META Group Aligning IT and Business Through Value Management Dale Kutnick Chairman and Co-Research Director dale. kutnick@metagroup. com
The IT Spending Roller Coaster 5 IT costs as a percentage of revenue decline 5 More business functions externalized 5 Vendor consolidation accelerates 5 Shift in IT spending patterns and drivers Cost reduction valued vs. revenue generation 4 Variable vs. fixed costs 4 Measurable productivity gains required 4 Budget reductions will be common in 2003 4 5 The “do more with less” mindset dominates Enterprise IT Expenditures Cross-Industry: IT Spending as % of Revenue 3. 16% 2. 48% 4. 00% 3. 68% 3. 55% 3. 41% 2. 68% 3. 00% 2. 00% 1. 00% ’ 97 ’ 98 ’ 99 ’ 00 ’ 01 ’ 02 0. 00% % Change in IT Budget 40% 30% 20% 10% 0% -5% ’ 96 -’ 97 -’ 98 -’ 99 -’ 00 -’ 01 -’ 02 IT and business operations are becoming inextricably linked © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary. 2
The IT Portfolio 4 4 4 5 The tempo of alignment is extreme: Budget cycles going from yearly to quarterly to monthly 4 Investment patterns and spending plans must be adjusted to market conditions — down to daily 4 The IT portfolio must stay in dynamic alignment with business needs 4 Growth Discretionary Enhancements Non. Discretionary Core Discretionary Projects 4 Venture TTB GTB Risk Non-Discretionary Costs 4 Cost management Risk management Value management Global technology management Performance management Human capital management Risks 4 Value/Timing IT Expenditures Portfolio 5 The pressure is increasing on IT for: RTB The structure of the costs (fixed or variable) will become important, as within all LOBs in the enterprise © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Assessing Budget Goals 5 Organizations have focused on IT budgeting in terms of IT as a % of revenue, IT spend per employee, or IT annual budget growth rate 5 Today, organizations need to go beyond basic ratios and benchmark: 4 4 4 IT cost of goods IT cost structure IT portfolio alignment IT fixed cost vs. variable cost IT spend agility Multivariate Management Mode Industry Sector Organization Type Size Mission Products Value Discipline Capability Performance Cultural Style Metric Maturity © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Investing Based on Character of Organization Autonomous: Stewardship investment strategy 4 Centralized: Dictatorial investment strategy 4 5 Risk acceptance Year 4. . . Averse/medium/inclined 5 IT value creation strategy Value creation 4 Value optimization 4 Value preservation 4 5 Identify technical silo budget requirements Critical vs. discretionary 4 Third party vs. in-house 4 Costs vs. quality vs. speed 4 CAPEX vs. OPEX Year 3 Year 2 Excellent Technical Condition 4 Managing Asset Life Cycle 4 Re-Evaluate/ Reposition Asset Low Project Source Maintain/ EA Evolve Asset LOB Retire/ Consolidate Asset Re. Engineer/ Modernize Asset Poor Technology Costs 5 Organizational structure High Low High To sustain value creation, IT organizations MUST be able to continually calibrate their performance against competitors and market opportunities © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
The IT Portfolio and Its Associated Programs t Bottom Line 5 Introduce speed and flexibility in the core budgeting processes 5 Adopt an investment mindset and discipline 5 Introduce a new funding model for IT as an investment portfolio manager 5 Adjust budget cycles to be a forecasting process and not a backward-looking adjustment process 5 Transition IT from cost center to value center 5 Shift more toward variable costs 5 Consider outsourcing as a strategic initiative Business Impact: Technology is fundamental to modern business — IT organizations must integrate with the business © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Calculating and Communicating ITO Value © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary. Q 11 Q 9 Q 7 Q 5 Q 3 Q 1 5 ITO value is a balance of Sustainable Value/Risk Balance net profit versus risk + 1, 000 change 800 600 5 Systemic risk 400 management is required 200 for both operational and 0 -200 project risk -400 5 Risk costs must be -600 -800 reduced through -1, 000 mitigation Operational Risk Project Cost 5 Product pricing (value) Project Risk Value is directly proportional to the risk taken The objective is to balance value/risk/change over time
The Value of the Product Is Reflective of the Risk Assumed 5 Typical ITOs are: Time & Materials Service Levels % of Revenu e V al u e. Based 5 Leading ITOs: Are profit centers Assume risk within IT scope Price products at market value, not cost 4 Contribute to the business bottom line 4 4 4 5 Product price is proportionate to the risk level assumed Business Risk Ma r k e t. Based Positioned as cost centers Risk averse or risk victims Perceived to add little or no business value C o s t. Based 4 4 4 Market Pricing IT Products Pricing Model ITO Risk Ownership Leading ITOs calculate the value of the ITO as its net profit contribution to the business bottom line © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Techtonics and Technomics 4 Changing economics of technology that may impact its application 5 IT must provide full range of economic tradeoffs 4 Constantly changing Wireless Evolution of Mobile Computing Cost 5 Must understand the key technology trends — “techtonics” 5 Develop common vision of “technomics” Sweet Spot ’ 99 ’ 00 ’ 01 ’ 02 ’ 03 ’ 04 ’ 05 Time 2002: Bandwidth (BW) Explosion 2003+: Handheld Device & P/P Improvement 2003/04: Mobile Middleware Maturity 2004/05: Better BW Pricing & Wireless Coverage Consistent understanding is critical to establish value cases of IT opportunities © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Technomics for 2003/04 1. 