I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

Monday, May 28, 2007

Just as Capital Has a Static Cost of Change, So Must IT

The global economy is awash in cash. We’ve experienced unprecedented profitability growth for the past 16+ quarters, the cost of capital is low, investment risk is more easily distributed, and companies find themselves with strong cash balances. Increasingly, though, we're seeing companies being taken private and their cash taken out by new ownership, or companies buying back their own stock.

This has implications for IT, as it competes for this same investment dollar on two fronts. First, if the executive decision is to concentrate equity or engage in M&A, it inherently means that these types of investments are expected to provide greater return than alternatives, notably investments in operations. IT projects, being operations-centric, are losing out. Second, when companies are taken private, it’s often with the expectation that they’ll be flipped in a short period of time; to maximise return, operations will be streamlined before the company is taken public again. This means private capital will scrutinise the business impact of not only new projects, but existing spend.

To win out, IT has to change the way it communicates. It must think and report more in terms common to capital, less in terms common to operations.

This means that IT has to show its business impact in a portfolio manner. For every project, there must be some indication of business impact, be it reduction of risk, reduction of cost of operations, revenue generation, and so forth. This is not a natural activity for IT because, for the most part, IT solutions don’t themselves provide business return; they do only as part of larger business initiatives. As a result, IT often abdicates this responsibility to a project’s business sponsor. As stewards of spend and benefactors of budgeting, IT cannot afford to be ignorant of or arrogant to the larger context in which its solutions exist.

ITs effectiveness depends on its ability to maximise use of people and resources. This means taking decisions across multiple initiatives, which can bring IT into conflict with the rest of the business, especially with sponsors of those initiatives that are deprioritised. Business issues are not universally understood by IT's business partners. For example, Accounting and Finance people may recognise the need for systems that reduce restatement risk, whereas operations people may see systems and processes designed to reduce restatement risk as contributing only to operational inefficiency. Communicating business imperative, and then people and resource decisions in a business-priority context, make IT decisions less contentious. It also makes IT more of a partner, and less of a tool.

This is not to say that business-impact and return offers ubiquitous language for business projects. Not every dollar of business value is the same: an hour of a person’s work reduced is not the same as reduced energy consumption of fewer servers is not the same as a reduction in restatement risk is not the same as new revenue. However, always framing the project in its business context makes both needs and decisions unambiguous, and gives us the ability to maximise return on technology investment.

Because the business environment changes, so do returns. As a result, assessing business impact is an ongoing activity, not a one-off done at the beginning of a project. Over the life of any project it must be able to show incremental returns. The further out that returns are projected, the more speculative they are, if for no other reason than the changes in the business environment. Capital is impatient, and can find faster returns that provide greater liquidity than long-term programmes. If the business itself is providing quarterly returns, so must any IT project.

Operating and measuring an IT project in the context of its business impact is a fundamental shift for IT. The purpose of continuing to spend on a project is to achieve a business return; we don't continue to spend simply because we think we’ll continue to be “on-time and on budget.” This latter point is irrelevant if what doing - on-time or otherwise - has zero or even negative business impact. Measuring to business impact also allows us to move away from a focus on sunk costs. Sunk costs are irrelevant to capital, but all too often are front-and-centre for operations-centric decision-making: e.g., the criteria to keep a project going is often “we’re $x into it already.” This inertia is, of course, the classic “throwing good money after bad.” We forget that it’s only worth taking the next steps if the benefits outweigh remaining costs.

Managing to business impact requires perspective and visibility outside the IT realm. The actual business impact made must be followed-up and assessed, and all stakeholders – especially business sponsors – must be invested in the outcome. That might mean a budget reduction with the successful delivery of a solution, or bonus for greater revenue achieved. Whatever the case these expected returns must factor into the budgets and W2s of the people involved. This makes everybody oriented to the business goals, not focused on micro-optimisation of their particular area of focus (which may be orthogonal to the business goal.)

To execute on this, the quality of IT estimating must also be very high. When the business does a buy-back or engages in M&A, it has a clear understanding of the cost of that investment, an expectation of returns, and the risks to the investment. IT projects must be able to express, to the greatest extent possible, not only expected costs but the risks to those costs. Over time, as with any business, it must also be able to explain changes in the project’s operating plan – e.g., changing requirements and how those requirements will meet the business goal, missed estimates and the impact on the business return model. This creates accountability for estimating and allows a project’s business case to be assessed given historical estimate risk. It also improves the degree of confidence that the next steps to be taken on a project will cost as expected, which, in turn, improves our portfolio management capability.

Estimation must also go hand-in-hand with different sourcing models. Very often, projects assume the best operating model for the next round of tasks was the operating model taken to date. We often end up with the business truism: “when the only tool you have is a hammer every job looks like a nail.” Estimates that do not consider alternative sourcing models – different providers, COTS solutions, open source components, etc. – can entrap the business and undermine IT effectiveness. Continuous sourcing is an IT governance capability that exists at all levels of IT activity: organisational (self-sourcing, vendor/suppliers), solutions (COTS, custom), and components (open-source, licensed technologies, internally developed IP.) The capability to take sourcing decisions in a fluid and granular manner maximises return on technology investment.

In this approach, we can also add a dimension to our portfolio management capability to attract high-risk capital of the business. Every business has any number of potential breakaway solutions in front of it, not all of which can be pursued due to limited time and capital, not to mention the need to do the things that run the business. In addition to offering potential windfall benefits to the business, they are most often the things that provide the most interesting opportunities and outlets for IT people, necessary if an IT organisation is to be competitive for talent as a “destination employer” for best and brightest. These are impossible to charter and action in an IT department managing expectations to maintain business as usual. It becomes easier to start-up, re-invest and unwind positions in breakaway investment opportunities – and the underlying IT capability that delivers them – if they’re framed in a balanced technology portfolio.

By doing these things, we are better able to communicate in a language more relevant to the business: that of Capital. The behaviour of IT itself is also more consistent with Capital, with a static, as opposed to an exponential, cost of change. Such an IT department is one that can compete for business investment.