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34 CONNECT TO THE BOTTOM LINE


The first and second categories, though real, are very much in the minority
of opportunities in companies today. The biggest challenge, and opportunity, is
controlling IT spend and improving bottom-line impact when projects and
lights-on budgets do not produce their promised cost reduction or yield imme-
diate financial returns. IT is at least one step removed from direct bottom-line
impact. Business units apply IT in their business processes, and it is through
those business processes that the company™s expenses are reduced or revenues
improved. In other words, IT™s bottom-line impact is filtered through the activ-
ities of other functional areas of the business.
For new IT project investments, direct bottom-line impact is normally
addressed in each project™s business case. Jack Keen and Bonnie Digrius™s book
on business cases1 deals effectively with this, laying out a powerful method for
expressing a business case and defining bottom-line impact for an individual
project. The method is based on making the strongest possible business case by
connecting the project to the business through a variety of techniques including
financial measures.
Our focus, however, is on the total IT spend, including all projects and
lights-on expenses. The challenge is to use a common method to connect to the
bottom line for all new projects and all components of the ongoing IT spend,
and to determine how to control spending for the total IT spend.
We assume that acceptable business cases have been made for new IT proj-
ects. Our objective is to examine the complete new project portfolio after busi-
ness cases for individual projects have been made and select the best ones from
all the opportunities. For the lights-on portion of the IT spend, we assume that
all the activities have relevance to the business, but this is an opportunity to
eliminate or renew the lowest performing activities. We need tools and meth-
ods to work with the complete IT budget. The problem is not to justify an indi-
vidual project; the problem is to choose the best portfolio of projects. Similarly,
the problem is not to justify an individual line item in the lights-on budget; the
problem is to allocate the ongoing lights-on budget to the best line items, and
thereby improve overall bottom-line impact. This is how we control IT spend-
ing and improve bottom-line impact.
Our basic approach for connecting to the bottom line has three elements:

1. By prioritizing all IT investments in terms of bottom-line impact (includ-
ing risk), the company improves overall bottom-line performance by choos-
ing the high-impact investments and eliminating or reworking low-impact
investments.
2. By aligning the lights-on IT spend (e.g., infrastructure, existing applications)
to the business, the company improves overall bottom-line performance by
changing or eliminating the low-impact activities.
3. By understanding the cost of elements of the IT spend and by assessing the
performance of the lights-on IT spend in terms of technology, architecture,
quality, and service level, the company improves overall bottom-line per-
formance by eliminating costly, poorly performing IT activities.
35
Bottom-Line Impact Based on Cause and Effect


In simpler times, managers would use financial analysis alone (e.g., ROI) to
determine bottom-line impact for a proposed project. By extension, a portfolio
of projects could be ranked solely by ROI results. But the problems with ROI
and similar financial analysis techniques are well known, particularly in a port-
folio context for ranking projects. Risk is not easily assessed on a consistent basis
within a portfolio by solely using an ROI methodology. ROI is not easily com-
puted on a consistent basis across widely different projects, particularly when
nonfinancial benefits (e.g., improvements in quality or customer satisfaction) are
included. Additionally, ROI is also not applicable to lights-on costs for applica-
tions and infrastructures. But the most critical problem with exclusive reliance
on financial analysis is that ROI measures do not easily connect to manage-
ment™s strategies for the company™s future.
We do not downplay ROI or other financial analysis, but treating “enabling”
projects with financial evaluation methods alone will lead to serious decision
errors. We do, however, put ROI into a larger context of overall IT spend and
overall total impact of the complete portfolios of IT activities. We apply a more
effective way to connect to the bottom line, one that includes financial compu-
tations such as ROI as one factor in evaluating IT investments. This way is based
on a financial philosophy of shareholder value and is founded on the basic idea
of cause and effect.
In this chapter, we lay out the basic principles of connecting to the bottom
line based on cause and effect. (In the next chapter, we introduce the specifics
of portfolio management, which is the framework within which we implement
this basic approach.)


