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individually by e-mail at:

Bob Benson
Tom Bugnitz
Bill Walton

March 2004

W e have benefited from the advice and suggestions of a number of people.
We are grateful that Jon Shapiro, Rodney Alsup, Cecil Smith, Francois
Wouters, Larissa Moss, Dennis Smith, Camille Appledorn, Ed Curvey, David
Reo, Tony Salvati, and Nicholas Nash gave us the benefit of their thoughts and
reviews of early drafts. We are especially grateful for the work we have done
with Joe Barkley and Bruce Schneider of AIG and the many insights they gave
us in the course of writing this book.
We recognize the many people who have influenced our professional lives
and our thinking over the last twenty years and more. These include: Bill Smith
and the late Hardy Fuchs at Washington University, the best “IT guys” we™ve
ever known; Marilyn Parker, Bob™s coauthor of Information Economics and a
prime influence; Ed Trainor, who contributed the practical foundation for Infor-
mation Economics; Piet Ribbers of Tilburg University, with whom we always
have great ideas; Ken Orr, who always inspires; John Zachman and Dick Nolan,
who set the standard for what we try to do; Mike Nicholson, our first client
and a faithful supporter, and Bob Rouse, associates in the Beta Group; Linda
Bastoni of Gartner and Regina Paolillo of Creditek, always encouraging better
from us; Chuck Lybrook, who has supported us all these years; Greg Sullivan,
whose constant friendship and good humor means so much; Mary Ann Gibson,
whose business sense, intelligence, and support have pointed the way in build-
ing our business; Mike Luby, who possesses a first-rate executive mind connected
to an exquisite sense of humor; Phil Andrews, Swami Viswanathan, Jason Grant,
and the rest of our other clients and good friends (many of whom are both).
Students in our Washington University and Tilburg University courses also have
had a considerable impact on our thinking, as they have often heard our ideas
first and served as a valuable crucible in improving how we express them.


Define the Goals

T his book is based on a very simple idea: A company should only spend money
on IT1 that directly supports its business strategy and its operational effective-
ness, and should not spend money on IT that doesn™t. The management team can
control IT budgets and investments,
and at the same time improve IT™s Control Spending and Maximize
bottom-line impact, by consistently Impact on the Bottom Line
and persistently selecting the best IT ¤ 1 Define the Goals
investments, and eliminating under- 2 Ask the Right Questions
performing existing IT activities. This
3 Connect to the Bottom Line
book shows how to do that.2
4 Understand Costs and Resources
Right Results: The “right results” we 5 Focus on the Right Things
want are controlled IT costs and at
6 Adopt Effective Process to Produce Action
the same time improved bottom-line
7 Tackle the Practical Problems
8 Make the Right Decisions
Right Decisions: The “right decisions” 9 Plan for the Right Results
lead to the management actions needed
10 Keep Score
to produce the right results. These right
11 Deal with Culture
decisions lead to:
12 Char t the Path to Implementation
Creating better investment alterna- 13 Define What™s Next
tives”or, in IT terms, creating bet- 14 Answer the “So What?” Question
ter ideas for development projects.
Choosing the right investments and projects from the alternatives.
Eliminating nonperforming and poorly performing existing IT resources from
current spending.
Improving the performance of the remaining existing IT resources.
Implementing and following through on the right investments and perform-
ance improvements.

Our Right Results goals of controlled IT costs and improved bottom-line
impact work together. As new projects enable the business to improve its products,

services, and quality, and at the same time reduce operating costs, higher impact
on the company™s bottom line will result. As management focuses on control-
ling ongoing operational costs, overall costs may decline. This combination
allows the company to move from today™s cost and bottom-line position to a
future controlled-cost and improved bottom-line impact position.
To accomplish this, business executives and IT managers balance new IT
investments with the ongoing assessment of the performance of committed
IT resources. Money saved in one area can be applied to the other. From sen-
ior management™s perspective, this all adds up to the “IT spend.” From IT man-
agement™s perspective, this all represents the resources that must be managed
effectively. Working together, the goals of controlled IT costs and improved
bottom-line impact can be realized.
This is the goal of this book, as illustrated in Exhibit 1.1. Companies can
work toward goals in the IT Improvement Zone by examining and improving
both new project impact and ongoing costs.

