The Role of IT Portfolio Management BADM 559 Enterprise IT Governance

Transcription

1 The Role of IT Portfolio Management BADM 559 Enterprise IT Governance Yong Mai December 11, 2008

2 Table of Contents Abstract... 1 Introduction... 2 IT Portfolio Management s Role in Business Benefits of IT Portfolio Management... 5 Integrated Portfolio Management Process... 6 Integrated Portfolio Management Process - Initiation... 6 Integrated Portfolio Management Process - Evaluation and Prioritization... 7 Integrated Portfolio Management Process Monitoring... 8 Integrated Portfolio Management Process An Example... 9 Conclusion Exhibits References...15

3 Abstract In this era of tight budgets and technological growth, organizations depend on technology to provide greater values for them. However, many companies fail to actively manage their IT portfolio. It is essential for these companies to employ an IT portfolio management methodology to help balance and align their portfolios with business objectives. Implementing an IT Portfolio Management methodology can help organizations achieve greater control over their portfolios through the ability to categorize, evaluate and manage their IT resources as well as to prioritize projects. An integrated Project Management provides in-depth knowledge as to the status and performance of all approved projects. This will provide companies with constant feedback to support their investment decisions and make adjustments when necessary. With greater visibility and control over IT processes, as well as a focus on quality, organizations are able to deliver direct results, which add greater value to the business 1

4 Introduction Most organizations today depend heavily on their information technology (IT) systems and if the technology that support them fails, the whole organization will be thrown into chaos. As shown on Exhibit 1, the IT system includes the services that enable communication & collaboration, data capture, processing, storage, access and analysis. Because the importance of the information technology systems cannot be underestimated, numerous organizations invest in IT. Organizations can easily devote up to 50% of their capital investment in IT projects. However, a report by AMR Research had stated that 75% of the IT organizations still have limited supervision over their project portfolios and employ dysfunctional planning processes. These organizations not only lack defined processes for initialing projects and reviewing project proposals, but they also fail to look at the entire IT budget as a unified set of investments. Consequently, more projects are executed than what the organizations are capable of managing, and bad projects take the funding away from good ones. This means that organizations cannot readily assess what kind of probable impacts the investments may have on them and their overall IT system. IT Portfolio Management s Role in Business Because of substantial IT investments, companies need to establish proper processes and systems in order to evaluate the value, cost, risk and performance of IT services. Hence, great importance is placed in IT portfolio management. However, not all organizations fully understand what IT portfolio management is or how to administer it. Companies have used different methodologies or assigned inconsistent weights on IT portfolio management. According to Jurgens Pieterse, an enterprise design strategist, the main IT portfolio management methodologies that companies have used consist of the following: 2

5 1. Enterprise Architecture - views IT portfolio management as a means to align IT investments with budget constraints. 2. Project/Programmed Management Discipline - focus primarily on assessing the value of projects and to prioritize projects within a set of projects competing for the same funds. 3. Budgeting Process - focuses on aligning IT spending with business requirements. 4. Asset Management System - focuses on managing and maintaining IT assets over its life cycle. Although significant, none of these approaches can completely represent IT portfolio management. Programs, assets, and budgets are parts of IT Portfolio management and they must be considered collectively. An IT portfolio is made up of a group of anticipated and ongoing IT projects as well as the whole IT systems within an organization. Thus, IT portfolio management is not just a list of IT assets but a process that helps companies gain greater control over their IT projects and supply meaningful value to the business. In the past, organizations mainly used technology to improve efficiency through the automation of traditional clerical tasks. However, the role of IT in business has grown considerably to the point that it now assists in formulating business strategy (for more information, refer to Exhibit 2). Information regarding the direction of the business in terms of its target markets, growth strategies and competitive strategies can be found within the business strategy. IT portfolio management supports business strategy by attesting the viability of business strategies and signals risks connected to them. Thus said, business strategies serve as inputs to IT portfolio management and the portfolio managers 3

6 use the information to create a valuation of all IT assets through portfolio impact analysis, which are used to support the business strategy. IT portfolio management further provides value to business by making sure that the funds companies spent are assigned to the most suitable project that generates the greatest return and value. Thus, part of the challenge goes into doing projects right and part goes into doing the right projects. (See Exhibit 3) An organization that uses an integrated IT portfolio management approach would see improvements in business performance as well as growth opportunities that would lead to new strategic advantage and advancement. According to Mary Lou Griffith, senior IT planning adviser in the Department of Information Services for the State of Washington, integrated IT portfolios help increase organizational effectiveness and improve the quality of IT service delivery. After the State of Washington state adopted IT portfolio management in 2000, the state had experience decrease in the size, scope, and complexity of the average IT project, while seeing an increase in the success rate. Dennis S. Callahan, executive vice president and CIO of Guardian Insurance, reveal that the company s total IT applications expenditures have decreased 20% while maintenance costs have gone from 30% to 18%. Annually, companies that fully utilize integrated IT portfolio management show saving of 2%to 5% in their IT budgets. Benefits of IT Portfolio Management Many organizations failed to benefit from IT portfolio management by discontinuing the process halfway. Reports have shown that companies can generate up to 40% greater return than their competitor if they oversee the entire lifecycle of the portfolio management. Thus, it is very crucial for the portfolio management to be executed from 4

