson, Xcel Energy’s vice-president of business transformation and customer value. “We are trying to eliminate the black hole between users and IT.” This required finding a comprehensive way to capture, analyze, and prioritize IT demand while providing business units clear, easy-to-access views of IT processes and activities.

In other words, Gogel and Carlson wanted to make IT transparent to the business. The participation of business leaders would be both welcomed and facilitated at every stage of projects being created to help their units.

TWO MAJOR INITIATIVES TO TRANSFORM IT: MANAGED PORTFOLIO AND MANAGED DEMAND

Gogel, Carlson, and their team envisioned two major initiatives to transform IT. These two initiatives, implemented in sequence but closely interrelated, were designed to drive down the cost of routine, “keep-the-lights-on” IT activities to free more funding for strategic projects, while more effectively governing both kinds of activities with improved visibility and control.

The first major initiative encompassed a program management office (PMO) to manage delivery of projects and a formal portfolio management system for evaluating and prioritizing strategic IT projects. The PMO was initially set up to manage $100 million of mostly discretionary spending, including all mandatory regulatory and compliance initiatives, via a set of standard and consistent metrics.

The second major initiative was to implement an automated demand management system to capture all routine requests on IT, insert business governance, and manage fulfillment of the demand. Requests captured by the new system include a wide range of typical IT activities for which no consistent corporate-wide processes existed, and which were largely handled manually at significant expense. Purchases of hardware and software; employee additions, subtractions, and moves; password resets; and similar activities contributed to a $135 million annual O&M budget for this “keep-the-lights-on” portion of IT. The demand management initiative would be implemented as a second phase, following successful implementation of the portfolio management system. These two initiatives, combined with consolidating all company-wide IT functions into one business unit, enabled Xcel Energy to manage the complete portfolio of IT investment and begin to drive transformational change into the organization.

Because they wanted these initiatives to be integrated with each other and with overall IT operations, Xcel Energy selected Mercury IT Governance Center software for portfolio management, program management, and demand management. A particular appeal of these products, Carlson said, was their use of customizable desktop dashboards to provide real-time status on requests and projects, with the ability to roll up the data in ways that generated metrics meaningful to Xcel Energy’s operation. These dashboards could be personalized on both the IT and business sides, advancing the goal of making IT initiatives and operations transparent to business stakeholders. Due to the strategic nature of these initiatives and the success Xcel Energy has had, Mercury has also become one of Xcel Energy’s “third generation” partners and a member of its Strategic Advisory Board along with IBM and three other companies.

METHODOLOGY AND PEOPLE FIRST

Following Ernest Hemingway’s famous dictate, “Never confuse motion for action,” Xcel Energy’s Business Systems group resisted the temptation to dive into its new PMO, determining instead to first establish a solid governance methodology and build an effective team.

They started by identifying essential ingredients for a successful PMO. These included:

· Clear and consistent governance policies, standards, and processes

· Automated core processes

· Support from and mentoring of project managers for the PMO’s new “end-to-end” processes

· Achieving and maintaining close alignment with business units on PMO goals and processes

· Special emphasis on the financial management of projects

· Creating an understanding of commercial rigor and accountability

· Driving recognizable business transformation through existing IT investment

· Leading with a “practice what we preach” example by running the PMO initiative itself as a project.

Team members were selected based on specific skill sets determined to be necessary for success. The PMO director position required not only organizational management skills, but also business process reengineering and transformation experience. The manager for policy, process, and standards had to have extensive project management skills and process engineering experience. The manager overseeing PMO finance came from the financial organization and helped build the foundations. The PMO project manager had to be not only an experienced project manager (PM), but an experienced process engineer with extensive subject matter expertise. Business unit liaisons had to be able to promote and facilitate the use of the end-to-end process inside their organizations. All of these people had to have what Carlson calls “a bias for results” in addition to a passion for process.

