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EXHIBIT 4.16 Investment Decisions within Portfolio
Total Cost of Applications ($000)
by Dependency and Quality Scores
8,000
Abandon:
Dependency is low
7,000 Crisis:
Dependency is high
6,900 (4, 5) and Quality
6,000 equals 2 or less

Noncritical, Stabilize:
5,000 Dependency is
moderate (3)

4,000
Improve Only as
4,000
3,700 Needed
3,000 Dependency is high
3,450
(4, 5) and Quality is
moderate (3)
2,000 2,500
Excellent, Monitor
Both Dependency
1,000 and Quality is
(4 or Greater)

0
Abandon Crisis Noncritical, Improve Only as Excellent,
Stabilize Needed Monitor




Practical Problem: Maintenance of the Portfolio Information
Most companies spent considerable time and energy constructing application
and infrastructure portfolios as part of the Y2K effort. Often this was the first
time that company management saw the holistic listing of everything that IT
managed. The outcome was a successful transition to 2000. However, almost
all companies then put aside the portfolio information so arduously completed,
with the result that the portfolios are no longer accurate or useful.
Adopting portfolio and portfolio management as a component of the
Strategy-to-Bottom-Line Value Chain, and as applied in the NIE practices, is a
67
Summing Up Portfolios and Portfolio Management in Information Technology


commitment to continue portfolio maintenance. This is a management com-
mitment and a process development problem. For example, in many ways, the
“asset management” which companies undertake to control the proliferation of
hardware/software in the company is a form of infrastructure portfolio. Com-
panies rapidly learn how difficult it can be to maintain the information, given
the pace of acquisition of new hardware (e.g., PCs) and the retirement of old
hardware.


SUMMING UP PORTFOLIOS AND PORTFOLIO
MANAGEMENT IN INFORMATION TECHNOLOGY
We made the point earlier that the use of portfolios integrates the five NIE
practices and applies to the entire IT spend rather than just the application
development portfolio. We also noted that current industry practice relegates
portfolio management to prioritization of the application development projects.
See Exhibit 4.17.

EXHIBIT 4.17 Portfolio Analysis for Decision Making
Total Cost of Applications ($000)
Breadth/Dependency Pairs

1,500
5



6,000
3,650
4
1,300
Breadth




4,600
3 8,550
2,000

1,200
2



1



0
0 1 2 3 4 5
Dependency




The use of portfolios is more than Prioritization.


The use of portfolios is much more. It is the foundation for managing IT in
the company. Including risk and uncertainty in project assessment and includ-
ing service and quality in base resource assessment permits management to
understand and take appropriate action about these portfolio elements.
68 UNDERSTAND COSTS AND RESOURCES


Using IT Portfolio Management to Control IT Costs
A pervasive problem facing most companies is cost containment, particularly in
difficult economic times. By defining exactly how much resource is devoted to
each portfolio category and line item, and by providing information about serv-
ice and quality and strategic alignment, management can identify the least valu-
able (in business impact terms), and the least well performing, element of each
portfolio. This allows cost-containment actions based on bottom-line impact
and performance. Again, the key point is that portfolios represent 100 percent
of IT costs.
The power of portfolios applied to the lights-on budget is that it enables
management review of 100 percent of the IT spend, rather than the “add-on”
entitlement mentality that pervades most organizations. As we™ve noted, manage-
ment has tended to spend most time on the project/development budget, which
is normally around 20 percent of the whole spend. By understanding where
costs are, and by applying NIE practice tools such as alignment to the port-
folios, management can assess the 80 percent, with the likely outcome of iden-
tifying poorly performing resources, and poorly performing or poorly aligned
activities, with a view to reallocating those resources to higher performing
opportunities or, even more valuably, to additional new projects.
For example, consider the application portfolio for a financial services com-
pany that is assessed (using the Alignment Assessment practice described in Chap-
ter 8). These applications have been assessed for the “breadth” of use (whether
the application is used by just a few individuals, or a business function or depart-
ment, or company-wide) and for dependency (how important is it to the func-
tioning of the individual or department or company). The size of the bubble is
application cost (annual support personnel and computer processing). In this
example, management should consider the cost of the applications that are not
used widely and are not depended upon. In this case, this is the applications rep-
resented by the lower left-hand bubble. The management question is: Why are
we spending money on this? Are there opportunities for cost reduction here?11


CHAPTER SUMMARY
Portfolios allow management to classify costs and resources into useful group-
ings for asking the important Affordability and Impact Questions. Portfolio
Management allows management to understand the full IT spend, make resource
investment tradeoff decisions, and improve the bottom-line impact of its IT
investment decisions.

