Focus on the Business Value of Your IT

May 25, 2011
Companies must begin to move from "budget-based thinking" to "portfolio-based thinking."

The fusion of business and technology is one of the core overarching principles of what I refer to as an "always-on" business philosophy. To achieve a higher-level of IT sophistication, companies must begin to move from "budget-based thinking" to "portfolio-based thinking." Specifically, this means shifting its IT function from a focus on bottom-line costs toward efforts to maximize the top-line potential of the whole business.

Traditional budget-based thinking creates alignment conflicts with the business by treating IT as a cost that must be tightly controlled. IT then becomes a slave to cost-control, constantly justifying its expense.

In The Real Business of IT: How CIOs Create and Communicate Value, Richard Hunter and George Westerman explain that this means most organizations base their IT investment decisions on a non-strategic process that the authors label "anything-else." Decisions are based on politics, intuition and other non-rigorous approaches.

Instead, "portfolio-based thinking" shifts from the traditional cost-only model to one emphasizing business value. Here companies seize opportunities to gain competitive advantage, even going so far as to fundamentally alter their industries' rules. Investments in IT innovation are prized.

Shifting your perspective is critical to maintaining a fused "always-on" atmosphere. IT investments must be assessed through a lens of well-defined prioritization so that top-line potential is optimized. Hunter-Waterman's thesis, validated in seminal research at McKinsey, categorizes portfolio-based thinking IT investments in three buckets: Run, Grow, Transform.

"Run-the-business" investments enable essential non-differentiated services that achieve a desired balance between cost and quality. These projects and initiatives must be done sto achieve the basics. As a result, they deliver the lowest ROI or perceived business value.

"Grow-the-business" investments foster improvements in operations and performance related to the company's existing markets and customer segments. Value here is measured in terms of operational performance improvements (cycle time, improved quality) or in financial terms (capital expense reduction, increased revenues, reduced administrative expenses).

"Transform-the-business" investments embrace new markets, products, customers, i.e., new horizons for the company and even for the industry. Investments are measured in prospective market share and new-market revenues. Big rewards are possible (though big failures are as well). This category is extremely high risk.

Running, growing and transforming, however, are not ends in themselves. Instead, they point the firm toward the kinds of performance levels and improvements that should be expected from IT. They keep us looking in the right direction and choosing wisely as we maintain and advance our businesses with its expert assistance. Such carefully-calibrated structures ensure we stay focused on the business value of IT investments rather than simply on IT's cost.

Tim Hebert is Chief Executive Officer of Atrion Networking Corp., which provides training and consulting to companies in all industries. Contact Hebert at [email protected] or 401-736-6400.

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