Of these ingredients, the financial portion of the process soon emerged as especially important. Company leadership wanted a standard measure of value delivered against which the performance of all IT projects could be judged. The measure chosen, economic value add (EVA), is very similar to return on investment (ROI), with a weighted average cost of capital. Exhibit C shows a snapshot of how EVA is measured at Xcel Energy. The bars represent dollars currently committed to IT projects, by business unit. The line graph represents current percentage of return on each business unit’s investment. For example, the Energy Markets business unit was receiving a 409% return on its portfolio projects, while the CFO was experiencing a negative return. Negative returns are experienced either when the bulk of projects in the unit’s portfolio are mandated by regulation or required for compliance like Sarbanes-Oxley. Throughout the portfolio management process EVA is recalculated, and serves as a key criterion for project approval. EVA serves as a barometer of health. For example when EVA is strong, potentially lower return infrastructure projects can be taken on to increase the return of expected future projects. Beyond the measurement of value, Xcel Energy leadership believed that how the purse strings were controlled could play the decisive role in how successful the PMO would be. It was decided that Business Systems (the IT organization) would control funding for IT projects, even those requested by business units. The business units themselves would have to put some “skin in the game” up front to demonstrate their support of proposed projects and risk charge-backs for “unapproved” projects.

EXHIBIT C SNAPSHOT OF ECONOMIC VALUE ADDED (EVA) FOR IT PROJECTS AT XCEL ENERGY

NEW END-TO-END PROCESS

The biggest driver of the PMO was the recognition that the existing method of approving and funding IT projects was seriously flawed. Business units would express a need; IT would respond with a proposal and solution outline. Approval of the proposal by the business unit was coupled to full project funding. However, at this early stage, many projects were “half baked.” The business side might not have thought through its needs carefully; IT might not have asked the right questions needed to elicit sufficient detail. The usual result was a continuing stream of project change requests (PCRs) as work progressed and the actual requirements came to light. These PCRs often led to added costs and project delays, which in turn eroded business unit trust in IT’s estimation capabilities in particular, and its project management skills in general. As an illustration, prior to the new process PCRs consumed over 69% of Xcel Energy’s IT capital budget. The Xcel Energy Business Systems leadership, working closely with the core business units, remapped the prior project process to a stage gate view. This provides a consistent, easy to understand set of requirements to carry an initiative from the idea stage through adoption into the portfolio, then execution through the PMO and post-implementation benefits realization. See Exhibit D .

EXHIBIT D EVOLVING END-TO-END PROJECT MANAGEMENT AND APPROVAL PROCESS AT XCEL ENERGY WITH GOVERNANCE PROCESS TOUCH POINTS

GOVERNING THE PROCESS

The PMO used powerful incentives to ensure the business units would collaborate closely with IT in selecting only the highest value proposals for implementation. Xcel Energy employs a zero-based yearly budgeting process that places IT project budgets under the purview of Business Systems. These are allocated to mandated legal and regulatory projects first, then to other ideas/projects under consideration for the next year based on their expected EVA. Proposed ideas/projects stand on their merits, with budget going to those expected to deliver the highest value.

Even after an idea/project is budgeted for the coming year, business units must still prove its value through the PMO process. If they cannot, the budget is made available to other opportunities. Business units expense all costs associated with idea development in stage 1 and stage 2 from their operating budgets. When a business unit approves an idea at the end of the planning stage ( Exhibit D , Gate 2.) to prepare a business case, up to 20% of the total estimated project budget may be approved to fund the business case stage and prepare the business case. This funding is administered by Business Systems from its central capital budget, and is drawn against the business unit’s earmarked funds. If the item under consideration does not have an earmarked budget, dollars can be obtained from the general pool or from canceling, delaying, or otherwise changing other in-process projects or earmarked projects. It is the expectation that all ideas approved for business case stage funding will ultimately be approved for delivery, because if the business case is not approved (the project rejected), the business unit may be required to cover the costs with its operating budget. In addition, that entire earmarked project budget is then removed and made available for reallocation to any approved project from any business unit.

