Raise the Bar for Return on Investment | IT PROCESSES

Many companies have guidelines and qualifications that require projects to deliver a minimum ROI, a net present value, or other financial measurement. Before a project begins, complete a feasibility study to identify the total costs and benefits to ensure it is a worthwhile project. When cutting budgets, consider increasing these requirements to eliminate the lower-value projects and focus resources on the projects that deliver higher results in a shorter time frame. Require a rapid return on investment for all projects to generate as much value as possible in the short term. If you cannot do it quickly and experience a rapid return, then a time of economic downturn is not the occasion to do it. Cautious spending in all markets is always advisable but even more important in unpredictable times.

Business managers can get caught up in the emotion of wanting their project completed and can get optimistic or biased in claiming benefits. ROI inflation becomes a game or contest in creative writing as ROIs stretch far beyond the bounds of reasonability You know this inflation occurs, the other governance members know it occurs, and the business users submitting requests know it occurs. The challenge lies in how to discourage the practice, determine what to do when it happens, and ensure consistency in the process. Have the governance members review the feasibility analysis submitted by the business and challenge the business benefits to verify that they are not inflated and the project is a valid investment for the company. The finance department might be able to help with challenging a project's benefit claims, unless it is finance's own project. Additionally, work with finance for a consistent approach to factoring nonfinancial benefits into the ROI, such as reducing cycle time by 33 percent.

Accountability is the key to successfully executing a cost-justification model. After completion of any project or cost reduction initiative, complete post-project reviews to ensure you have achieved the projected benefits and cost savings. Have the governance committee clearly establish responsibility for conducting a post-project review during the approval process and verify that the responsible party conducts one and reports the results back to the committee. In the event of unachieved benefits, the responsible business users must identify causes and determine if the benefits are achievable or were initially overstated. Without key checks and balances, users become accustomed to inflating projected benefits to get their project approved.

Cut the Appropriate Costs | IT PROCESSES

A company's IT spending is comprised of:

• Nondiscretionary spending. This is the operational cost of keeping the lights on. These costs result from past decisions on hardware and software that support business functions implemented over the past decade or more. They include maintenance costs for hardware or software, or the labor costs to keep existing systems functional.
• Discretionary spending. Typically, this includes projects and improvements to the existing environment. These are projects requested by the business to add business value, to reduce business costs, or to support the business strategy. They are also efforts that improve efficiencies and reduce future operational costs.
• Hidden costs. These are not typically in the IT budget but in the business unit's budget. If a business unit is not able to get its needs satisfied by IT, the problem may be solved by obtaining software and having individuals within the department support the software. A common example is an engineering department that is running ProE or some CAD/CAM application that requires higher-powered PCs and dedicated servers supported by the engineering department.

Unfortunately, even the cost of just maintaining often increases. As an infrastructure ages, keeping it running takes more resources and money. Compliance with new regulations and keeping up with increasing security demands also increases costs.

Over time, reduce nondiscretionary operational costs so you are able to spend more time on discretionary project spending that adds value to the business. Many organizations spend approximately 70 to 80 percent of their budget (including resources) on operational nondiscretionary costs while upper-tier organizations that have implemented best practices strive to have a lower-maintenance environment in which they can devote 40 to 50 percent on projects. It is important to identify and track all nondiscretionary spending. Conduct an evaluation of all these costs to determine where you are able to realize potential cost efficiencies. Tracking this over time will help determine if cost savings initiatives are effective.

IT has more pressure than ever to deliver business value while reducing costs. As shown in Figure 1, IT spending on nondiscretionary maintenance costs and discretionary new projects are both facing pressure, creating the IT cost squeeze. Discretionary spending on each new project must deliver increased business value. IT is faced with an increasing backlog of projects to reduce business costs, improve end-user productivity, provide a competitive advantage, enable new technology, and help the business meet competitive pressures. Maintenance, operational costs, and nondiscretionary spending face cost pressure as well since IT must meet increasing requirements relative to regulations, security, performance, availability, reliability, and an increasing speed of technology obsolescence.

 

Figure 1: IT cost squeeze

As nondiscretionary spending is not usually optional, many companies when faced with budget constraints cut discretionary spending as it is easier and quicker. However, the discretionary spending is moving the organization forward and creating value. In addition, companies need to make wise choices on discretionary spending because it becomes nondiscretionary spending in the future.