EXHIBIT 1.1 Our Goal Is the IT Improvement Zone
Impact Increase from New
Cost and Cost

Impact Reduction
Cost Zone Operational
(“Lights-On” )

Cost Cost and
Lower Higher
Impact Impact

Companies spend as little as 2 percent and as much as 10 to 15 percent of rev-
enue on IT, including the ongoing cost of keeping the existing IT operational
activities going as well as new investment in development and enhancement
projects. As shorthand, we call the first the “lights-on” budget,3 and the second,
the “projects” budget.
We are interested in the entire IT spend, the sum of lights-on and proj-
ect budgets. Most of the spending is connected to ongoing operational costs,
often 70 or 80 percent of the total. To be serious about controlling cost
Today™s Reality

and increasing IT™s impact on the bottom line, we have to address the entire
However, with IT as in many other parts of the business, simply reducing
IT costs does not by itself improve the bottom line. But with the right manage-
ment frameworks and management practices, companies can successfully control
the growth of IT costs and at the same time improve the business bottom-line
impact of those costs and investments.
Historically, company executives have spent a great deal of time evaluating
and prioritizing new IT projects and investments. Considerable management
energy is spent prioritizing and dealing with the politics of project selection.
However, this effort applies to perhaps 20 or 30 percent of the overall IT spend.
The other 70 or 80 percent, the lights-on budget, is larger but attracts almost
no attention from management. In many ways, the lights-on budget is a black
box with no visibility to management.
An “entitlement” mentality tends to apply to the lights-on budget, where
each business manager expects that the information systems now in place will
continue with current or improved levels of support, and the CIO tends to
expect that the base budget for current applications support, including infra-
structure, will continue at current or increased levels. This entitlement mental-
ity also affects project prioritization (managers fight for “their” projects to be
done by “their” project people) as well as the ongoing costs of supporting each
manager™s applications. It can be very difficult to reduce support for existing
individual applications, making it difficult to control and possibly reduce the
lights-on budget over time.
As a result, rather than pursuing the goals of both reduced cost and im-
proved bottom-line impact, managers focus on one or the other. This leads to
one of several unfortunate scenarios, as shown in Exhibit 1.2.

1. Lower lights-on cost and reduced bottom-line impact, where companies
focus solely on cost reduction, without considering the specific impact the
cost reduction has on IT™s contribution to the bottom line. A typical out-
sourcing arrangement fits this scenario.
2. Higher lights-on cost combined with no improvement in bottom-line impact.
This is the entitlement situation, where managers assume that lights-on
budgets will regularly increase and new projects are chosen that do not pro-
duce enough bottom-line impact to overcome increased costs. Companies
that rely on traditional budget methods and traditional business-case and
prioritization methodologies often end up here.
3. Higher lights-on cost and higher bottom-line impact. This scenario is com-
mon where business conditions are improving or where the business is rap-
idly growing. Business growth obscures the fact that better management
scrutiny of both projects and the lights-on budgets can make the result even
better, and perhaps even move the scenario into the sweet spot of both lower
costs and higher bottom-line impact. In times of rapid growth, higher cost
may be unavoidable, but it does not have to be uncontrolled or unreasonable.

EXHIBIT 1.2 Current Patterns for Many Companies
All too common:
Higher Cost
No Change of Impact
Higher Higher Growth:
Cost Higher Cost
Higher Impact

Cost Situation IT Improvement

Lower Cost
Lower Impact

Lower Higher
Impact Impact

We want to be very clear on this: Getting the Right Decisions/Right Results means
dealing with both IT™s cost and IT™s impact on the bottom line. Of course, if we
reduce IT™s cost, then some of that cost reduction will filter down to the bot-
tom line. But that is not what we mean when we talk about IT™s impact on the
bottom line. Bottom-line impact, both short- and long-term, comes from the
cost reductions, quality improvements, and so forth that IT enables in the rest
of the company, and from making sure that these IT business impacts flow to
the bottom line. Over time, we want management teams to be able to dramati-
cally improve both cost and bottom-line impact.
To accomplish this, we propose three possible objectives, shown in Exhibit
1.3, that a company may pursue, depending on its current circumstances:

1. A Reduced Cost Objective 4 ” By applying the frameworks and five man-
agement practices, company management can reduce IT costs and retain the
contribution that IT makes to the bottom line. IT can perform just as well
as before, but at reduced cost.
2. A Stable Cost Objective ” Company management can continue to grow IT
use and keep up with the growth of the business, and yet control the overall
IT spend. IT can increase its support of the business and its impact on the
bottom line, but at current cost levels.
The Strategy-to-Bottom-Line Value Chain

EXHIBIT 1.3 Possible Outcomes for Companies
Higher Growth:
Higher Cost
Higher Impact

Stable Cost:


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