Richard Hunter

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Richard Hunter
VP Distinguished Analyst
17 years at Gartner
32 years IT industry

Richard Hunter is vice president and Gartner Fellow in Gartner's CIO Research Group – Office of the CIO Research Team, where his recent work has focused on issues of interest to CIOs, including risk and value. ...Read Full Bio

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IT investment decisions are the best early-warning system for the success of enterprise strategies

by Richard Hunter  |  October 17, 2013  |  7 Comments

I’ve been thinking a lot lately about the “kernal” construct that Richard Rumelt proposes in his book “Good Strategy, Bad Strategy.”  According to Rumelt, the irreducible core of a strategy–the “kernal”–consists of a diagnosis of the environment an enterprise operates in, one or more policies that are intended to address the diagnosis, and coherent execution in support of the policies.  IT governance looms large in coherent execution; every change in an enterprise that’s more than trivial eventually comes to IT, because nothing that’s more than trivial can be implemented without supporting technology. 

In other words, the IT project proposal process essentially generates a running list of proposed and actual change in the enterprise.  In fact, the IT project portfolio is the only place in the enterprise where all that change is visible at once.  Smart enterprise leaders can use that fact to their advantage by turning the IT investment decision making process into a forecasting system for the success of enterprise strategies. Here’s how:

1)       Ensure that any proposal for change that comes to the IT investment decision making process (a/k/a IT governance) has two explicit characteristics:

  • It spells out outcomes in material, quantified, baselined terms, and
  • It links those outcomes to the goals associated with specific enterprise strategic imperatives, of which there are probably no more than half-a-dozen at any point in time, assuming that the enterprise is genuinely clear on its strategy; great strategies don’t have 15 segments.

Investment portfolios aligned to strategic imperatives are useful for the latter purpose.   The CFO or COO, not the CIO, is the appropriate party to ensure this basic investment discipline, because it’s not the CIO’s job to enforce investment discipline, whether IT is involved or not.

2)      By adding up the outcomes, costs, and timeframes associated with projects within an investment portfolio linked to a strategic imperative, the enterprise can determine how far (hypothetically) the full range of initiatives will move the enterprise towards the goals specified by the imperative, at what cost, and within what timeframes.  That knowledge can be put to good use in deciding how much and where to invest.  Summing of these factors is relatively trivial if the basic information is included in project proposals, and can be done by a project management office, by personnel within IT or a sponsoring business unit, or by the CFO’s office.

3)      When proposed projects are reviewed, approved, resourced, and started, the same approach can be used to determine how far the approved project portfolio (as opposed to the proposed project portfolio) will move the enterprise towards its goals.  Comparing proposed project portfolios to approved portfolios can help to show whether the enterprise is investing enough, too little, or too much in pursuit of its strategies; for example, whether attractive investment opportunities are being left on the table because of arbitrary constraints on “IT spending.”  (Calling an initiative supported by IT an “IT project” is like calling your exercise program “the Nautilus project”; yes, machinery is involved, but that’s not the point of the exercise.)

4)      When approved projects are completed (and after a suitable waiting period to account for the lag in benefits that always follows any change initiative), actual outcomes can be measured, which will help both to refine forecasting going forward and to improve current forecasts.

Suppose, for example, that we have a strategic imperative to improve product quality in order to increase initial and repeat sales and reduce capital allocated to allowances for returns.    If we can quantify, even hypothetically, the extent to which a given increase in product quality will increase sales and reduce allowances for returns, and we frame our project proposals in those terms, we can then use our IT-supported project portfolio for that strategic imperative to estimate how fast, how much, and at what cost we will be able to achieve these strategic goals with our current project initiatives.

I said earlier that this approach offers a level of insight into the potential for success or failure of strategic imperatives that is available nowhere else.  Even more importantly, this insight can be achieved with only minor adjustments (if any) to an investment decision-making process that is already present in the vast majority of enterprises.  For many, the discipline of specifying initiative outcomes in material, quantified, baselined terms (as opposed to fuzzy measures of success like “improve collaboration”) will be the most difficult to master, but this can be expected to improve over time with management attention and team learning.  In return, the enterprise gets a powerful early-warning mechanism for strategic success, not to mention a better way to think about its investments involving scarce IT and non-IT resources, and (ultimately) higher yields on those investments.

Most enterprises think about IT governance as a mechanism for allocating IT resources to “IT projects,” but that’s way too limited a view of what’s really going on.  I hope I’ve made it clear here that not only is IT governance one of the most important enterprises for coherent execution of strategy, it’s also the one that offers the best and most comprehensive tools for estimated and validating the outcomes that execution will deliver.

I’ve been talking about these ideas with CFOs, CEOs, and CIOs lately, and the reception has generally been favorable.  I wouldn’t be surprised if Wall Street investment analysts figure this out at some point, and CIOs start getting calls from said analysts about what’s in the project portfolio. 

Think about it, and let me know what you think.

 

7 Comments »

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7 responses so far ↓

  • 1 Grant Furley   October 17, 2013 at 10:57 pm

    Great post Richard – I agree with you. What this shows is that all investment decisions across the organisation should be considered together on the basis of their return (or value). Pure IT investments are just a specific type of project to reduce risk or maintain/advance IT capability, all the rest are business investments that most times involve IT.