7 the beginning to the end of the system s lifecycle. Often, companies develop their own IT portfolio management methodologies. Others use portfolio management software such as Microsoft Excel and Project and Compuware Changepoint to outline and administer projects. There s no single right way to do IT portfolio management, the challenge, however rests in doing it well. Part of the decisive factors in determining whether a portfolio management methodology would be successful or not depends on a good IT governance committee. An IT governance committee may consists of senior IT leader and business leaders whose responsibilities include proposing, reviewing, and monitoring the projects. Good governance occurs where there are common goals and a strong communication within the committee (see Exhibit 4). In cases where there are a lack of strong IT governance committee, incorporating a good IT portfolio management methodology may force the company to improve it because the comprehensive process would continuously encourage them to take responsibility for the projects. Integrated Portfolio Management Process IT portfolio management should also conform to policy requirements and present enough information for effective IT planning and procedures. Thus, IT portfolio management should contain proper documentations consist of the following: Descriptions of the relationships between the investments in the portfolio Plans relating to current and proposed IT investments in support of the agency mission, strategies, and business processes Risk assessment and risk management plans Project plans and project management reports 5

8 Application documentation and user training materials Hardware, software, network, and facilities inventories Budgetary and financial records and reports, including annual agency IT spending References to the existing Security and Disaster Recovery plans. Integrated Portfolio Management Process - Initiation The process in IT management portfolio begins by ensuring that all projects are visible and planned for. Proposed IT applications are initially reviewed in terms of their values as potential investments. This is done by compiling comprehensive information of the propose projects in a database. The database should include a list of all the names, project lengths, estimated costs, business objectives, return on investments, business benefits, and other relevant measures of the projects. This initial step of portfolio planning is crucial because it layouts the foundation for performance evaluation and effective IT planning. Integrated Portfolio Management Process - Evaluation and Prioritization The majority of the portfolio management process lies in the evaluation and prioritization of the projects. A careful evaluation is crucial in identifying redundant projects or projects that will yield low returns. Some projects may have interdependencies between them, and these relationships would need to be identified and understood within the portfolio. Frequently, there are more projects than what the company can fund even after the evaluation process. Hence, the projects will undergo a prioritization process to help companies determine which projects most closely align with the company s strategic objectives and the impacts of each program. To determine a project s priority, a typical 6

9 prioritization process takes into consideration the financial cost and benefits, risk, business value, and strategic alignment of the project. One way to accomplish this is to perform "what if" analysis in various scenarios to come to a conclusion as to which project to execute. Each proposed project will be assessed on its strategic value and risk criteria which has been developed and agreed by the IT governance committee. Companies can also use graphical analysis to further compare the projects against key business criteria. Besides using what if and graphical analysis, companies can further prioritize their projects by scoring or categorizing their projects. Companies can set scoring methodologies such as improvement ratings, risk assessment and financial calculations. This way, they would be able to have a clearer understand about the return on investment from each individual project to prevent redundant, overlapping or underperforming projects. Categorizing consists of developing criteria which help clarify what a project is suppose to accomplish. These criteria are further enforced to make sure that projects are comparable to one another and assist in categorizing. There are many ways to categorize an IT investment portfolio. One approach is to categorize it like a financial portfolio where IT portfolio would be a diversified mix of high-risk with high-reward and low-risk with low-reward investments. According to Tecolote Research, Inc, riskier strategic investments (high-growth stocks) are balanced with more conservative investments (cash funds), and the mix is constantly monitored to assess which projects are on track, which need help and which should be shut down/ retire. Another method to categorize projects is to divide investment projects into four standard areas: Productivity, Maintenance, Innovation and Growth (see Exhibit 5). 7

10 Productivity includes projects that drive short-term profitability within existing processes. Maintenances are those projects that are necessary to maintain the functionality and performance level of technology. Innovation includes the developing of new assets and opportunities. Growths are those projects that increase the assets base. Integrated Portfolio Management Process Monitoring Monitoring of existing projects is an important aspect of portfolio management. Projects are constantly observed until they are completed and summary information about the status of each project is regularly updated. This way companies would be able to respond quickly to market changes. According to Carl Ascenzo, Senior Vice President and at Blue Cross and Blue Shield of Massachusetts, some companies detail project status where green means good, yellow means caution and red means help. Yellow and red will includes a description showing the causes and effects of the two alert signals. During the monthly IT governance committee meeting, the status report of the project will be announced and decisions would be made on whether to prolong or end certain projects. At the same meeting, the causes of any divergences from the initial plan would be considered and recommendations for avoiding problems with similar future projects would be made. Funds would also be reviewed and resource issues would also be settled. The results of these reviews would be recorded as updates to the IT portfolio. At the conclusion of a project and after enough time has passed for the benefits to be realized, a report on the overall project will be made. This information would be used to update the portfolio financial information to complete the portfolio analytical cycle. See Exhibit 6 for a complete diagram of the IT Portfolio Management Process relationships. 8

