Manufacturing companies and other enterprises are increasingly recognizing the opportunities for information technology to add competitive advantage and significant business value, especially in the current highly competitive, volatile economy, yet the track record of successfully doing so continues to be less than stellar. The latest Standish Group Chaos survey shows that only 32% of IT projects are considered successful -- a number that has stayed relatively constant over the last 10 years. Troubled implementations of enterprise resource planning (ERP) systems in enterprises including Hershey, Nike and Whirlpool have had very visible and negative impacts on business results, and in other cases, such as FoxMeyer Drugs, have resulted in bankruptcy.
The underlying difficulty lies in failing to recognize that we are no longer investing in technology, but in IT-enabled change. Enterprises need effective governance processes in place, supported by proven value management practices to ensure they pick the right IT-enabled investments -- those that will create and sustain measurable value -- and manage those investments such that they deliver that value throughout their lifecycle. Enterprises that do this are able to thrive in good times and survive in bad ones. Unfortunately, they are in the minority.
In today's troubled economic times, which may last beyond this year, this situation becomes even more critical. Tough decisions are required and the quality of those decisions will determine not just the performance of enterprises but their very survival. The risk of failing to create or sustain value or, worse, eroding or destroying it, is significant. No sector is immune from this risk, certainly not the manufacturing sector, which has been, and continues to be, transformed by global competition.
The traditional response has been to first freeze all spending and then apply across-the-board, fixed percentage cuts. This is quick and simple but also very dangerous. Dangerous because IT is no longer a "black box," although many enterprises often still manage it as such. Today, the box is empty; its contents distributed and embedded throughout the enterprise as electronic bits of business processes that run up, down, across and among enterprises and their customers, suppliers and other stakeholders.
A recent ISACA survey of more than 500 IT professionals in the U.S. found that, in response to the current economic crisis:
- 16% of enterprises are making across-the-board cuts in IT spending;
- 14% are freezing at current levels;
- 44% are reducing spending selectively; and
- 26% are increasing selectively.
These results are encouraging in that they show that enterprises are moving away from the traditional across-the-board cuts, but other responses raise some interesting questions. While 67% of respondents felt that they were realizing between 50% to 100% of expected value from their IT investments, only 34% felt there was a shared understanding of what value was in their enterprise, and only 29% had a comprehensive approach to measuring that value. This raises the question, "On what basis are spending decisions made?" These findings support the results of a number of other studies, anecdotal evidence and my own experience that most decisions related to value from IT are subjective, and all too often based on perception and emotion rather than facts.
In talking with a number of enterprises around the world-across many sectors including manufacturing-I have found that those that have taken steps to improve the effectiveness of their governance are able to:
- Identify, define, select and execute new investments such that they optimize value creation and sustainment, taking early corrective action when this is at risk
- Ensure that their ongoing investments create and sustain value and again, where this is at risk, take early and appropriate corrective action
- Make intelligent spending decisions, avoiding the value destruction inherent in across-the-board (percentage) cuts and focusing on spend that creates or sustains value
Many of these enterprises are using proven principles based value management practices that can be found in the Val IT Framework1 from ISACA. In the case of one enterprise, faced with the need to reduce the demand on IT, it used Val IT to determine common value metrics. Using these metrics, it was able to analyze its projects to determine which contributed to business value and which didn't. This focus on the financial side of IT projects took the emotion out of "killing" projects, and, as a result, it was able to reduce the demand on IT by 50% to 60%. Further, by applying other Val IT practices, the remaining projects-those that did contribute value-had well-developed business cases, with a much better shared understanding of project scope, and were up and running more quickly.
In many, if not most cases, where value management processes and practices have been adopted the implementation has taken many years, and is still a work in process. However, such processes can also be used selectively in response to the current economic situation to improve the quality of decision making, and reduce risk. While the results of such a light approach may not be as effective as if the processes were already fully implemented, they will be significantly better than an across-the-board approach.
In the short term, portfolio management practices can be used, based on appropriate criteria, to determine the relative value of current expenditures, including both ongoing costs of services and infrastructure, and new investment programmes. Criteria include such factors as alignment with business objectives, which may well have changed; benefits being realised or expected; current and projected costs; and risks. Experience has shown that, where such an analysis has not previously been undertaken, somewhere between 20% to 30% of current and new expenditures can be reduced or curtailed.
Once low value expenditures are eliminated, investment management practices can be used to confirm the outcomes of ongoing investments and their alignment with business objectives, confirm or rework the scope of effort, confirm accountabilities, review and revise assumptions, and review and focus metrics to better manage the investments. Here, experience has shown that such analysis can increase the potential value of investments by two to three times.
In the longer term, effort shifts to implementing and sustaining the value management principles, processes and practices contained in Val IT. The foundation of Val IT is continually asking the questions below, known as the "Four Ares":
- Are we doing the right things?
- Are we doing them the right way?
- Are we getting them done well?
- Are we getting the benefits?
Effective governance, based on Val IT and the "Four Ares," involves getting leadership understanding and commitment; implementing required processes and structures with clear roles, responsibilities and accountabilities; and implementing metrics and supporting tools. It is not easy, but it is worth it. In the long term, effective application of the principles, processes and practices contained in Val IT will enable enterprises to prosper in good times and successfully weather troubled times. Failure to do so will threaten their very survival.
Interested in information related to this topic? Subscribe to our Information Technology eNewsletter.