As a result of the economic down-turn the strategic business goals have shifted for almost every company. Short term survival has become a topic on virtually every C-level agenda. The resulting issues facing the business in this time are amongst others:
- Lower income due to less customer (both Consumer and Business) spending
- Lack of investment capital from the financial market (As a result of Financial Institutes unwillingness to supply loans)
- Increased business risk (increased risk of business partners defaulting on their commitments)
All this insecurity leads to organisations trying to increase their financial reserves. To achieve this business leaders focus on improving their Cash-Flow: Ensuring each month enough money comes in to pay for the bills and hopefully even a bit more, to improve the financial reserves .
In the worst of times the cash-flow is negative (more money is flows out than comes in). This eats into the reserves. When the reserves are depleted in combination with a negative cash-flow the organisation goes bankrupt. Which explains the sense of urgency shown by top-management.
For a correct understanding of the Cash-flow equation it is important to understand it is only concerned with actual money flows:
- Sales on credit does not actually bring cash into the company at the moment the deal is closed. Only when the credit is due (and paid) it results in positive cash-flow
- On the other hand, depreciation of assets does not involve actual payments leaving the organisation so this also does not influence cash-flow
How does this focus on cash-flow translate to the day-to-day reality of the business?
The simple answer is: It does not, since the Business does not exist. Every enterprise is a unique combination of divisions, functions, logical entities, etc. the operational translation of a strategic statement like: “Short Term Cash Flow Improvement" will translate differently for each of these Enterprise segments. A couple of examples of operational actions resulting from the focus on short-term cash-flow:
- Marketing communication might cut-back on advertising expenditure
- Sales might put extra effort in maintaining (or even increasing) the short term income volumes
- Finance might focus on debt collection and/ or pay additional attention to customer risk management .
So where does that leave IT?
If IT were to be considered just a cost-centre the answer would be easy, pull the plug and save yourselves a bundle of cash each month!
The fact that you do not see that happen even in the worse of circumstances indicates something we all know. Though we might not always be able to prove it: IT helps business to create value. By pulling the plug we might inadvertently stop whatever is left on the income side of the Cash Flow balance.
For instance if a bank were to close down its internet site and subsequently its Internet Sales channel this might lead to the loss of any remaining confidence in that bank with the possible devastating result.
So a stalemate: We need to reduce expenditure for the enterprise (Including IT) but ensure we do not worsen the Income side of the Cash-flow equation while doing so. To answer the question were we can safely trim down the IT Expenditure we need to know how we add value to the (individual sections of) the business.
How IT should react?
First of all we need to break-down the business into its segments so we can see what services IT actually supplies to that particular segment. You could think of this as customer segmentation as we see it in (business-to-business) marketing.
Then together with that (section of) business we need to check how IT can help to create the maximum (short term) business value (Read: Income) at the lowest expenditure. The first step to achieve this is for Business to identify what the current Business Value of each of its business processes is (and how they want to react to these troubled times). For those business processes business want to keep up and running IT and business jointly need to identify the services they supply that are actually supporting those business processes.
Imagine IT decides a certain Service is very important for the manufacturing facilities of a Detroit car maker and they focus their effort on enhancing that service so the manufacturing plant can even generate more Value! And then the Enterprise decides to shut down manufacturing since they have more than enough cars on stock already….
Furthermore Service Portfolio Management needs to identify the nature of the IT-value the individual IT-services offers to each of the business processes. For example: An IT Project that will reduce the operational cost of a business process by let's say 75% percent 10 years from now is useless if the current expenditure for running that project bankrupts the company in the next two months.
At this time we should not be interested as much in the chicken that lays the golden egg sometime in the distant future, we need a chicken that lays eggs now! So we can sell it and generate cash. Furthermore, we should check for chickens that don't eat that much. The primary question should be about the nature of the value created by using IT-services even if the value is not 100% quantifiable.
Marketing communication has never been able to give hard guarantees about the exact amount of extra sales generated by advertising. We all know, feel and accept the need for advertising. This lack of proof is not the correct argument when a decision is made to stop advertising in times of crisis.
