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

The balance of this book provides answers to the question: “What is our
plan for correcting this?”

The book™s website contains additional information:
Website Note 8: Gap Analysis: Closing Disconnects between Business and IT
Website Note 9: Building an IT Profit Model
The appendices also contain related information for Chapter 1:
Appendix C: The Development of Strategic Intentions, with Examples


1. Our European friends prefer the more inclusive term Information and Commu-
nications Technology (ICT). Our use of “IT” includes communications tech-
2. As we noted in the preface, while the terminology used here and throughout
the book is in business terms, the concepts and practices apply with equal force
to government and nonprofit organizations. While business is concerned with
competitive strategy and bottom line outcomes, government is just as concerned
with strategy and performance to organizational mission.
3. Our thanks to Joe Barkley and Fabrice Forsans for introducing this term to us as
it applies to the ongoing operational component of the IT spend.
4. Our objective is the effective management of overall IT costs. Cost objectives, as
we apply them in the scenarios, take unit cost reductions and demand changes
into account. We do not focus directly on unit costs but rather on macro-level
IT costs. We focus on demand in terms of increasing high-value activities and
reducing low-value activities.
5. Executives for government and nonprofit agencies also work to improve per-
formance. Rather than “bottom line,” they work to improve agency mission per-
formance. Throughout this book, we typically use “bottom line” terminology.
However, our concepts and practices work equally well for “mission perform-
ance” and “mission impact.”

6. For an extended discussion of the origins and challenges of business/IT discon-
nects, see Website Note 8, “Gap Analysis: Closing Disconnects between Business
and IT.”
7. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors (New York: Free Press, 1980) and Competitive Advantage: Creat-
ing and Sustaining Superior Performance (New York: Free Press, 1985).
8. J. Rockart, “Chief Executives Define their Own Data Needs,” Harvard Business
Review, March“April 1979.
9. See Chapter 6 for a complete description of the 12 Value Chain deliverables.

Ask the Right Questions

T he purpose of this chapter is to explore how management can most effec-
tively address basic questions about IT and business, and thereby set the stage
for effectively controlling the IT spend and maximizing IT™s bottom-line impact.
Managers ask tough questions about IT spending, particularly at budget
time. Here are typical questions we
have heard: Control Spending and Maximize
Impact on the Bottom Line
CEO: Can we afford what we™re spend-
1 Define the Goals
ing on IT? Do we even know
how much we™re spending on IT? ¤ 2 Ask the Right Questions
How can I tell if IT is helping 3 Connect to the Bottom Line
with our strategies? Are we get- 4 Understand Costs and Resources
ting bottom-line impact from our 5 Focus on the Right Things
IT investments, and how will I
6 Adopt Effective Process to Produce Action
know that? Are we making as
7 Tackle the Practical Problems
much use of the technology in
our business as we should? How 8 Make the Right Decisions
can I get all of my managers to 9 Plan for the Right Results
agree on our technology strate- 10 Keep Score
gies and plans? 11 Deal with Culture
CFO: Are we controlling our IT ex- 12 Char t the Path to Implementation
penses? Do our IT managers 13 Define What™s Next
understand the financial implica- 14 Answer the “So What?” Question
tions of their decisions? How do
we justify new IT investments?
How do we balance our resources between requests for new investment and
the needs of existing activities? How do I know IT is contributing to our
business success? Can we justify spending what we are, on IT?
CIO: I™ve got $75 million in IT project proposals and $30 million in IT budget
. . . how do we as a company decide which are the best $30 million of
projects to do? What is the correct balance between infrastructure support
and new projects? How do I get business and IT people on the same page


about IT initiatives, priorities, and expectations? How do I get business
managers to agree on IT™s priorities? How does IT communicate its per-
formance and its impact on the business in terms business understands?
Business Unit Manager: How can I help control my IT costs? How do I figure
out how to use IT to improve my business and competitive edge? My
direct reports all have good technology ideas . . . how do I choose? How
do I get IT working on the things the business needs, as opposed to the
things that individuals need? How do I build a business case for the IT
investments we need?
IT Managers and Professionals: How do we explain to the business what we
are doing and why it costs what it does? How do we cut costs and still
provide good services to the business? How can we work most effectively
with our peers in the business, to assure that we are addressing the right
problems and producing the right solutions? How do we know that the
infrastructures and applications we manage are making a difference for the

These are the questions managers feel they have to answer to get to Right
Decisions/Right Results. The questions address management process (e.g., “How
can I get IT working on things the business needs”) and outcomes (e.g., “How
do I know we™re getting value from IT?”). However, we propose a simpler set
of questions that address all of these concerns while focusing the company™s
attention on the most effective IT actions.

Businesses feel three pressures when trying to control IT spend while produc-
ing bottom-line impact. First, the overhang of existing IT activities (legacy sys-
tems, infrastructure, personnel, etc., which we will call the “lights-on” expense)
usually requires annual spending increases. Second, each year business defines
new IT investments (“projects”), increasing the budget requests for future peri-
ods. Finally, business managers continue to put downward pressure on IT costs,
forcing hard examination of lights-on expenses and new investments.
From a practical perspective, we see these pressures play out in the annual
IT budget cycles. First, companies develop future lights-on budgets with pro-
forma increases, with little examination of the underlying bottom-line impact
of the activities and expenses. Second, new IT investment proposals are devel-
oped (often as business wish lists), and combined with the lights-on expenses to
complete the overall IT budget proposal. Finally, business management places
spending constraints on the organization, forcing a close examination of all IT
The Right Questions Focus on Affordability and Impact

In many companies, the lights-on budget (up to 85% of IT expense in some
companies) is treated as an entitlement, with little examination of the value of
those continuing expenses. Consequently, controlling IT spending means con-
trolling the costs of new investment, squeezing new projects out rather than
reducing existing activities. In effect, the amount of new IT investment is the
difference between overall budget targets and the budgeted lights-on expenses.
We propose that the role of management in this context is to force the
examination of all IT expenses, using the yardstick of bottom-line impact, and
creating IT spending patterns and budgets that are affordable for the business,
given budget constraints and guidelines, while supporting the new IT activities
that the business needs. To do this, management must address two comple-
mentary sets of questions:

Affordability Questions
What can we afford to spend on IT?
Can we reduce unnecessary IT costs?
Can we redeploy expenses to support needed projects?

