Mark McDonald

IT cost cutting is on the minds of everyone these days as companies look to better match operating costs to revenues. While CFOs are looking to cut IT costs, IT professionals report being as busy as ever. How CIOs use these resources is critical to the value of IT.

CFOs and CIOs face the need to change the structure and operating practices associated with IT rather than just cutting IT costs. Among other things, enterprises need to find new sources of arbitrage to get the value they need at a lower cost.

Arbitrage is the simultaneous purchase and sale of the same resource and earning a profit on the differential between the two prices.

Historically, CIOs and CFO’s have sought to reduce their cost structures through labor arbitrage through offshore outsourcing – trading on the cost differential between labor in say India versus the United States or United Kingdom. In its simplest form Labor arbitrage assumes that both resources can create the same result but at different prices.

Arbitraging labor across geographies resulted in initially significant cost savings with rate differentials of 10 to 1 were common. However, over time the value potential of labor arbitrage declines as wages in countries like India increase and companies have less opportunity to benefit as they have already outsourced labor intensive activities such as maintenance, operations and development.

With labor costs arbitraged away through offshore outsourcing, the challenge facing CIOs and CFOs is to find other opportunities. One area leading CIOs are looking at is the notion of requirements arbitrage.

Requirements arbitrage  focusing on earning the greatest return on the same set of resources. Here the value gained is measured by the speed of results as CIOs arbitrage the business value of projects and initiatives against time. The goal is to increase the yield on IT resources and the stream of business value produced by the same set of resources.

Requirements arbitrage sounds like good old-fashioned investment prioritization. It would be in a stable environment where project priorities are based on factors such as expected business value, ease of implementation, etc. However, the type of arbitrage we are beginning to see is not based on trading business cases against each other, but trading value streams against each other and time.

Time becomes a determining factor in the arbitrage equation given the unprecedented levels of economic volatility and uncertainly. These factors erode the predictability of the IT investment portfolio increasing the possibility that an IT project will be worth less when it is completed than when its started. The issue is not if the value exists but will that value still exist in the future. The point becomes not how much value can you create, but rather when and in what order will that value come online.

Requirements arbitrage is not about implementing small projects and quick wins faster. We assume that you have already picked the low hanging fruit. Requirements arbitrage is about how do we deliver the deep change needed now. This makes schedule a priority.

Schedule priority becomes a significant factor in the arbitrage process as CIOs will realize more value from addressing few priorities faster – creating additional value based on the differences between implementation time between options.

Requirements arbitrage changes traditional approaches to project prioritization, scheduling and mobilization. This approach upsets traditional notions of resource loading and resource contention replacing it with a focus on putting as many resources as possible on one or two initiatives in order to complete them faster.

Arbitrage overturns much of what we know about project management and that is the subject of another blog entry. But suffice it to say that CIOs success in the future will be more about how fast they can deliver the highest value initiatives while effectively managing cost.

How do you arbitrage requirements effectively? Well here are a few practices emerging that are defining new approaches to managing IT investments. These include:

• Getting a single prioritized list of investment projects across the enterprise. This provides the single list from which to identify arbitrage opportunities. The list is the result of a consolidated IT governance process.

• Evaluating that list to determine the implied time to business benefits incorporating implementation and deployment time. This places a higher priority on business initiatives that are consistent with your current IT assets, reuse proven solutions, and can deliver benefits based on changes in business process as well as technology.

• Incorporating implementation time and effort as higher priority variables in project scheduling. Program managers are directed to load the schedule based on value schedule rather than resource availability.

• Changing the organizational structure of IT to enable IT to focus on only one or two initiatives to do more work faster. The accelerated pace and focus on the most important things now, support greater business involvement and contribution.

• Applying services and concurrent engineering approaches to the problem that eliminate rather than create resource tension. These approaches reduce the sequential solution planning and its implied waterfall view of how the parts fit together.

CIOs need to change the priority, cost, scope and schedule equation. The economic forces that are reducing IT budgets are, at the same time, increasing the demand for new IT solutions and keeping people very busy.

Many CIOs have already arbitraged labor rates and now face the need to do more. Applying these and other practices enable the enterprise to gain greater business value by realigning their resources around few projects that deliver value faster and that requires the CIO arbitrage between requirements

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Category: CFO CIO Economy Leadership Strategy     Tags: cost cutting, Leadership, Management, value delivery

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