    There is an emerging school of thought that has merit that suggests assessing an investment portfolio on anything but value is not useful. It suggests that we should do away with strategic alignment and other such “rate and weight” approaches, and focus only on value. I intend to explore this more in coming months.

    Another interesting idea is looking at an enterprise project portfolio as a series of “releases” of change into an organisation. Organisations would adopt a “release management” approach, similar to that used by IT operations to manage the release of changes into the technical environment, but extended to accommodate all business change. It is founded on the notion that the release cycle is what ultimately delivers change. Managing the release cycle in ways that best deliver value for the organisation is more important than managing the sequence of the projects individually.

    To find out more about this line of thinking see Louis Taborda’s book “Enterprise Release Management: Agile delivery of a Strategic Change Portfolio”.

  • 2 Richard Hunter   October 18, 2013 at 8:30 pm

    Thanks for the insightful comments. I wonder about this:
    “There is an emerging school of thought that has merit that suggests assessing an investment portfolio on anything but value is not useful.” I’d like to see some of the work that’s been done along those lines.

    My recent research tells me that strategy matters deeply to perception of value delivered by IT, and absent clear strategy reflected in investment decision making, there’s a low ceiling on perceived IT value. To me that means that executives who don’t have a strategy, or who don’t reference that strategy in their investment decisions, don’t have confidence that their initiatives aren’t simply moving the enterprise in circles, faster.

    Beyond that, any–every–enterprise has an overwhelming number of options for where to invest their scarce resources. Strategy is what tells me (or should tell me) whether one investment with good (hypothetical) returns is better than another–better because it takes the enterprise down a differentiated path that should lead to sustained success.

    So count me as skeptical that abandoning strategy as a factor in investment decision-making is the right thing to do. But I’m always willing to hear the argument. Feel free to comment with references to the best arguments you’ve read on this score. And thanks again for commenting already.

  • 3 Grant Furley   October 20, 2013 at 6:16 pm

    Thanks for the feedback. I’m still getting my head around this so only too happy to have the discussion. I came across this idea on Lee Merkhofer’s very useful site http://prioritysystem.com/.

    He’s posted a great of useful information there but the page that specifically addresses strategic alignment is here:
    http://prioritysystem.com/reasons3c.html#strategicalignment

    He says despite its popularity strategic alignment is not a sound way of prioritising an organisation’s projects because it is subjective and can’t be measured.

    This doesn’t mean having a strategy isn’t very important, or that you shouldn’t focus on projects to implement strategy. I work developing strategies and improving IT-business alignment so I see firsthand the real benefits these bring for IT and client organisations. But I also help develop the IT investment portfolios that arise from this strategy work. It isn’t always easy to sort out the most important so I have been looking for a genuinely robust approach to prioritisation.

    Merkhofer suggests that “Translating strategy to action is important, however, being well-linked to an element of strategy doesn’t guarantee that a project will be successful or that it will generate the most value for the organization.” In other words a project that is risky and doesn’t deliver much benefit but is seen as “strategic” should still be rated a lower priority investment than a sure-fire winner that is assessed as less “strategic”.

    Creating value is why we develop strategy and why (as you say in your post) IT investment outcomes need to be spelt “out in material, quantified, baselined terms”. I think what Merkhofer is suggesting is that we should use these tangible measures to prioritise your investment portfolio rather than any notional judgement of the value of strategic alignment.

  • 4 Lee Merkhofer   October 21, 2013 at 1:59 pm

    Good post and exchange of ideas!

    I am one of those who support the proposition, identified by Grant Furley, that assessing the project portfolio on anything other than value is not useful (see my website, http://www.prioritysystem.com). Organizations conduct projects because they think it useful to obtain the consequences of doing those projects. By definition, the value of the portfolio is its worth to the organization, the most the organization’s leaders would be willing to pay to obtain the (uncertain) consequences of the portfolio. If the organization’s leaders would be willing to spend more to obtain the lottery over Portfolio A’s consequences than to obtain the lottery over Portfolio B’s consequences, then Portfolio A must be preferred (an “if and only if” relationship). One cannot argue that a portfolio with better strategic alignment (whatever that means) is necessarily preferred over one with less strategic alignment.

    As you say, strategy and the perception of IT value are intimately linked. Organizations value initiatives that contribute to the achievement of key elements of strategy. The argument that portfolios be configured to maximize value does not mean that strategy be abandoned as a factor in investment decision making. Rather, it means that project portfolio should be assessed based on estimated impacts to all relevant sources of value, including near- and long-term earnings, customer value, option value, and advancement of key components of strategy. The initial quantitative relationships may not be very good, but like all models they can be improved over time. Developing those relationships advances the understanding so essential to successfully managing the organization.

    Thanks again, Richard, for stimulating post.

  • 5 Richard Hunter   October 23, 2013 at 9:48 am

    Thanks Lee for this explanation. It appears to me that we’re in sync on the idea that strategy is one of the factors to be considered in investment decisions, not the only one. And I certainly agree that objective measures of outcomes are the key factor in either case. We pursue strategies because they are designed to produce desired outcomes. Absent those outcomes, what’s the rationale for the strategy?

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