BOTTOM-LINE IMPACT BASED ON CAUSE AND EFFECT
The key to assessing bottom-line impact is determining cause and effect. Because
IT is one step removed from the bottom line, we look for the chain of connec-
tion between the IT expenditure (whether project or lights-on expense) and
direct bottom-line impact. “If we do project A, then we will cause a change in
business process B, which then will translate into reduced expenses C and/or
improved revenue D.” This is the logical flow of cause and effect. Or, for a
“strategic” investment, “if we do project A, then we will cause a change in our
business process B or a new business process C, or create a new product D,
which will cause our customers to buy more from us or allow us to raise the
price, etc., which creates improved revenue E.” This is strategic cause-and effect
thinking.2 See Exhibit 3.1.
The key to cause and effect on the bottom line is management action. The
cause-and-effect logic above exists only in an ideal world. Of course, the real-
world causality is “If we successfully do project A, then we will hopefully cause
a change in business process B, which if successful and if the result effectively
connects with the rest of the things going on with the business, will translate into
reduced expenses C and/or improved revenue D.” The words in italics reflect
risk and the vagaries of whether and how individual business units actually apply
36 CONNECT TO THE BOTTOM LINE


new tools and harvest the resulting benefits. This is the crux of the issue. Whether
IT investments, either projects or ongoing, produce bottom-line impact is com-
pletely dependent on the behavior of the management team and individual busi-
ness units. Simply buying infrastructure, building IT systems, or purchasing
software means nothing by itself unless business units take action and managers
actually change what they do. Action is key.


EXHIBIT 3.1 Cause-and-Effect to the Bottom Line


Strategic
Effectiveness

Expense,
Bottom-Line
Revenue
Impact
Performance

Operational
Effectiveness




The key to bottom-line impact is future management action. What counts
is what management will do in the future with a new IT investment, or with
existing IT resources. At a low level, this is the basis of change management: to
successfully cause the needed change in a business process or business behavior,
and to achieve the cost reduction or revenue improvement. The key, however,
is that business cases for projects and justification for ongoing expenses are
completely dependent on estimating the future actions of management. It does
not matter what the business case says, if management doesn™t do anything or,
more realistically, doesn™t do enough to actually accomplish the goals of the
project. It doesn™t matter what the expense justification is for infrastructure or
ongoing applications, if management doesn™t effectively use the IT capability
and apply it effectively in the business. Future management action is a moving
target, greatly affected by changing business conditions and, more fundamen-
tally, changing management teams.


CAUSE AND EFFECT IS BASED
ON MANAGEMENT™S INTENTIONS
Fundamentally, by focusing on strategic intentions, we are predicting what man-
agement will do in the future in order to use IT in the business in the ways that
create bottom-line impact. Management™s intentions apply to the use of a given
new IT project, and to the use of ongoing IT resources such as applications and
infrastructures.
37
Management™s Strategic Intentions


We use the term intentions to reflect what management will do in the future.
(In Chapter 5, we define the specifics of tools using strategic intentions as the
base. Here, we establish what management intentions are based on.)
The Shareholder Value financial philosophy provides a strong platform for
management intentions.3 Briefly, a company performs better if it improves its per-
formance of its strategies (strategic effectiveness) or improves the performance
of its operations (operational effectiveness). By extension, bottom-line impact is
created when the company improves its strategic and operational effectiveness.
Therefore, what management intends to do in terms of improving strategic or oper-
ational effectiveness should impact the bottom line. We call this strategic intentions.
Our approach is to show the cause and effect between the IT spend, both
projects and lights-on expenditures, and the bottom line by measuring IT™s
cause-and-effect connection to management™s strategic intentions.
This addresses the key problem of predicting management™s intentions for
the future. By obtaining agreement on what those intentions are, and by using
performance measurement to track this, we can directly establish IT™s cause-and-
effect impact on the bottom line.


