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Tuesday, August 24, 2010

Portfolio Management and IT Savvy

George Westerman
Nils Fonstad
Cyrus Gibson

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
MIT CISR gratefully acknowledges the support
& contributions of its Research Patrons and CISR’s Mission
Research Patrons CISR’s
Sponsors.
•• Founded
Founded in in 1974;
1974; CISR
CISR has
has aa strong
strong track
track
record
record of practice-based research on
of practice-based research on how
how
firms
firms manage
manage & & generate
generate business
business value
value
from
from IT
IT
Research Sponsors •• Research is
Research is disseminated
disseminated via
via electronic
electronic
research
research briefings, working papers, research
briefings, working papers, research
workshops
workshops & & exec.
exec. ed.
ed. programs
programs
2010 CISR Research Projects
•• Agile
Agile IT
IT Decision-Making
Decision-Making with
with Accountability
Accountability
•• Adopting
Adopting Business
Business Applications
Applications inin the
the Cloud
Cloud
•• IT’s New Look
IT’s New Look
•• Innovating
Innovating the
the Future
Future of
of the
the Enterprise
Enterprise

•• Building
Building the
the Information-based
Information-based Organization
Organization
•• Digital
Digital Intelligence:
Intelligence: Capturing
Capturing the
the Value
Value of
of
Unstructured Data
Unstructured Data
•• Collaboration
Collaboration Platforms:
Platforms: Managing
Managing the
the
Opportunities
Opportunities of of Web-based
Web-based
Business
Business Practices
Practices
•• Increasing
Increasing Reuse
Reuse to to Improve
Improve Enterprise
Enterprise
Performance
Performance

•• The
The MIT
MIT CISR
CISR Value
Value Framework—How
Framework—How
Firms
Firms Achieve Superior Business
Achieve Superior Business Value
Value
from IT
from IT
•• Transparency:
Transparency: A A Critical
Critical IT
IT Management
Management
Competency
Competency
•• What
What we
we Measure
Measure Matters:
Matters: Key
Key Measures
Measures
for
for Digitization
Digitization
Contact Information:
5 Cambridge Center, NE25, 7th Floor
Cambridge, MA 02142
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Ph. 617-253-2348; Fax 617-253-4424
"
"## cisr@mit.edu; http://cisr.mit.edu 1
Rethinking IT Investments as IT Portfolio
Based on proven and familiar principles of financial portfolio
management

Two (four) management objectives for investing in IT creates an IT

portfolio with two (four) asset classes
Each asset class has different risk return profiles
The role of senior management is to align the IT portfolio
to strategy and balance for risk and return
IT Savvy enterprises can get up to 40% more
bottom–line value per IT dollar*
– Diagnostic
# of
firms
– “times they are a changing”
-40% +40%
Below Average Above Average
Industry
Average
* IT Savvy = enterprise’s ability to gain above industry 0
average returns from IT by better management. IT Savvy

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
2
7-Eleven Japan

Concept Chart of System Integration

Source: Seven & i Holdings, Corporate Outline 2008,

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) http://www.7andi.com/en/ir/pdf/corporate/2008_all.pdf
3
Actively Manage the IT Portfolio — less run and more new1
IT Portfolio Total IT dollars including all technology, services, digitized
information, outsourcing, and people dedicated to IT—broken
into asset classes. Can be viewed as flow (i.e., annual spend)
or stock (i.e., accumulated spend)

IT Programs Groupings of projects

linked to business goals
Run Ongoing
New (38%) 71% spending to
29% keep current
IT Projects Set of activities creating (62%) systems running
outcomes to a budget
and timetable

IT Functions Ongoing activities (e.g., operations, maintenance, planning,

development, sourcing, security, and test)
1Firms who spend more of their total IT spend on new initiatives (dashed box) had statistically significantly higher
industry adjusted growth and margins – MIT CISR study, July 2008 (95 firms).
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Source: MIT CISR study of 1508 firms in late 2007 (Weill & Woerner). Gartner Executive Programs 2009 CIO Survey
$$ Total N=1541 4
An IT Portfolio Informational

with Four Asset Classes Strategic

Transactional

Transactional IT: automates processes, cuts costs or Infrastructure

increases the volume of business a firm can conduct per unit cost, e.g., order
processing, bank cash withdrawal, billing, accounting and other repetitive
transaction processing functions

Informational IT: provides information for managing, accounting, reporting

and communicating internally and with customers, suppliers and regulators, e.g.,
decision support, accounting, planning, control, sales analysis, customer
relationship and Sarbanes–Oxley reporting systems

Strategic IT: supports entry into a new market, development of new products
or capabilities, and innovative implementations of IT. Example: ATMs

Infrastructure IT: provides the foundation of shared IT services (both

technical and human) used by multiple applications, e.g., servers, networks,
laptops, shared customer databases, help desk, application development

A project may be any combination of all four.

