TPC Insights, December 2008
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Responsible corporations want to ensure they are spending wisely, including
spending on Information Technology (IT). Whether getting the most bang
for the buck or battening down the hatches, proper management and oversight
of IT expenditures is critical to IT and business success. Even in
times of flat or shrinking budgets, strong IT Governance yields the
optimal resource allocation.
Organizations face a primary challenge ensuring that capital allocation
to new IT initiatives aligns with business objectives. Corporations
that fail to manage IT capital expenditures suffer profound consequences
to the top and bottom line. Some instructive examples include:
- In 2008, Sun Microsystems posted a $1.68 billion loss on an impairment
charge, due in part to a failure to successfully integrate its acquisition
of Storage Technology Corp.
- In 1999, Hershey Foods experienced a
12% drop in revenue and 27% market share loss as the direct result
of a failed system implementation.
- In 1996, a failed IT project
at FoxMeyer Drug led to the collapse of the entire $5 billion company.
Corporations must manage IT capital expenditures with a proper structure
and process to decide how to allocate funds – a Governance process.
If the process is too casual, decision making will not be scrutinized
with adequate rigor. But a draconian approach may lead to a lack
of process support and unnecessary bureaucracy that paralyzes the progress.
- Return on Investment (ROI)
- Weighted Return on Investment (WROI)
- Total Cost of Ownership (TCO)
- Return on Objective/Opportunity (ROO)
- Net Present Value (NPV)
- Economic Value Added (EVA)
- Return on Assets (ROA)
- Internal Rate of Return (IRR)
- Net Assets Employed
and the list goes on…
Just as critical to Governance is determining what information will
be used to decide which initiatives are pursued. This information
is often detailed in a business case. A business case typically includes
a project summary, cost benefit summary, opportunity definition,
recommendations, justification, implementation plan and alternatives
Potential financial measures used for the decision package cost-benefit
analysis are numerous. All of the choices carry with them risks,
particularly if they are not properly applied.
There are also the issues of indirect and intangible benefits.
they be included and if so how?
- Is time saved a benefit or is it
only a benefit when there is a net reduction of staff?
- Are better
customer relationships a benefit or are they a benefit only when
better customer relationships result in increased sales?
- How do
you measure increased productivity?
- Can cost avoidance be quantified?
It is natural to ask, how can I establish the right governance that
will work for my firm? Many factors, including those above, must
be considered when developing a Governance program.
How is IT work currently being performed? Determine the organization,
the technical architecture and the manner in which IT communicates
with the rest of the organization. Determine how IT currently carries
out its duties including how requests for service are handled and
what tools are being used to manage service requests. Understand how
IT supports the business strategy, how IT manages its application assets
and how those assets are supported. Finally, it is important to understand
the current backlog, if any, and the mix of maintenance versus new
How are decisions made at my firm? Review any extant decision making
bodies in the business as models for a similar IT governance structure.
Determine how business cases are prepared and used. Discover if there
are any decision trees, hurdle rates or processes that are used to
make investment decisions. Evaluate the adaptability or adoptability
of existing processes. Using an existing process can be an efficient
way to launch an IT governance program.
Several key elements are important for efficiently and effectively
deploying IT resources in support of an organization’s business
objectives. They include:
- Active top management support
- One or more decision-making bodies
with clear charters, processes and authorities
- An approach to service
request segmentation that ensures that executive management is focused
on the most important matters and that lower-cost service requests
are appropriately delegated
- A business case development process
that ensures adequate participation prior to presentation for decision
- Inclusive cost estimating of all activities, whether performed by
internal or external resources
- Facility for charging users for requested
projects to ensure true value
- Data collection processes that enable
clear reporting of key activities
- Comprehensive reporting of key
IT delivery metrics, including resource utilization and project status
process for IT strategy, business plans and budgets, project progress,
and post-implementation reviews
Management and the organization must
adhere to the governance process. Changing corporate priorities and
a reluctance to say “no” can
lead to dysfunction. Management needs to see the necessity, buy into
the process(es) and support the requirement for the process(es).
There are three keys to a successful governance process. Your governance
- be simple yet effective;
- get in line with the needs of the organization;
- obtain ownership and buy-in from the organization decision-makers.
development and implementation of a viable Governance program and
processes is often such a paradigm shift for an organization that expert
assistance may be required. Transition Partners has assisted numerous
organizations to create and deploy effective and efficient Governance
programs. Please contact us if you would like additional information.
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