MANAGEMENT™S STRATEGIC INTENTIONS
Management™s strategies and plans to improve strategic and operational effec-
tiveness are its strategic intentions.4
Senior management teams make decisions and allocate resources according
to their vision and commitments to a set of strategies, whether explicit or infor-
mal. These strategies are intended to increase the company™s success, ultimately
measured in terms of profitability Companies can have formal and explicit strat-
egy statements, or they can have an informal set of strategies that are implied
by management™s decisions. (We typically find a set of formal strategies that are
explicitly stated and saluted (often in a slick publication) but, in reality, are sub-
ordinate to the unstated strategies that drive actual decisions and actions.)
We like Michael Porter™s general definitions for operational and strategic
effectiveness, and use them to define management™s strategic intentions:

Operational effectiveness means performing similar activities better than
rivals perform them.
Strategic effectiveness means performing different activities from rivals™ or
performing similar activities in different ways.5

Operational Effectiveness includes: Strategic Effectiveness includes:
–« –«
Efficiency Product/service development
and positioning
–« Process improvement
–« Customer access
–« Quality improvement
–« –« Targeting customer segments
Management information
38 CONNECT TO THE BOTTOM LINE


Operational and Strategic Effectiveness
For example, an insurance company has strategic intentions of: (1) increasing
its sales performance through partnering with other financial service firms, (2)
adding to customer loyalty through improved service and improved products,
and (3) reducing administrative overhead through innovative uses of technol-
ogy and consolidation of headquarter locations. The management team will take
actions based on these strategic intentions; if the strategies are successful, they
will result in improved revenues and/or reduced costs, and improved financial
performance.
As Michael Porter™s definition states, operational effectiveness includes effi-
ciency (meaning cost and productivity), quality improvement, and process im-
provement. Strategic effectiveness includes customer and product/service issues.
We go beyond Porter™s definitions of strategic effectiveness to a more gen-
eral definition. Consider an example of strategic intentions as shown in Exhibit
3.2. These are the strategic intentions of a company engaged in the production
and sale of a basic commodity.


EXHIBIT 3.2 Examples of Strategic Intentions
Strategic Intention Strategic Intention Goals Strategic Intention Metrics Weight
Name
• Focus on markets in which the • Market share in specific
Focus on Specific, 30
Narrow Markets company can profitably compete markets
• Build strategic partnerships with • Profitability in specific
key customers markets
Improve Efficiency • Employ best practices throughout • Percent of standard systems 10
through Common the company used throughout company
Business Practices • Reduce the unique systems and • Percent of standard
processes in each operating processes in use throughout
location the company
Be the lowest-cost • Reduce the administrative, • Production throughput 40
• Net delivered cost of product
supplier in focused manufacturing, and operations
markets costs of the company
• Optimize purchasing power
• Increase the capability of the • Time to integrate a new
Grow through 20
Acquisition company to rapidly integrate new acquisition or operation
applications and operations, with
decreased cost



These strategic intentions conform with Porter™s definition of strategic effec-
tiveness. But the point is that IT will connect to the bottom line to the extent
that IT™s current applications, new projects, and infrastructures support the
achievement of these strategic intentions.
When IT makes the company more successful in achieving its strategic inten-
tions, which improve the company™s operational effectiveness and strategic effec-
tiveness, then IT impacts the bottom line.
39
Principles of IT™s Bottom-Line Impact


PRINCIPLES OF IT™S BOTTOM-LINE IMPACT
This section builds the base for cause and effect to the bottom line. (Note that
“agency mission performance” can be used as a government and nonprofit orga-
nization™s surrogate for bottom line, or profitability.)

Bottom-Line Principle 1: IT™s bottom-line impact is based on its direct con-
tribution to improved profitability.
Bottom-Line Principle 2: IT™s direct contribution to improved profitability
is based on improving the company™s operational and strategic effectiveness.

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