Source: P. Weill & S. Aral, “Generating Premium Returns on Your IT Investments,”

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) MIT Sloan Management Review, Vol. 47, No.2, Winter 2006.
5
Rethinking IT as an Investment Portfolio
— Four Different Asset Classes
•Increased control
•Better information
•Better integration
•Improved quality
•Faster cycle time
18%
INFORMATIONA STRATEGIC
19%
• Cut costs
• Increase throughput
( ) = public sector
(Innovation)
(Major Change)
(Facilitation)
(High Value Added)
(Interact with customers)
• Increased sales
18% • Competitive advantage
• Competitive necessity
• Market positioning
L
• Business integration
TRANSACTIONAL • Business flexibility
45%
• Reduced marginal
INFRASTRUCTURE cost of BU’s IT
• Reduced IT costs
• Standardization

Source: Framework from P. Weill & M. Broadbent, Leveraging the New

Infrastructure: How market leaders capitalize on IT, Harvard Business School
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Press, 1998. Data: Percentages are 2010 total $IT spending (operations+ capital)
6
from 120 firms from MIT CISR Survey.
 Information Strategic
(15) (5)

2010 IT Portfolios in Different Industries Transaction

al (40)
Infrastructure
(40)

Financial Distribution All

Manufacturing3 Consumer4 Services6
Services2 & Infra5 For-Profits
2010 Total $IT as
a Percent of Total
Firm Revenues1 8.4% 2.2% 4.8% 4.2% 4.9% 5.2%
(Number of (15) (25) (23) (11) (18) (109)
Firms%
12% 27% 18% 14% 15% 18% 24% 15% 15% 19% 18% 18%

$IT 20101 16% 25% 24% 15% 17% 19%

45% 43% 43% 46% 49% 45%

(Number of
(20) (28) (23) (13) (17) (120)
Firms)
19968 20019 200710 200911 20101

IT infrastructure
as a % of total IT 57% 54% 47% 36% 45%
spend7

1MIT CISR 2010 IT Investment Survey of 140 enterprises. IT 5 Distribution and Infrastructure includes: Telecom, Utilities,
Spend as a Percent of Revenues between 0 and 50%. Transportation, and Logistics
2 Financial Services include: Banking, Financial Services, & 6 Services include: IT & Software, IT Services, and Professional
Insurance. Services.
3 Manufacturing includes: Manufacturing, High Tech, Aerospace, 7 Framework: “Generating Premium Returns on Your IT
Construction, Electronics, Chemicals, Energy, Mining, and Investments,” P. Weill & S. Aral, MIT Sloan Management
Agriculture Review, Vol. 47, No. 2, Winter 2006.
4 Consumer include: Retail, Travel & Food, Consumer Services, 8Leveraging the new Infrastructure: How market leaders
Health Care, Pharmaceuticals, & Media capitalize on information technology, P. Weill and M.
Broadbent, HBS Press, 1998
9MIT CISR See IT survey (140 firms).
10MIT CISR 2007 survey (1508 firms).
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) 11 Gartner Executive Programs 2009 CIO Survey, N=1541.
7
Infrastructure Has Multiple Layers...
Where should infrastructure & systems capabilities go?

remove complexity
Innovate, then move
into shared services

Consolidate and
G
Business
Unit 1 Business R
Shared/
Centrally Unit 2 A
Coordinated V
Order processing I
Customer portals T
Product configuration Y
Knowledge management

Electronic mail
Shared & standard
Large scale
applications
processing
Firm-Wide Information Customer self serve
Shared customer
Technology Infrastructure PC/LAN service
database

Vendors
Publicly Available Infrastructure
Telecommunications
(e.g., Internet, Telcos, Industry Nets) Service providers
Industry services

Updated from : “Building IT Infrastructure for Strategic Agility,” P. Weill, M.

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Subramani & M. Broadbent, MIT Sloan Management Review, Vol. 44, No.1, Fall
2002. 8
BMW: “The leading provider of premium products and
services for individual mobility”
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< +
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Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
9
BMW IT Spending

January December
2006 2008
IT as a % 2.2
of Revenue 1.7

62
Run vs. Build %
51

IT Infrastructure 42
as % of Total IT 35

Infrastructure operations costs down 25% ( 83mm)

between end 2006 and end 2008

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
10
 BMW Global IT Structure and Governance

•
• 1+
•& ?

•
IT Leadership Committee

Engineerin Productio Financial In-car •& +

Sales Admin •* 2
g n Services IT* •)
•@ A
(ITL)

Global Operations •
•)
Infrastructure •@
Applications

•
Vendors B
•C 1 75.