As an illustration of Xcel Energy’s strong governance processes, the business case stage is managed as a project with a funded budget and regular status reporting. At its conclusion, candidate projects face the third gate in the process to receive full funding. When a business case project is approved for full funding, the EVA benefits are communicated to finance and will be subtracted from the sponsoring business unit’s next year operating budget. Project approvals are tiered, depending on budget. The business unit project sponsor will present the business case to the PMO director, lead architect, finance director, and the business unit’s business technology executive (BU CIO or equivalent). The intent is that the business case is strong enough to fund the remaining 80% of the project’s estimated cost. This team can give final approval of all projects with a total budget of up to $250,000. Projects above this level go through a series of sequential reviews depending on size, all the way up to corporate board of directors’ approval if the project is budgeted at $10 million or more. It’s also important to note that estimated costs are always targeted to be +/− 10% of what will be incurred in the next stage of the process.

This method of governing budgeting and funding may seem punitive on the business units, but it gives them a compelling incentive to choose among candidate ideas carefully, and participate seriously in the evaluation of them. Failing to do so may impact their bottom line. The evaluation activity throughout the governance process is made easier for the business units through detailed real-time metrics of all proposals and projects in various stages, which are available to both IT and business unit participants through the dashboards used in the Xcel Energy PMO.

IDEA AND PLANNING STAGES

The process begins simply with ideas. Anyone in the company may submit an idea within their business unit by providing sufficient information to permit objective evaluation of it. Each idea is reviewed to decide if it merits further attention and approval to continue to the next stage (planning). Each business technology executive (the senior liaison between the business unit and IT) has regularly scheduled meetings where submitted ideas are discussed with each idea’s sponsor in the business unit. These leaders decide which ideas are eligible to advance to the next level, the planning stage. Gate 1 in the process occurs here with business units deciding whether they will fund the planning stage, a short feasibility study, to identify potential fatal flaws and further refine the idea. Costs of the planning stage are expensed within the sponsoring business unit. This initial hurdle is a high one. Of the 309 ideas currently in the system only 12% have progressed past the idea gate and into further stages, as shown in Exhibit E .

EXHIBIT E DISPOSITION OF THE FIRST 309 IDEAS ENTERED INTO THE PORTFOLIO MANAGEMENT SYSTEM

Each idea submitted for consideration by a business unit is evaluated using consistent metrics. These include nine criteria for scoring business value and seven criteria for scoring technology innovation. These are plotted on axes in bubble charts generated by Xcel Energy’s portfolio management system, using the data entered and managed by the project teams as shown in Exhibit F . The data is focused on quantifying the business value (the Y axis) and the technology innovation introduced by the project (the X axis). The estimated cost of the project is used to determine the size of the “dot” plotted on the graph.

EXHIBIT F BUBBLE CHARTS EVALUATING CANDIDATE PROJECTS IN IDEAS AND STAGESa

a Note the significant reduction in projects in the right-hand chart, the effect of winnowing out low-value candidates.

Xcel Energy uses nine business value criteria including:

· EVA—Economic Value Add, taking into account hard benefits and all costs

· Does the idea align tightly with corporate priorities? If not, how much is it off?

· Would the idea have a corporate-wide customer?

· Would this idea impact Xcel Energy and its customers globally, geographically, or just a specific product line?

· Would it potentially affect Xcel Energy’s brand reputation positively or negatively?

· Will it increase or decrease service delivery reliability?

· How positively will it impact daily processes, enhance customer service, and improve capabilities?

Xcel Energy uses seven technology innovation criteria including:

· Does this align with the corporate architecture footprint? If not, how different is it?

· Does this simplify the existing architecture/process, or complicate it?

· How innovative is this initiative in the energy industry? Does it use an ascendant technology or one that is declining? Is it addressing a new industry issue or one that’s lagging?

· Will this initiative improve the company’s technological flexibility, enabling it to add more value faster in the future?

· Is this a catch-up, status quo, or leapfrog activity in terms of competition?

