Tough decisions will be required in today’s troubled economic times – times that may be with us thorugh 2009 and beyond.
The quality of those decisions will determine not just the performance of enterprises but their very survival. Many of these decisions will involve potential cuts to information technology (IT) spending – estimated at more than $US3.4 trillion worldwide in 2008.
The traditional approach in such situations has been to first freeze all spending then apply across the board, fixed percentage cuts – this is quick and simple but also very dangerous. Dangerous because IT is no longer a “black box” – although enterprises often still manage it as such.
Today, the box is empty – it’s contents distributed and embedded throughout the enterprise as the electronic bits of business processes – processes that run up, down, across, and between enterprises and their customers, suppliers and other stakeholders.
While many, if not all enterprises do have opportunities to cut costs, especially those that do not have effective governance in place, across the board cuts have a significant potential to destroy value and increase risk. This is where effective governance around value management comes into play.
In talking with a number of enterprises around the world who already have taken steps to improve the effectiveness of their governance, including enterprises in the energy and financial sectors, I have found that they are able to:
- Make intelligent cost cutting decisions – avoiding the value destruction inherent in across the board (%) cuts
- Ensure that their on-going investments create and sustain value and, where this is at risk, take early and appropriate corrective action
- Identify, define, select and execute new investments such that they optimize value creation and sustainment, again taking early corrective action when this is at risk
Many of these enterprises are using proven principles based value management processes and practices that can be found in the Val IT™ Framework from the IT Governance Institute (ITGI).
Unfortunately, very few enterprises actively manage for value. Research carried out by The Cranfield School of Management suggests that less than 30 percent of the largest UK companies actually have a formal benefits management process . Anecdotal evidence suggests that similar figures are to be found among European and US companies as well.
In many, if not most cases, where value management processes and practices have been adopted the implementation has taken many years, and is still a work in process.
Such processes can however also be used selectively in response to the current economic situation to improve the quality of decision making, and reduce risk.
While the results of such a “light” approach may not be as effective as if the processes were already fully implemented, they will be significantly better than an across the board approach.
In the short term, portfolio management practices can be used, based on appropriate criteria, to determine the relative value of current expenditures, including both on-going costs of services and infrastructure, and new investment programmes.
Criteria would include such factors as alignment with business objectives – which may well have changed, benefits being realised or expected, current and projected costs, and risks. Experience has shown that, where such an analysis has not previously been undertaken, somewhere between 20 – 30% of current and new expenditures can be reduced or curtailed .
Once low value expenditures are eliminated, focus shifts to on-going investments. Investment management practices can be used to confirm the outcomes of such investments and their alignment with business objectives, confirm or rework the scope of effort, confirm accountabilities, review and revise assumptions, and review and focus metrics to better manage the investments. Here, experience has shown that such analysis can increase the potential value of investments by 2 -3 times .
In the longer term, once costs are under control and the value of on-going investments is more certain, effort shifts to implementing and sustaining the value management principles, processes and practices contained in Val IT. The foundation of Val IT is continually asking the questions below, known as the “Four Ares”.
- Are we doing the right things?
- Are we doing them the right way?
- Are we getting them done well?
- Are we getting the benefits?
Effective governance, based on Val IT and the “Four Ares”, involves getting leadership understanding and commitment, implementing required processes and structures with clear roles, responsibilities and accountabilities, and implementing metrics and supporting tools. It is not easy, but it is worth it. In the long term, effective application of the principles, processes and practices contained in Val IT will enable enterprises to prosper in good times and successfully weather troubled times - failure to do so will threaten their very survival.