•
C
•
? A " +
•

•
1 Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
11
IT Savvy—How Some Firms Get 40% More Value
IT Savvy

$IT Value

These firms have:

More top management savvy
More integrated business and IT planning
Less political turbulence
Higher user empowerment and satisfaction
Learnt from their experience with IT and
operations
(e.g., reengineering)
And have above industry average IT Savvy*
A +
+D E 1 + + 1Sources: P. Weill & M. Broadbent,1 !
Leveraging the New Infrastructure: How market leaders
capitalize on IT, Harvard Business School Press, June 1998. “Generating Premium Returns
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) on Your IT Investments,” P. Weill & S. Aral, MIT Sloan Management Review, Vol. 47, No. 2,
Winter 2006. 12
Why Some Firms Achieve More Business Value (1 of 5)
1.Top Management Savvy with Information Technology
Senior Managers:
Attend information technology council meetings themselves and don’t send a nominee.

Define the target degree of business process standardization and integration and the
necessary capabilities of the digitized platform (e.g., business processes, data and
technology).
Require carefully considered business cases for investments with measures
and responsibilities identified.

Support the strategic uses of information technology by providing seed funding, not
requiring traditional net present value financial justifications, and stopping poorly
performing projects early.

Encourage post implementation reviews which are not witch-hunts and facilitate the
gathering and dissemination of the lessons learned.

Encourage, fund, and actively support training in the use of information technology.

-8 +8
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) 0
13
Why Some Firms Achieve More Business Value (2 of 5)
2. Integrating Information Technology with Business Planning
In your firm there are/is:
Executive management considerations of information and IT implications in
business strategy discussions.
Regular high level briefings on the implication of IT developments
in your industry.
Accountabilities for achieving strategies which were clear and documented.

Articulation of the respective roles and responsibilities of business and

information technology management in achieving effective and efficient
systems and delivering business benefits. Managers are named and held
accountable.

-8 +8
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) 0
14
Why Some Firms Achieve More Business Value (3 of 5)
3. Organizational Politics & Political Turbulence
Your firm:
Exhibits a strong sense of community, a feeling of shared interests and
purpose and cooperation amongst managers. This is reinforced with reward
systems and incentives that are based on the right balance
of firm-wide and local measures.

Captures relevant data in one business area and willingly shares it across the
firm. Cross functional and business opportunities are actively sought to
innovate, improve service, and reduce costs.

Encourages cooperation via cross functional teams, secondments and

movement of personnel.

-8 +8
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) 0
15
Why Some Firms Achieve More Business Value (4 of 5)
4. Empowered and Satisfied Users
There is:
A feeling of empowerment for all people in the firm resulting from immediate
access to data and systems that helps with their job.
Confidence in the reliability of systems and the completeness of information.
A sense of relevance and accuracy of the information in the system.
Excellent support provided to those using the systems. Help desks are very
effective and assistance from technical personnel is excellent.

Excellent user understanding resulting from easy to use systems and

good training.
The attitude and responsiveness of those who provide support for systems
is enthusiastic and professional.

-8 +8
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) 0
16
Why Some Firms Achieve More Business Value (5 of 5)
5. Learn From Experience
Your firm always:
Redesigns, simplifies or reengineers business processes before any money is
spent on information systems.
Maximizes the reuse of business process and information systems
components.

Ensures that every new IT project that is not infrastructure has a business
person as champion with clearly identified deliverables and responsibilities
for the business and IT people.

Ensures that infrastructure investments are treated separately from

investments in applications to take account of their shared nature and long life.

Encourages innovative use of IT in the business units even if firm-wide

standards are not always followed. Integration can be achieved
later if successful.
-8 +8
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) 0
17
IT Savvy Why Some Firms Achieve More Business Value

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
18
Risk-Return Profiles in the IT Portfolio
Increasing Risk

1 Statisticallysignificant controlling for industry size and firm differences.

2 IT Savvy = enterprise’s ability to gain above industry average returns from IT by better management.

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Source: “Generating Premium Returns on Your IT Investments,” P. Weill & S. Aral, MIT
Sloan Management Review, Vol. 47, No. 2, Winter 2006. 19
IT Savvy Monday Morning Mandate
CEO Business Unit Leader
+ 1 F 1 2 ?
– " " 1? F
? F
: +
+ F: +
+ F
21 2 " : + 1 F
F E F
– 2 1 11
+ F : ++ F
2 + 1 : 2 2 F
+ F
– <!1!" " +! 1 "
$ G H HR Director
+
: +
+ F
I 2 F : ++ F
– ( ? " 1" 1 +
@ + 1 +
+F
: + + +
+F
CFO : F
F
– 2 1 11 CIO
+ F 1? F
2 F 1 2 1? F
: 2 F & 1 F& 1 F 1
– F: F 21 F
: 2 + " ++ F +
++ >J - 1% + F
F : 2 1 1
– 1 K F +
+F
: +
+ F: +
+ F F
– &2 +
+ + !1! : 1 F
( +
– ? " 1" 1 + F
1 1+ 2
L +F
Source: “Generating Premium Returns on Your IT Investments,” P. Weill & S. Aral,
MIT Sloan Management Review, Vol. 47 No. 2, Winter 2006; and IT Savvy: What
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Top Executives Must Know to go from Pain to Gain, P. Weill and J. Ross, Harvard
20
Business School Press, 2009.
 Additional slide(s)

Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
21
Rethinking IT as an Investment Portfolio
— Four Different Asset Classes
•Increased control
•Better information
•Better integration
•Improved quality
•Faster cycle time
19%
INFORMATIONA STRATEGIC
27%
• Cut costs
• Increase throughput
( ) = public sector
(Innovation)
(Major Change)
(Facilitation)
(High Value Added)
(Interact with customers)
• Increased sales
18% • Competitive advantage
• Competitive necessity
• Market positioning
L
• Business integration
TRANSACTIONAL • Business flexibility
36%
• Reduced marginal
INFRASTRUCTURE cost of BU’s IT
• Reduced IT costs
• Standardization

Source: Framework from P. Weill & M. Broadbent, Leveraging the New

Infrastructure: How market leaders capitalize on IT, Harvard Business School
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Press, 1998. Data: Percentages are 2009 total $IT spending (operations+
22
depreciation) from 1091 firms in 77 countries from Gartner CIO Survey.
Tracking the Impact of Information Technology Investments

Impact Sought Sample Value Measures Responsibilities

Revenue growth BUSINESS

BUSINESS UNIT
UNIT FINANCIAL
FINANCIAL Business
Return on assets PERFORMANCE Management
Dilution of IT Impacts

PERFORMANCE
Revenue per employee

Time to bring new product to mkt. BUSINESS

BUSINESS UNIT
UNIT C Dilution
OPERATIONAL
OPERATIONAL of Impact
Sales from new products
PERFORMANCE
PERFORMANCE
Product or service quality

B Dilution
Time to implement a IT of Impact
IT APPLICATIONS
APPLICATIONS
new application BUSINESS
BUSINESS VALUE
VALUE
Cost to implement
a new application Information
Technology $ Dilution
A of Impact
Infrastructure availability IT
IT INFRASTRUCTURE
INFRASTRUCTURE
Cost per transaction BUSINESS IT
BUSINESS VALUE
VALUE
Management
Cost per workstation
Information
BV = BUSINESS VALUE
Technology $
Time

Source: Leveraging the New Infrastructure: How market leaders capitalize on IT, P.
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) Weill & M. Broadbent, Harvard Business School Press, June 1998.
23
Management Objectives for Investing in IT

1. Reduce the cost of doing business

- Transactional IT

2. Provide better information

- Informational IT

3. Gain competitive advantage or a major innovation

- Strategic IT

4. Provide a shared base IT capability

- IT Infrastructure

Any project may be a combination of objectives

Source: Weill & Broadbent, Leveraging the New Infrastructure: How market leaders
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) capitalize on IT, Harvard Business School Press, 1998.
24
Governance: Transparency and People Focus
Transparent decision making structures: global federated governance
– "C"M 1 " “Without
1 " J transparency,
– M 1 steering is not
– ) - % J 1 effective.”

Transparency through facts control of infrastructure spending

– N 7 O 1 0 " " + +
From chargeback to management by exception
– ) "!1!"
– + 1
People focus:
– 2 - 1% " 1
No profit center concept
Negotiate a good practices global solution (200 architects)
Solutions owned by solution leaders
ITL as the “board” of the IT company
– + + -
+! 1%
“It’s about
– *1 " "
changing
Workshops with 20 employees every three weeks
minds.”
ITS: top business leaders prioritize IT for overall benefit
ITL as board of the “IT Company”
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR)
25
7-Eleven Japan—An IT Savvy Next Gen Retailer
"77 #
– 79" " 505 "
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<> 1 ;@
“It’s not enough to exchange information. The information has no
value unless its properly integrated by the franchisees and makes
them work better.” —Toshifumi Suzuki, CEO
Source: IT Savvy: What Top Executives Must Know to Go from Pain to Gain, Peter Weill
and Jeanne W. Ross, Harvard Business School Press, 2009. K. Nagayama and P. Weill, “7-
Center
Center for
for Information
Information Systems
Systems Research
Research (CISR)
(CISR) ELEVEN Japan Co., Ltd.: Reinventing the Retail Business Model,” Working Paper #338,
MIT Sloan Center for Information Systems Research, Cambridge, January, 2004, and
Seven & i Holdings Corporate Profile 2009. Several visits to 7-Eleven Japan. 26