Hidden IT costs can be a significant amount of money and a substantial percent of spending, but these often go unnoticed, unmanaged, and even unmeasured. Oftentimes, as IT cuts discretionary spending, hidden costs increase as the users find solutions to their own problems. The company must strive to make decisions to reduce nondiscretionary spending and hidden IT costs over time as shown in Figure 2 and Figure 3.

 

Figure 2: Unmanaged IT costs

 

Figure 2: Managed IT costs

Look at Total Cost of Ownership | IT PROCESSES

When looking to make IT investments, make sure proposals include recommended budget increases to cover all the costs—initial as well as ongoing—and projected budget decreases associated with the promised cost reductions. Often, companies focus on the initial costs to purchase and implement a solution rather than the total cost of ownership. Have the CFO make these budget adjustments automatically upon completion of each project. 

Suggestions on how to collaborate effectively with finance and the CFO. Similarly, when comparing to the base case of doing nothing, make sure you include all the costs, such as the opportunity cost of lost savings due to inefficiencies. It is a challenge to determine the base case correctly because the future without doing the project (i.e., the base case) is often different from the current situation (i.e., your existing budget). Ensure that the base case reflects the full effect of not doing the project in question, including new costs. Examples of total cost categories to review are:

• External implementation costs:
  • Software
  • Database
  • Server
  • Network
  • Software modification
  • Consulting for implementation
  • Interfaces, conversions, customization
  • Training and change management
  • Project management
  • Travel and expenses
  • Sales tax
  • Investment tax credits (to defray the investment costs)
• Internal implementation costs:
  • IT setup and operations labor
  • Business analysis and configuration labor
  • Subject matter expert labor
  • IT interfaces, conversions, customization labor
  • Training and change management labor
  • Project management labor
  • Travel and expenses for internal labor
• On-going costs:
  • Application maintenance
  • Database maintenance
  • Operating system maintenance
  • Server maintenance
  • Network maintenance
  • Sales tax (varies by state)
  • IT operations and support
  • Depreciation
  • Business labor
  • Interest expense (if investment was financed)
  • Software license expansion for growth
  • Software upgrade

Focus on what is Important | IT PROCESSES

In times of economic pressure, governance is critical. It is the organizational structure and process of making IT investment, project, and resource decisions and prioritization. Governance is usually the responsibility of a small group of IT and business leaders. If you do not have a strong steering committee and project review and approval process in place, establish them now. Although governance is not the sole responsibility of the CIO, he/she is paramount in making sure the governance process is effective or helping to fix it if it is not working properly. The disciplines and processes used in the down times will also be worthwhile in the good times, as making better investments never goes out of style. The governance members need to "Just say no" to some of the IT requests, particularly those that do not add value relative to the costs. Some CIOs often take the path of least resistance and do projects that they know do not add to the bottom line. They may even shortcut the defined governance process. Oftentimes, too many borderline projects are funded, too many projects die midstream, and too much technology is procured and not implemented, all of which cost the company money. It requires more finesse, courage, wisdom, and good communication skills, but a tough line by governance committee members is best for the company at all times.

To help governance members with saying "no," have a financial analysis and project review process for the business to justify the project. Project portfolio tools are useful in the process to help identify priorities. The key is to focus resources on areas that provide the most value for the business. Particularly when reducing costs, scrutinize the sphere of projects more than ever. Figure 1 shows how to focus on projects with the most value to the business. It is also a good time to focus on projects that have value across the entire enterprise rather than departmental benefits, as shown in Figure 2.

 

Figure 1: Projects with a higher impact on company profitability and goals

 

Figure 2: Projects with a wider impact on the company

Just because you adopt IT governance does not mean that the process is effective. Like any other function, it is important to strive for continuous improvement. The best way to improve governance is to monitor key measures and target improvements. Some of these key measures might include the following:

• Projects completed within budget (weighted)
• Projects completed on time
• Projects begun and carried through to completion
• Projects that fulfilled staffing requirements
• Procured solutions that were implemented
• Procured solutions that were implemented within a planned time frame
• Average project ROI or time-to-benefit