Portfolio Outcomes in NIE Practices
Portfolios are applied in each of the five NIE practices. By doing so, a number
of outcomes can be expected:
69
Understand Costs and Resources: Management Agenda


Overall
Provide visibility to 100 percent of IT spend
Establish a framework for planning through budgeting (supporting the
Strategy-to-Bottom-Line Value Chain)

Strategic Demand/Supply Planning and Innovation NIE Practice
Link as-is and to-be resources to the company strategic intentions
Establish the foundation for assessing the as-is portfolios and defining the
strategic to-be portfolios
Establish a consistent vocabulary for IT and the business
Describe where IT resources are applied and connect them to company
budget and planning processes
Provide a framework for defining IT requirements, including renewal and
growth
Establish connections to performance measurement

Prioritization NIE Practice
Establish strategic-intention basis for resource allocation and prioritization
Provide perspective for future investment requirements
Provide basis for assessing project risk and benefits

Alignment NIE Practice
Establish basis for service, quality, reliability, and risk assessments
Establish multiyear information for alignment
Address 100 percent of the IT spend and connect the IT spend to business
strategic intentions

Performance Measurement NIE Practice
Provide a framework for performance measurement of 100 percent of the
IT spend
Connect performance measurement to strategic planning
Connect to the business performance affected by IT portfolios


UNDERSTAND COSTS AND RESOURCES:
MANAGEMENT AGENDA
The following is a self-examination for the critical success factors for Right Deci-
sions/Right Actions, in the use of portfolios.
70 UNDERSTAND COSTS AND RESOURCES


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

Do we manage our development and enhancement projects
as a por tfolio of projects?

Do we analyze our lights-on expenditures from a por tfolio
point of view?

Do we assess lights-on activities by strategic alignment?

Do we assess lights-on activities by quality or services
levels?

Do we know how much we are spending for IT services?
For IT management?

Do we have an investment strategy for our lights-on
expenditures?

Do we have an investment strategy for existing applications?

If we are doing por tfolios now, are we able to maintain
the information accurately?



The balance of this book provides answers to the “What is our plan for cor-
recting this?” statements.

ADDITIONAL READING
The book™s website contains additional information:
Website Note 5: Modern Portfolio Management
Website Note 6: One Company™s View of Portfolio Management
Website Note 7: Constructing Portfolios
Website Note 17: Other Portfolio Classifications

The appendices also contain related information for Chapter 4:
Appendix C: The Development of Strategic Intentions, with Examples


NOTES
1. F. Warren McFarlan, “Portfolio Approach to Information Systems,” Harvard
Business Review, September“October 1981, pp. 142 “150.
2. The template shown in Exhibit 4.1 is adapted from Parker and Benson, with
Trainor, Information Economics (Englewood Cliffs, NJ: Prentice-Hall, 1988),
p. 145.
71
Understand Costs and Resources: Management Agenda


3. See Website Note 5, “Modern Portfolio Management,” for the history of port-
folio management.
4. See, for example, F. Warren McFarlan, “Portfolio Approach to Information Sys-
tems,” Harvard Business Review, September“October, 1981, pp. 142 “150.
5. “Information Technology Investment Management: An Overview of GAO™s
Assessment Framework” (GAO/AIMD-00-155, May 2000), http://www.gao.
gov/special.pubs/a10123.pdf.
6. See Parker and Benson, with Trainor, Information Economics: Linking Business
Performance to Information Technology ( Englewood Cliffs, NJ: Prentice-Hall,
1988).
7. See Website Note 6 for a perspective on the use of portfolios to manage IT.
8. See Website Note 7, “Constructing Portfolios,” about the issues in establishing
portfolio information.

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