· Who will Xcel Energy rely on to deliver this initiative: in-house resources, a single vendor, or multiple vendors who can work in a partnering model?

Beyond these business value and technology innovation criteria, other business drivers are captured and analyzed in this process including regulatory impacts, the degree to which the project is discretionary, the strategic nature of the project, and detailed EVA and benefit information.

As demonstrated in Exhibit F , a large number of projects appear on the screen during the initial evaluation round in the idea stage. Those that appear toward the upper right corner of the graphic are those that earned the highest combined score. These are generally the top candidates to move forward, although specific needs and opportunities may dictate projects with somewhat lower scores, such as those required by government and/or industry regulation.

In the next stage, the project planning stage, more research is done on the idea and the business value and technology innovation criteria reevaluated. This refinement process winnows out a majority of candidate projects, determining that they would deliver too little value, are poorly aligned with business priorities, or overlap significantly with other projects. Projects in this stage that don’t appear to be above the bar are a challenge to the sponsor to increase the value of the project or risk losing it. Stopping low-value or redundant projects from being funded in these first two stages is saving Xcel Energy millions of dollars per year.

At the conclusion of the second or planning stage, the business unit sponsor presents the idea (depending on size of the project) to the business unit’s business technology executive, finance director, and director of the PMO using an established presentation template. The template ensures all potential projects are comparable and understandable in a short time frame, and that a good decision can be made on whether the idea should be approved to move on to the next stage, creation of a detailed business case funded by the PMO (not the business unit).

BUSINESS CASE STAGE

This stage fully explores the business value, cost, and impact of the potential project on Xcel Energy’s business. The first step of the business case stage is where all participants attend business case training. The training is a 40 slide presentation that details what the process is, what lessons have been learned by other projects during this stage and what is expected of the participants. All participants must clearly understand the objective is on-time, on-budget delivery of the business case and the resulting value proposition for the company. Scope creep is allowed only if it adds more value to the business case, and is approved through the formal change request process.

The deliverables of this stage include everything required to execute the project if it were to be approved. Project plans, contracts, required resources, risks, processes, architectural blueprints, integration requirements, integration approaches, and highly detailed cost/benefit or EVA analysis. Similar to the planning stage, the goal of the business case stage is to have financial estimates within plus or minus 10% of what the next phase will cost—in this case the final project cost if execution is approved. Due to the detailed financial analysis performed during this stage, the resulting economic impact of moving the project forward (or holding it back) is very clear. Also in this stage, a detailed architectural viability assessment is performed, determining the alignment to the technology architecture blueprint and extensively evaluating technology risks.

A detailed risk management plan is also prepared in the business case stage. Risks are evaluated in two dimensions: probability (high/medium/low); and impact (high/medium/low). Any risk in either dimension that is medium or high must have a risk mitigation plan created for it. Medium and high risks have an entry created as part of the project plan to ensure it is managed and not overlooked. Each risk is also created in a separate “log” entry within the PMO software to provide visibility to Business Systems and the BU management to the degree of risk outstanding on the project.

Projects are ultimately judged on a combination of EVA, risks, and other factors. Just as important as the number crunching that results in project rankings is clear communication of expectations between top executives. For example, often times when a project is approved, the CIO and business unit president sit down together, discuss, and agree on a set of expectations for project results. This top-level human communication reduces the chance of misunderstandings and finger-pointing later.

CALCULATING CANDIDATE PROJECT SCORES

Xcel Energy calculates detailed return on investment or EVA (Economic Value Add) metrics for every idea as part of the idea, project planning, and business case stages with sharper knives coming out in each subsequent stage. In the business case stage, all prospective costs of the project are analyzed and estimated, including, labor, outside services, hardware, software, and other costs. On the benefit side of the ledger, both “hard” and “soft” benefits are scrutinized. SIXFOLD RETURN: Between June 2003 and July 2004 Xcel Energy approved $100 million in PMO projects that are expected to return $600 million in value to the company over a seven-year life. Hard benefits include increased revenues resulting from the project as well as both capital and labor savings. Particular attention is paid to whether a project would reduce future full-time-equivalent (FTE) employees or contractors. As an example, if solid metrics prove growth in application usage has caused the addition of two FTE database administrators (DBAs) in each of the last several years, then a project to implement an application that eliminates this growth in DBAs can count these future projected labor savings as a hard benefit.