11 Integrated Portfolio Management Process An Example To understand how IT portfolio management is carried out, let s look at how it would work in a fictional midsize software company called ABC Inc. Let s take for example that the company s business strategy is to increase next year s customer base by 15%. It plans to accomplish this by increasing the business operations and building up an alliance with another business intelligence software company to add analytical capabilities to its software. Hence, its IT strategy is to have the IT projects develop new software programs that offers universal data exchange for easy integration with the other software companies. In this example, the IT projects are aligned with the business strategy in increasing customer base, however, the exact values of the IT projects are still unclear. The company can begin the portfolio management methodology by supplying proper documentations with comprehensive information of the propose projects. Then it can determine the value by looking at four criteria: 1. Expense reduction: In terms of developing links to other vendors software, the new platform s cost would be reduced because the platform is based on Web services standards. 2. Revenue increase: Overall revenue should increase as customer base increase. 3. Strategic: The software platform project has a direct impact on ABC s product and the company s competitive position. 4. Legal/regulatory/security: Security in the new software platform should be safe enough to maintain sensitive data. When performing prioritization, ABC could take a top-down approach and collect information from business leaders in all departments to ensure that business focus areas 9

12 and performance measurements are understood. Then each of the four criteria would be divided into assorted factors. At ABC Inc, the IT governance committee may decide to split the expense reduction criteria into four factors: customer service expense, customer acquisition and retention, office efficiency gains, and other expense. Afterward, ABC may want to use a bottom-up approach to score each of its projects across all factors to find out the overall project score. Projects would be scored by giving executives a set of questions asking for their level of agreement on a scale from 1 to 10. For example, in the ABC integration project, there may be a question that ask Do you agree that this project will lead to cost reduction for the company? a rating of 1 means no cost reduction, while a rating of 10 is referred to $15 million in cost reduction. This scoring system will repeatedly prioritize the projects to give them a final score. Once all the projects are scored, they can be sorted to determine their degree of alignment with the current business priorities. Depending on the amounts of funds and other constraints, some projects will be carried out and others will be discarded. ABC Inc. would continue to monitor the portfolio to make sure that new projects don't exceed expected budgets, are delivered on time and fulfill the business need. This would help the company to create a strategic framework that shows which project to maintain or to withdraw. Conclusion Companies depends on IT to provide strategic advantage to the greater business. The challenge, however, rests on how to better manage IT projects in order to maximize their economic benefits. IT Portfolio management can benefit companies in this area because it 10

13 is a continual and evolving process that help companies assess the value of IT investments and prioritize IT initiatives. It further monitors IT spending to increase the return on investment while maintaining an acceptable risk-reward balance. But successful prioritization requires both ongoing adjustments based on shifting business demands as well as a way to evaluate whether projects have delivered the anticipated return on investment. When implemented correctly, IT portfolio management guide the companies allocation of IT resources in support of their mission and programs. 11

14 Exhibit 1: Information Technology System IT Services Communication and Collaboration Data Capture Processing Storage Access Examples , desktop videoconferencing, instant messaging Point of sale [POS] systems, Internet-based data entry systems, business intelligence, customer portals Order processing, invoicing, contract management, order processing, invoicing, contract management Data centers and databases with information about customers, inventories, assets Ad hoc queries, report writing Analysis Analytics, modeling Exhibit 2: Portfolio Management - Old Vs. New 12

15 Exhibit 3: Relationships between Top-down Approach & Bottom-Up Approach Exhibit 4: IT Portfolio Management Goals and Benefits Good Governance and a Strong IT Portfolio Management can Good Governan 13

16 Exhibit 5: Example of IT Projects Categorizing Exhibit 6: IT Portfolio Management Process Relationships 14

17 References Cummings, Joanne. IT Portfolio Management Network World, April Available at Hoffman, Thomas. Obstacles Hinder IT Portfolio Management. Computerworld. Feb Vol. 37 Issue 6, p57 Hoffman, Thomas. Balancing The IT Portfolio. Computerworld. Feb Vol. 37 Issue 6, p25. Musich, Paula. Portfolio managing is automated. EWeek. Feb 2004 Vol. 21 Issue 7, p Portfolio Analysis Using ACE Via The Web. Tecolote Research, Inc. January 2008 Available at 20Update.pdf Verhoef, C. Quantifying the value of IT-investments. Science of Computer Programming Vol. 56, p