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Name
Name




# Application Assets/Costs $ 0,000 4 180
# Application Assets/Costs $ 0,000 4 180
# Infrastructure Assets/Costs $ 0,000 5 160
# Infrastructure Assets/Costs $ 0,000 5 160
# Service Assets/Costs $ 0,000 3 140
# Service Assets/Costs $ 0,000 3 140
# Management Assets/Costs $ 0,000 1 120
# Management Assets/Costs $ 0,000 1 120
TOTAL $ 0,000 Avg Avg
TOTAL $ 0,000 Avg Avg





Concept 4: The New Investment portfolios are classified from a business per-
spective, similar to financial investments.


New investments are also classified into strategic, factory, mandated, and
future strategic portfolios.
Portfolios that classify resources and expenditures, and new investments,
into functional categories (applications, infrastructures, services, and manage-
ment), represent an IT management perspective. We also need to take a busi-
ness perspective in portfolio classification, particularly for new investments. See
Exhibit 4.9.
Our purpose here is to classify prospective IT investments in ways that are
meaningful to management, similarly to how financial investments are classified.
The objective is to increase management™s understanding about the nature of
the investments but, more important, to enable management to “balance” the
investments it makes among the investment categories. Just as in financial invest-
ments, where the objective is to balance risk and returns (e.g., stocks versus
bonds, cash versus real estate, and so forth), here we want to balance not only
60 UNDERSTAND COSTS AND RESOURCES


EXHIBIT 4.9 Separating New Application Investment into Four Portfolios
for Balancing and Decision Making
Portfolios from
IT Perspective
Applications Infrastructure Services Management

Existing Application Infrastructure Services Management
Portfolio(s) Portfolio(s) Portfolio(s) Portfolio(s)
Portfolios
Added Application Infrastructure Services Management
Investment to Development Development Development Development
Portfolio(s) Portfolio(s) Portfolio(s) Portfolio(s)
Portfolios




Strategic Factory Mandated New Strat
Portfolios from Applications Applications Applications Applications
Business Infrastructure Infrastructure Infrastructure Infrastructure
Investment Services Services Services Services
Perspective Management Management Management Management




the risk and return of the company™s investments in IT, but also what the com-
pany is capable of doing.
Two issues must be considered when balancing IT investments. The first is
the distinction between discretionary and nondiscretionary funds. Often, IT
investment is made necessary because of legal or ownership mandates, irre-
spective of the business value of the investment. Second, differing kinds of IT
investments have different kinds of risks and returns. For example, the risks
associated with existing applications that have ongoing support requirements
are different than the risks carried by a brand new technology or an enterprise-
wide process change. See Exhibit 4.10.
Twenty-five years ago, McFarlan9 proposed a way to view the IT activities
of a company. He proposed two basic considerations: the degree to which IT


EXHIBIT 4.10 Four Portfolio Categories


FACTORY STRATEGIC
HIGH
Current
Importance of
IT to
Enterprise FUTURE
MANDATED
LOW
Operations STRATEGIC
(Nondiscretionary)


LOW HIGH
Importance of IT in the Future Competitive and
Business Capabilities of the Enterprise
61
Four IT Portfolio Concepts


activities are currently important to the operations of the company, and the
degree to which the IT activities will be important to future competitiveness.
We adapt their classifications into those shown in Exhibit 4.11, which take into
account different risks/returns and the distinction between discretionary versus
nondiscretionary investments.

EXHIBIT 4.11 Four Portfolio Category Descriptions for Development Portfolios
NIE Description Typical Value/ Typical
Portfolio Justification Risks
Categories

Strategic Investments that directly impact the Revenue High
competitive performance of the Market share
company. This can be as simple as new
Innovation
revenue generation, or as complex as
reengineering basic processes or Flexibility
maintaining barriers to competitive entry,
and so forth.

Factory Investments that keep the company Reduced costs Low
running. These typically are thought of Increased throughput
as “back office” investments. The
Reduced time
company depends on the underlying
applications to “keep the lights on” as Individual productivity
well as perform the company™s basic
functions.

Future Investments that will impact the future Same as Strategic High
Strategic performance of the company, typically
new businesses, new products/services,
and so forth.

Mandated Legally or board-mandated investments. None, or same as Low
Factory




The desired outcome is to allow management to determine the relative per-
centage of resources to be put into each portfolio category, based on risk/return,
discretionary versus nondiscretionary, and the outcomes of Planning, Innova-
tion, Prioritization, Alignment, and Performance Measurement analysis.
Some companies, however, may be more comfortable with just two basic
classifications: Strategic (all those with competitive implications), and Oper-
ational (all those that keep the doors open in the company). Still others may
prefer a single portfolio classification and, consequently, perform all portfolio
analysis with all current resources or all investments. See Exhibit 4.12.
At the highest level, the management decision is on the balance of invest-
ment among classifications. One company may be comfortable with 50 percent
Strategic, 20 percent Factory, 20 percent New Strategic, and 10 percent Manda-
tory. Another company™s balance may be entirely Factory.
62 UNDERSTAND COSTS AND RESOURCES


EXHIBIT 4.12 Example Balance of IT Portfolios
NEW INVESTMENT PORTFOLIO RANKING NEW INVESTMENT PORTFOLIO RANKING




Value: Technology,




Value: Technology,
Strategic, ROI




Strategic, ROI
Uncertainty




Uncertainty
Consumed




Consumed
Resources




Resources
Number




Number
Risk &




Risk &
Name




Name
# Application Investment $ 0,000 4 180 # Application Investment $ 0,000 4 180
# Application Investment $ 0,000 5 160 # Application Investment $ 0,000 5 160
# Application Investment $ 0,000 3 140 # Application Investment $ 0,000 3 140
# Application Investment $ 0,000 5 100 # Application Investment $ 0,000 5 100
# Application Investment $ 0,000 3 14 # Application Investment $ 0,000 3 14
# Application Investment $ 0,000 1 5 # Application Investment $ 0,000 1 5
TOTAL $ 0,000 Avg Avg TOTAL $ 0,000 Avg Avg




STRATEGIC MANDATORY
PORTFOLIO PORTFOLIO
10%
40% 20%
30%


FACTORY
NEW STRATEGIC
PORTFOLIO
PORTFOLIO

NEW INVESTMENT PORTFOLIO RANKING
NEW INVESTMENT PORTFOLIO RANKING
Value: Technology,




Value: Technology,
Strategic, ROI




Strategic, ROI
Uncertainty
Consumed




Uncertainty
Resources




Consumed
Resources
Number

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