Soft benefits are, as the name suggests, somewhat intangible and difficult to measure, yet nonetheless very important. Project planning and business case stages analyze whether a particular project would improve service quality or improve responsiveness to customers, contributing to an enhanced reputation and a stronger brand. Where these benefits can be objectively quantified, they can be counted as hard benefits and included in the project’s EVA. Where such benefits do not flow directly to the bottom line, they are counted toward the project as more of an intangible.

As candidate projects move through these first three stages, the scores earned by each project typically decrease. As ideas are fleshed out and put under the increasingly harsh light of the planning and business case stages, the business value tends to descend from the clouds and the innovation score usually drops as well. This is not viewed as a bad thing, since most ideas of any kind tend to overestimate benefits and underestimate costs and risk. The Xcel Energy PMO puts the emphasis on the relative value of projects being considered. The flip side of declining value scores is the increasing confidence in the accuracy of the scores as more analysis is completed.

Xcel does not treat benefits lightly. Business units are held accountable for realized expected benefits when a business case is approved. To ensure this point isn’t lost, the last stage of the project process—post-implementation—serves to validate that benefits are being realized and costs were as expected. This stage will be discussed later.

PROJECT VALUATION SCORECARD

As the business case stage nears completion, Xcel Energy Business Systems (IT) performs an independent evaluation before a decision on full funding is made. Each case is evaluated in three areas: project risk, business risk, and financial return. A “perfect” project would score 100, but in practice this is unattainable (example, Exhibit G ). The score achieved represents a comparative assessment against the ideal. This is used to demonstrate that risks and return have been carefully evaluated, and is intended to provide a general “yardstick” on the project’s chances of success at this point. It’s important to remember that all approved projects at Xcel Energy are critical and intended to be successful, so this scorecard is more a metric of how much oversight will be required to ensure the project is successful.

EXHIBIT G BCS DASHBOARD*

* Note: displays estimated business case value against total possible for the candidate project shown in Exhibit H.

PMO PROJECT EXECUTION STAGE

Once a business case is approved for full project funding, it moves forward rapidly into the execution stages. However, on some occasions other projects may need to be delayed or cancelled to fund very high ROI opportunities that Business Systems and the BU sponsors feel should be accelerated.

Project start-up is expected to take no more than five days, as the preparation has really been done in the business case stage. During start-up, contracts are signed, people are brought on board, the scope is rechecked, kick-off meetings are held and the project plan is baselined. This can all be done quickly because the business case stage included development of all required pricing information and estimates, preparation of required contracts, and legal review. These items are incorporated into the business case stage to ensure that cost estimates are as accurate as possible for decision-making purposes. Therefore, for approved projects, all that should be required in the initiation stage are signatures and kick-off meetings.

Throughout this process, all project actions are consistently monitored, enforced, and reported to stakeholders through Mercury dashboards. Project status can be viewed in any number of ways, depending on the requirements and interests of each executive team member. Major projects with multiple independent components are typically termed “programs,” with individual components managed as projects within the program. Each project in a program is managed independently, but tied to the overall program schedule, with all data in the projects automatically rolled up into a single program view.

A typical project dashboard format (see Exhibit H ) would include summary information such as business sponsor, project manager, start and end dates, and budget, as well as completion status and detailed performance-to-date against schedule and budget. These dashboards offer drill-down access to more detailed information in each category by clicking on the item of interest.