2. 3. 4. 5. 6. Benchmark Communication prices up Business Value Data center consolidation Dynamic Third-party sourcing Value. Storage explosion Constrained Creating Licensing price structure Frequency Benchmark to reduce costs, Valueincrease SLA, and Minimized Constrained demonstrate value Static 7. Too many technologies are Single Multiple Dimensionality driving management and Dimensions Cost people costs up Cost Price Performance Process Value Consistent understanding of technomics is critical to establishing value of technology © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Techtonics for 2003/04 1. Security 4 It’s Coming. . . Strong authentication 2. VPN maturation 3. Wireless computing 4 Fixed wireless, not 2. 5 G or 3 G 4. Maturation of Web services for integration 5. User identity 6. Portals Consistent understanding of techtonics is critical to establishing technological adoption road map © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Economic Tradeoffs: Area of Non-Investments in 2003 Year 4. . . Year 3 Year 2 Re-Evaluate/ Reposition Asset Low Project Source Maintain/ EA Evolve Asset LOB Retire/ Consolidate Asset Re. Engineer/ Modernize Asset Poor Technology Costs Excellent Technical Condition 5 PKI projects 5 Strategic EAI 5 Massive convergence initiative 5 Mobile infrastructure 5 Ubiquitous CRM with channels synchronization Managing Product Life Cycle High Low High Align techtonics and technomics with business value creation © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Key Initiatives in 2003 t Bottom Line 5 Establish a road map for technology exit and adoption 5 Introduce vendor management as a key IT initiative in 1 Q 03 5 Eventually distribute infrastructure and applications, but centralize management and operations 5 Design and validate security governance and policies by 2 Q 03 5 Manage storage and communications demand costs 5 Re-evaluate all vendor contracts (first half of 2003) on yearly basis © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
The Make-vs. -Buy Paradigm 5 Consider sourcing as a strategic alternative in your portfolio 5 Make sure the “house is in order” before embarking on sourcing strategies 5 Determine the goals to achieve and the measurements Balanced Approach Plan Build Run Organizational Structure Evolution Plan Procure Manage Complement the internally focused processes with sourcing alternatives © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Outsourcing as Strategic Alternative Value/Risk Profile Sourcing Strategy Implementation 5 Select the right area to be managed by a third party 5 Explore market evolution for this area App Implement. App 5 Sort out sourcing options on Demand App 5 Assess vendor capabilities Maint. Server 5 Define the type of contract and Mgmt. Help the pricing options YOU want Network Desk Managed Mgmt. 5 Determine the performance Desktop Data indicators Center Capability/Focus Integration of third parties into the IT road map will represent the major challenge in the coming years © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
Defining Goals and Measurements 5 Define goals upfront Cost cutting for commodity types of services 4 Cost avoidance for immature or obsolete technologies 4 Value creation for business process outsourcing Outsourcing Value Continuum Monitor performance daily 4 Measure quality monthly 4 Assess relationship quarterly 4 Dynamically benchmark 4 Pr op os iti on Va lu e 5 Define rules for accountability and performance reviews Contribution 4 Value Creation IT GOVERNANCE Service Quality & Customer Sat. IT DEMAND Cost Reduction & Avoidance IT SUPPLY Capability Users pursuing outsourcing often explore sourcing options with cost cutting only in mind © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
What Are the First Steps on the “Road to Alignment”? t. Transformation Steps 5 Value-align Determine the elements of IT value for your business 4 Develop value categories, link to assets, programs, projects 4 5 Investment-align Institute IT portfolio management 4 Analyze level and type of costs as well as measurement indicators 4 Create your portfolio management “scorecard” or “dashboard” 4 5 Process-align 4 Determine the necessary processes that balance reactivity with “proactivity” and allow flexibility 5 Technology-align 4 Determine which technologies must be embraced or retired, which ones will be insourced, and which ones will be outsourced 5 People-align 4 Develop a plan to transform the IT organization, based on the technology road map © 2002 META Group, Inc. , Stamford, CT-USA, +1 (203) 973 -6700, metagroup. com. All materials are confidential and proprietary.
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