Implementing the solution
So we need the Business Relationship in order to jointly battle the problems at hand. However before we can embark on Business Relationship Management you need to have a relationship with business. Tools and Processes cannot build that relationship. The willingness to communicate and exchange ideas needs to be there on both sides of the table.
Portfolio management cannot force the Business Manager to listen when the IT Executive explains how new technology could improve the IT Value for business. Nor can portfolio management ensure that IT actually checks what the business requirements are instead of just assuming. The right cultural mind-set is required. Respect for the individual fields of expertise of each partner is a fundamental part of the foundation.
A shared sense of urgency and a willingness to partner in order to achieve goals. From that perspective the Financial Crisis can be a positive force to break the “us-against-them” culture you will still find in many companies. If the worse happens and the company goes bankrupt both business and IT personal will be unemployed together!
So once you engaged in the dialog, models like ValIT and ITIL V3 (specifically Service Portfolio Management) can help you structure the effort and ensure maximum effect.
The ValIT model describes three process areas:
- Value Governance: Create the Governance structure for the Business – IT Interaction
- Portfolio management: Describe the IT components/ deliverables offered including all metadata required for decision making
- Investment Management: Defines, Tracks and Manage individual Portfolio Items through their lifecycle to ensure that actually perform (deliver value) as expected.
When looking at IT Service Portfolio Management as described in ITIL V3 you will find overlaps and shared goals with ValIT. In comparison ValIT describes the field of Business-IT Alignment and Business Relationship management more from the Business perspective were ITIL v3 (specifically IT Service Portfolio Management) uses more IT Terminology. Working with these two models in combination will ensure focus both on the context and the content of IT Service Portfolio Management.
When we focus on the content of IT Service Portfolio Management you will find it contains two basic blocks:
- - Services currently in Operation
- - Services under development
Each of these has to be reviewed in a different context:
- Services in operation, hopefully these deliver IT-value to the business on a day-to-day bases. It is here we need to check if we would not hurt the income side of cash-flow by shutting them down. Think of Amazon deciding so save on IT-operating cost by shutting down their website. Not likely!
- Services under development, since these do not actually deliver value yet these are the obvious candidates to shut down. And indeed ever so often you will find that companies that are in bad weather decide to stop all their development projects. But now imagine you have a project that is close to completion, let’s say all that is needed is one more month and an investment of let’s say 10,000 (US$, Euro, Sterling). Upon completion the value to business is let’s say an out-of pocket cost reduction of 10,000 per month. The break even for the remaining investment would be two months and after that time it would help with a sustained improvement of the Cash-Flow position. Wouldn’t it be a good idea to try and find that remaining investment money? The example goes to show that there is no black and white decision making. Yet in the panic of the moment blunt cost-cutting exercises tend to do just that. In this calculation the money spend in the past is not relevant, it is about time and money still needed before the solutions starts generating value.
About the future
The current economic storm is not over yet and nobody knows how long it will last. So enterprises will need to take action. If IT does not engage into this exercise pro-actively C-level management will most likely force a cost-cutting exercise sooner or later. Any such exercise is likely to be very blunt.
We have already seen examples were all contractors were send home from one day to the next, no matter the kind of work they were engaged in. Another example involved a statement of a 20% budget cut across the board, no appeal possible. In some companies all IT-projects not in operation yet are stopped.
If this becomes the mind-set of the top executives because they feel the enterprise domains do not take affirmative action IT will be forced in the defensive and become the passive victim of any such exercise. Nobody like to be the passive victim in these kind of cases so IT should take action to remain in control especially in these troubled times.
Times are bad for everybody so cost saving is necessary for Business and IT alike but by doing it smart, together with the Business you can ensure maximum enterprise-value for the remaining expenditure. Winning is relative, everybody is experiencing the same head-wind. If IT and Business counter the effects together in a smart way you might even find yourselves in a better position relative to your competition by the time the wind shifts to a tail wind again…..
Arno Kapteyn is a Managing Consultant at Capgemini based in The Netherlands. His field of expertise is primarily IT Governance with a secondary focus of IT Risk, IT Compliance, IT Security, IT Service Management and IT architecture.