EXHIBIT H PORTION OF A DASHBOARD FOR A TYPICAL PROJECT IN XCEL ENERGY PORTFOLIO

Xcel Energy uses a measure called “project health” to give a snapshot view of each project’s status ( Exhibits I and J ). Seven key indicators of project health have been identified that are measured against the plan baseline including budget expended to date, budget expected at completion, milestones achieved to date, tasks completed to date, labor hours expended to date, labor hours expected at completion, and project issues. Using this data, project status is distilled into traffic signal (red–yellow–green) displays to instantly alert executives to the relative health of each project. A 10% variance (over or under) on any of the metrics automatically turns the project yellow; a 15% variance turns it red. Similarly, missing a deadline to submit project status reports immediately turns the project red. The use of agreed-upon metrics to measure project health has replaced a variety of subjective measures used by individual project managers, which made truly objective comparisons impossible.

EXHIBIT I GRAPH OF PROJECT HEALTH FOR ACTIVE PROJECTS WITHIN A BUSINESS UNIT AND COMPANY-WIDE PROJECT HEALTH ACROSS BUSINESS UNITS

EXHIBIT J PROJECT ISSUES, DEPENDENCIES, PCRS, AND RISKS BY STATUS, WHICH ALSO AFFECT PROJECT HEALTH

Again, drill-down capabilities in the software allow executives on both the business and IT side to determine causes of project problems. For example, the cause of a project’s red indicator might be as simple as the oversight of an executive who forgot to sign off on a required project approval in a timely manner, or more complex, such as the unexpected departure of an alliance partner’s key project person or the simultaneous slight delay of multiple unrelated tasks.

Every time a project goes yellow or red, a root cause analysis is performed, assisted by the drill-down capabilities of the software. An action plan is quickly created and implemented, with results monitored and published for stakeholders to see. The real-time communication of these key status indicators to all levels of the organization, including the individual business unit presidents, drives the collaboration necessary for successful project delivery.

POST-IMPLEMENTATION REVIEW

Every completed project that was approved based on value delivered to the bottom-line is required to undergo a post-implementation review stage driven by the corporate CFO and the sponsoring business unit. Here lessons learned are collected, the real cost of the project reviewed, and actual benefits are validated against the expected value committed to when the project was approved. For example, one project promised an EVA of 20% to be achieved by redeploying people and increasing revenue. The value measurement criteria that were defined during the business case are now validated to determine whether the expected value is being delivered. In addition, costs are reviewed to ensure all relevant costs have been included.

Business Systems participates and helps perform a root cause analysis if promised benefits are not fully realized. Where possible, corrective action is then taken to achieve the full expected value, because the CFO may deduct some or all of the shortfall in projected benefits from the business unit’s operating budget. The enforcement of this phase serves as a powerful incentive to all participants to make the business case estimates as realistic as possible. In addition, the sponsor is sent a survey to capture lessons learned which are then used to improve the overall process.

SINGLE SYSTEM OF RECORD

What makes these scorecards, and all the PMO data, reliable and actionable is the acceptance by all project participants at Xcel Energy—from the CEO, CFO, and CIO, to business unit leaders, and all project team members, whether in-house, outsourced, or vendor-related—of a single system for managing the portfolio and projects. Projects cannot proceed except by use of the system, so the practice, still common in some companies, of “renegade” projects operating without sanction has been all but eliminated at Xcel Energy. By performing all project actions through the system—from requesting consideration of an idea, to analyzing costs and benefits, to executing the resulting project—all data is uniformly captured and used to generate consistent metrics. There is no more checking and reconciling versions of project status spreadsheets at update meetings; project data is always available in real time through dashboards, putting everyone on the same page.

This automated data capture also automatically generates a complete audit trail. This is not only beneficial to double-check who performed which actions at what point in time, but it also provides a strong foundation for demonstrating the key processes and policies that IT control assumptions are based on. The single system also plainly displays the resources allocated to each project, making conflicts visible and easier to resolve, as well as greatly facilitating forward planning.

