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IT™s bottom-line impact. Management™s strategic intentions express how the
44 CONNECT TO THE BOTTOM LINE


company intends to improve them. Therefore, the business case justification for
each development and enhancement project needs to clearly state exactly how
the project supports management™s strategic intentions and exactly how the
project will therefore improve the company™s operational or strategic effective-
ness. This, of course, is connected to performance measurement, with the met-
rics that track operational and strategic effectiveness and management™s strategic
intentions. This also is connected to planning in terms of how strategic inten-
tions are defined, and to prioritization in terms of making project investment
decisions.
All this illustrates the importance of a common framework like the Strategy-
to-Bottom-Line Value Chain, and the basic alignment and affordability goals
expressed in Chapter 1.


Connections to Financial Performance
Of course, IT can produce direct impact to the bottom line. ROI computations
(or the many variants of ROI) hope to exactly measure this impact, and where
direct cost reductions or revenues are created, this is appropriate and encouraged
by NIE practices. But the other connections, made by cause and effect, are
equally or more important. The real leverage that management has in improv-
ing financial performance is through its strategic intentions. Right Decisions/
Right Results through NIE practices makes both a reality. The opportunities
to use financial measurements for bottom-line impacts, including using the new
advances in option theory, risk management, and similar developments, can be
included in the NIE practices.


Business Process and Operations: A Big Opportunity
It should be obvious that when we talk about “controlling IT spend,” we are only
talking about from 2 percent to maybe 10 percent of the total corporate budget.
Most of our interest focuses on the impact IT has on the rest of the company,
in terms of reducing those company costs and improving strategic effectiveness.
One major IT impact, of course, is on the back-office company activities.
These can be from 10 percent to as much as 50 percent or more of the com-
pany™s total expense budget. In this chapter, we express this impact in terms of
improving operational effectiveness. That presumably results in lower cost and,
consequently, bottom-line impact.
The big opportunity is to apply Right Decisions/Right Results concepts and
the five NIE practices directly to the company™s business processes which have
many of the same characteristics as IT systems and applications. We can con-
struct portfolios of business processes and apply alignment and portfolio assess-
ments such as service and quality to them. We can prioritize changes to them,
and we can put performance measurement metrics on them. In short, we can
apply the same kind of management decisions directly to business processes and
accomplish substantial impact on the company bottom line.
45
Connect to the Bottom Line : Management Agenda


This is beyond the immediate scope of this book. But the implications, and
direct applicability, of the Value Chain and NIE practices to business process is
a big opportunity.


The Connection to Performance Measurement
For Right Decisions/Right Results, Performance Measurement is critical in val-
idating and verifying the cause-and-effect relationships that were assumed during
the strategy and planning processes. Historically, IT performance measurement
has focused on the operational aspects of IT, with measures that report per-
formance in IT terms. For NIE, performance measurement focuses on IT™s per-
formance relative to business operational and strategic effectiveness. The role
of performance measurement is to track IT™s contributions in financial terms
and in strategic and operational effectiveness terms. Both are important, and the
latter are important in establishing the strategic connection to financial per-
formance.


CONNECT TO THE BOTTOM LINE : MANAGEMENT AGENDA
Questions for management about IT™s connection to, and impact on, the bot-
tom line:

If No, What Is
Yes or Our Plan for
Management Question No? Correcting This?

Do we know our strategic intentions?

Does IT demonstrably suppor t our strategic intentions?

Are IT investments prioritized against strategic intentions?

Does the entire IT spend, including development, operations,
maintenance, and services, align with strategic intentions?

Can IT reduce unnecessary expenditures?

Are we evaluating lights-on budgets against strategic
intentions?

Do both IT and business managers par ticipate effectively
in these management processes?