These questions address management™s judgment on where, and how, to spend
company resources on its operations, of which IT is but a part.

Impact Questions
Are we investing IT resources in the right places?
Do our business strategies drive our IT actions and produce bottom-line
Are we getting bottom-line impact from our lights-on resources?
Are we balancing our strategic and tactical investments?

These questions address the alignment of what IT spends with the company™s
basic strategies and goals. The questions also get at IT™s performance with respect
to doing the “right” projects and the “right” way to allocate IT resources.
We also want to point out a question we are not asking: We are not being
distracted by the “IT Value” question. Considerable energy has been expended
throughout the IT industry to answer the “What is the Value of IT?” question.
We do not believe that at this stage of business and IT development, this is the
right question, because it does not lead to the appropriate management actions.
We are focused on the actions needed to control IT spending and improve IT™s
impact on the bottom line.
To ask and answer these questions effectively, we need to engage senior man-
agers in discussing and resolving the basic Affordability and Impact Questions,
in order to take the actions that effectively control the IT spend and improve

IT™s bottom-line impact. Senior managers should be responsible for a number
of actions:

Establishing spending targets and specific justification criteria for IT spending.
IT spending is like any other business expense, and managers need to set
affordable and realistic IT spending targets.
Understanding investments. Senior managers should understand where and
why money is being spent for new projects and ongoing IT.
Understanding the business impact. Senior managers should know the con-
nection between IT investments and accomplishing what is important to the
business (reflected in the company™s strategic intentions).

By considering affordability and impact, the management team can most effi-
ciently focus its own activities and drive the actions of the IT management group.

Over the last 15 years, we have conducted many management exercises in pri-
oritization and alignment intended to answer the Impact Questions about IT™s
value: Are we spending our money in the right place, can we support our strat-
egy, and so forth. These exercises generally succeeded in getting management
groups to understand what they were doing with IT, and renew or redirect their
commitment to their IT strategic and tactical plans.
However, in almost all cases, there was a subtext to the management teams™
discussion: that the company had implied limits to what it could spend on IT.
In effect, an “affordability”1 factor enters into management™s concerns. Conse-
quently, for many companies, the “strategic” questions are not the first ones to
ask. The management actions needed are not only to decide on IT investment to
support strategy, but also to decide, in the context of that company and industry,
what is the right level of IT spending, and how should the company allocate those
dollars between ongoing activities and new investment as effectively as possible.
By starting with affordability, we start with reality. We are explicitly stating
that the issue is not one of garnering new budget support for every new idea,
but allocating a scarce resource between new needs and existing activities, so
that the mix produces the best bottom-line impact for the company.
The three Affordability Questions are simple to state but complex to answer.
Each question contributes a critical piece of understanding to managers making
resource decisions.

1. What can we afford to spend on IT? From a CEO™s perspective, IT is but
one of a number of business expenses that must be managed and controlled.
Affordability Questions: The Starting Point for the Right Actions

From the business unit or CIO perspective, IT expenses are often entitle-
ments (lights-on budgets) and new spend (project budgets) that need to
grow if services and functions are to continue. We propose that each com-
pany has an implied target for IT spend, which may or may not be articu-
lated throughout the company. The issue for management is to identify and
understand that constraint, and allocate IT resources within that number to
the best and highest-impact activities.
What is the right level for IT expenditures for a given company?
“Lights-on” should be stable at worst, given the constant decline in unit
costs of hardware and the many alternatives available for reducing software
costs. Project money should be dependent on the strength of the individual
project business cases, offset by the risks involved, and represented in total
by the project portfolio. Our starting point is to look for stronger projects
with larger bottom-line impact. Overall, the right level for IT expenditures
is based on executives™ judgments on what the company can afford, depend-
ent on industry conditions and company capabilities, rather than line man-
agement™s beliefs about what they need.
2. Can we reduce unnecessary IT costs? For the most part, this question deals
with lights-on budgets and ongoing IT activities. First, it implies that we
know what the costs for IT are. However, we have learned that in many
companies neither business nor IT managers truly understand the extent or
detail of the costs that make up ongoing activities. While gross bottom-line
budgets are known, such important issues as the cost to run a given appli-
cation (or even what the inventory of applications is), the people dedicated
to particular systems, and the overall infrastructure component costs (and
what is driving those costs) are completely unknown. Second, it also implies
that companies are examining these costs, but we have found there is very
little examination of ongoing costs (beyond anecdotal cases for outsourc-
ing, systems replacement with new purchased software, etc.). The issues for
management are to identify these costs, understand their bottom-line
impact, and eliminate (or redeploy) costs that are not contributing to the
bottom line.
3. Can we redeploy expenses to support needed projects? Given limited resources
(first question) and understanding of overall and especially unnecessary
costs (second question), this question implies that we can redeploy poor-
performing assets and resources to new projects. Assuming flat or slightly


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