Xcel Energy Business Systems intensively mines the information in the system for continuous improvement analyses. They track and analyze PCR trends, forecasting accuracy, budget accuracy, and many other metrics. The assurance that these metrics are consistent and reliable give them confidence in using them to continually identify opportunities to improve processes and increase value delivered to the business.

MANAGING DEMAND ON IT

While Xcel Energy’s leadership believed that effective management of its strategic IT project portfolio was essential to growing and transforming its business, they believed they needed to go farther. The percentage of the overall IT budget spent on routine, “keep-the-lights-on” activities was almost twice as high as the spending on strategic IT projects in 2002—63% to 37%, according to Mike Carlson. At this level, Xcel Energy was actually toward the positive end of the spending-split spectrum. Numerous surveys in recent years show that in most companies the ratio between routine and strategic IT spending is generally between 4 to 1 and 2 to 1.

Even at a 63–37 split, Xcel Energy was spending $135 million annually in routine IT operating and maintenance costs, with limited end-to-end visibility or control. IT services were requested and delivered differently in each Business Unit through disparate, nonintegrated systems, some of which were informal and marginally documented. Xcel Energy’s IT leadership saw both an opportunity and a requirement to control these costs: an opportunity to improve service delivery, gain insight into spending trends, and increase the business value provided; and an imperative to drive down these “keep-the-lights-on” costs to free more funding for strategic projects.

At the beginning of 2004, Xcel Energy implemented a unified system to manage demand used by 8,000 employees and contractors. All requests for IT services now had to be submitted through a web browser interface, using a request menu and templates to gather information. Requests move through an automated work flow, gaining review and approval first from the requestor’s business unit, then from IT. Requests are routed to authorized approvers, with clear approval criteria built into the work flow and automated reminders and escalations to expedite decision making. The system then automatically routes approved requests through the fulfillment process. See Exhibit K .

EXHIBIT K IT DEMAND AT XCEL ENERGY CATEGORIZED BY REQUESTING UNIT, ONE OF MANY METRICS AVAILABLE IN REAL TIME

Xcel sees multilevel benefits from this demand management system. At the enterprise level, it helps drive the shift toward more strategic spending by reducing routine IT spending, and by making discretionary spending far easier to identify and control. At the Business Systems (IT) level, it enables real-time visibility into all discretionary IT demand, provides the ability to easily adjust approvals based on business priorities, and gives IT leaders the ability to analyze service delivery performance. At the user level, the clear interface and automated processes increase the ease of doing business with IT. The metrics generated by the system and monitored by business unit leaders provide a clear understanding of what it costs, in money and effort, for IT to provide these services and allows them to prioritize their spending to maximize business value and return. The labor-reducing automation increases the value of IT spending on routine activities.

By understanding all the demand on IT, analyzing it, and inserting appropriate controls to manage demand, Xcel Energy’s leadership sees the organization transitioning from the common IT model of heavy spending on fixed costs and support activities to a new model focused on strategic investment that grows and transforms the business, and applies innovative technologies to position the company for the future.

Early benefits from the demand management system include significantly improved alignment of IT requests with business priorities and a sharp decrease in discretionary or non–value-added requests. Over time, Xcel Energy expects the combination of demand management and portfolio management discipline to shift that strategic/routine IT spending ratio from the 2002 split of 37% strategic and 63% routine to a ratio of 57% strategic and 43% routine.

REALIZING THE BENEFITS OF PORTFOLIO MANAGEMENT

Xcel Energy is more than satisfied with the initial results of its efforts to manage its IT project portfolio and overall IT demand (see Exhibit L ). After one year of portfolio management experience, their KPIs looked like this:

EXHIBIT L PORTION OF TYPICAL XCEL ENERGY IT SCORECARD

· Identified and stopped $8 million in grandfathered projects determined unlikely to deliver expected business value

· Redeployed $10 million in capital from budgeted projects that couldn’t demonstrate value to projects that could

· Reduced operating and maintenance spending by almost $1 million through improved PMO processes