ADDITIONAL READING
This book™s website contains additional information for Chapter 3:
Website Note 8: Gap Analysis: Closing the Disconnect between Business and IT
46 CONNECT TO THE BOTTOM LINE


Website Note 9: Building an IT Profit Model
Website Note 13: Our Use of Shareholder Value

There is also related information for Chapter 3 in the appendices:
Appendix C: The Development of Strategic Intentions, with Examples


NOTES
1. Jack M. Keen and Bonnie Digrius, Making Technology Investments Profitable:
ROI Road Map to Better Business Cases (Hoboken, NJ: John Wiley and Sons,
2002).
2. We do not ignore “mandatory” investments, enabling infrastructure invest-
ments, and so forth. We are setting up the cause-and-effect logic, which can be
applied in all these cases.
3. See Website Note 13 on Shareholder Value. Our use of shareholder value focuses
on the cause-and-effect relationship between management actions and ultimate
bottom-line impact. As the note points out, we do not require the financial deci-
sions components of shareholder value.
4. See Gary Hamel and C.K. Prahalad, “Strategic Intent,” Harvard Business Review,
May“June 1989. Our use of “strategic intentions” began as “management fac-
tors” in the original Information Economics work in the mid-1980s, and is par-
allel to the work on strategic intent reported in this article.
5. Michael E. Porter, “What Is Strategy?” Harvard Business Review, November“
December 1996, p. 62.
6. For most of this book, we use the term ROI as a generic label covering finan-
cial computations of expense, revenue, and return.
7. See Appendix C for examples of strategic intentions in business and govern-
ment. See Chapter 4 for further description of strategic intentions/management
factors and an example of their application in prioritization.
8. James M. McTaggart, Peter W Kontes, and Michael C. Mankins, The Value Im-
.
perative: Managing for Superior Shareholder Returns (New York: The Free Press,
1994), p. 49.
9. Michael E. Porter, “What Is Strategy?” Harvard Business Review, November“
December 1996, pp. 113 “118.
10. Ibid., p. 115.
4
CHAPTER

Understand Costs and Resources



T his chapter describes portfolio management and introduces some of its uses
in the Strategy-to-Bottom-Line Value Chain and the New Information Eco-
nomics practices.
The idea of managing IT as a set
Control Spending and Maximize
of portfolios has been around for three
Impact on the Bottom Line
decades. Most prominently, Warren
1 Define the Goals
McFarlan advanced the idea in a Har-
vard Business Review article in 1981,1 2 Ask the Right Questions
where he focused on investment deci- 3 Connect to the Bottom Line
sions, risk management, and portfolio ¤ 4 Understand Costs and Resources
classifications. NIE practices use port- 5 Focus on the Right Things
folios as a tool for obtaining and man-
6 Adopt Effective Process to Produce Action
aging information about applications,
7 Tackle the Practical Problems
infrastructure, services, and manage-
ment activities. 8 Make the Right Decisions

9 Plan for the Right Results
10 Keep Score
INTRODUCTION
11 Deal with Culture
Portfolios are collections of resources. 12 Char t the Path to Implementation
Portfolio Management, applied in NIE 13 Define What™s Next
practices, is a powerful tool for plan- 14 Answer the “So What?” Question
ning and decision-making about IT in-
vestments and resources.
In the financial world, a portfolio is a set of financial investments and
resources such as stocks and bonds, held by an individual or organization. The
portfolio also contains information about the investments and resources, such
as number of shares, current value, and when the asset was acquired. In IT, a
portfolio is a set of IT investments and resources, together with information
about them. Each line item in the portfolio is a separate investment or resource,
such as an application, an infrastructure component, an IT service, or a man-
agement activity.


47
48 UNDERSTAND COSTS AND RESOURCES


Exhibit 4.1 is an example of a template for portfolio information.2 Each
row is an individual member of the portfolio, such as an application or an IT
service. In addition to basic information about the line item (name of line item,
a size or quantity indicator, and costs/resources consumed), information about
service and quality, the risks, and bottom-line impact is specified in the template.
Exhibit 4.2 is an example of an application portfolio. Each line item is an
application currently in use by the company. The purpose of portfolio manage-
ment is to enable management analysis and decision-making about the individ-
ual elements of the portfolio. For example, in the portfolio listing shown in


EXHIBIT 4.1 Basic Portfolio Template

Basic Information Service and Risk and Value/State
Quality Uncertainty

(A Portfolio line




Technical Assessment
Consumed ($ or FTE)




item is an
Costs or Resources




Strategic Alignment
individual
Responsiveness




application,
Organizational
infrastructure
Functionality




Technology



component,
Availability
Accuracy




Business
Quantity




service, or Project
management




ROI
activity)

Item 1
Item 2
Item 3


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