· Reduced project change requests 21% through better front-end analysis and business case development

· Increased the number of healthy (green) projects in Xcel Energy’s IT portfolio by more than 70% in the first five months of use—from having only half of the projects meeting schedule and budget criteria to having more than 85% do so

· Reduced the percentage of capital budget consumed by PCR’s from over 69% to under 5%

· Between June 2003 and July 2004 approved $100 million in projects that over a seven-year life are expected to return over $600 million in value to Xcel Energy

· 41% turnover in project management resources as result of increasing level of accountability

REFINING PORTFOLIO MANAGEMENT

Xcel Energy’s leadership considers portfolio management an iterative process. Early projects in the portfolio skewed toward essential operational activities and strategic initiatives to consolidate and standardize processes and programs that reflected the decentralized era. These projects provided valuable feedback into the portfolio management activity, allowing continuing refinements in processes and success criteria.

As this consolidation effort is completed and the participants in the portfolio management process—the core business units and Business Systems (IT)—reach and maintain a high comfort level with both the methodology and the technology used, Xcel Energy leadership expects to undertake an increasing percentage of transformational projects that materially change the way the company does business. Both the risks and rewards of such projects are higher, but the portfolio management system gives them growing confidence that they can make the right choices and implement them successfully to maximize the return on IT investment.

LESSONS LEARNED

As they gain experience with their new portfolio management and IT governance systems, Xcel Energy team members have taken the opportunity to reflect on lessons learned.

Team members surveyed were unanimous in their views of what went well.

· Complete top-down support proved absolutely critical. The PMO was initially seen by many in the organization as an “unnatural change.” Not surprisingly, the underlying reason for the resistance turned out to be fear of a loss of control. Resolute support from the top knocked down this hurdle.

· Continuous, iterative, improvements to build and maintain momentum. Tight, 90 day incremental rollouts supported quick wins, prevented pent-up pushback, and ensured no one got “entrenched.”

· Communicating early successes was important in several ways. It reinforced the top-down support, validated the wisdom of giving Business Systems control of overall budgets, and backstopped the team’s ability to say “NO” to projects that didn’t demonstrate clear EVA.

· The decision to invest the time up front to build the right team, with a strong mix of project management, business process reengineering, and finance experience. That investment of time was more than recaptured in a smoother, faster, rollout process.

What could have been improved? Here, there was no unanimity among team members. The general view was that the strengths of the program far exceeded any weaknesses. However, on reflection, there were a number of “coulda, shoulda, woulda” thoughts from team members.

· A stronger communication strategy, formulated at the front end of the program, would have been helpful. Many of the communications activities were ad hoc.

· More training (one team member asked, “Can there ever be enough?”).

· Integrating the PMO to the CFO side of the house at the beginning of the process. Even though the PMO team included a member with experience in the Finance group, some team members thought it would be more effective to “bite the bullet” and integrate with established Finance processes and systems at the start. Doing it later in the program took longer.

· Taking the time to thoroughly understand the capabilities of systems used in the program, rather than just adapting the system to the desired organizational process or the process to the system. In hindsight, team members recognized that the processes implemented early in the program were overly complex. Simpler approaches would have taken less time to implement and might have required less “tuning” later on.

DELIVERING RESULTS

CIO Ray Gogel has told his team that Business Systems mission is to “Drive business transformation that results in an extraordinary difference for Xcel Energy” and “Business Systems credibility begins with the bottom line: ensuring that the right projects move forward on-time and on-budget.” Through midyear 2004, the company’s IT portfolio was producing an EVA of 10.24% against a 10.30% target. In August 2004, he reported to his team that Business Systems had achieved the best forecast-to-actual performance of any business unit during the preceding period—just 4% variance on forecasted spending—a major improvement largely attributable to the new process and systems. With a passion for continuous improvement and delivering IT solutions that result in an extraordinary transformational difference, Xcel Energy, its PMO, Business Systems, and its partners are off to a great start and still picking up speed.