Key organizational enablers for effective demand management

Key Organizational Enablers For Effective Demand Management Options Menu: Forum

Chapter 1 DeVelopIng anD DelIVerIng on The IT Value propoSITIon 2 Peeling the Onion: Understanding IT Value 3

What Is IT Value? 3

Where Is IT Value? 4

Who Delivers IT Value? 5

When Is IT Value Realized? 5

The Three Components of the IT Value Proposition 6 Identification of Potential Value 7 Effective Conversion 8 Realizing Value 9

Five Principles for Delivering Value 10 Principle 1. Have a Clearly Defined Portfolio Value Management

Process 11

Principle 2. Aim for Chunks of Value 11

Principle 3. Adopt a Holistic Orientation to Technology Value 11

Principle 4. Aim for Joint Ownership of Technology Initiatives 12

Principle 5. Experiment More Often 12 Conclusion 12  •  References 13

Chapter 2 DeVelopIng IT STraTegy for BuSIneSS Value 15 Business and IT Strategies: Past, Present, and Future 16

Four Critical Success Factors 18

The Many Dimensions of IT Strategy 20

Toward an IT Strategy-Development Process 22

Challenges for CIOs 23 Conclusion 25  •  References 25

Chapter 3 lInkIng IT To BuSIneSS MeTrICS 27 Business Measurement: An Overview 28

Key Business Metrics for IT 30

v

vi Contents

Designing Business Metrics for IT 31

Advice to Managers 35 Conclusion 36  •  References 36

Chapter 4 BuIlDIng a STrong relaTIonShIp wITh The BuSIneSS 38 The Nature of the Business–IT Relationship 39

The Foundation of a Strong Business–IT Relationship 41

Building Block #1: Competence 42

Building Block #2: Credibility 43

Building Block #3: Interpersonal Interaction 44

Building Block #4: Trust 46 Conclusion 48  •  References 48

Appendix A The Five IT Value Profiles 50

Appendix B Guidelines for Building a Strong Business–IT Relationship 51

Chapter 5 CoMMunICaTIng wITh BuSIneSS ManagerS 52 Communication in the Business–IT Relationship 53

What Is “Good” Communication? 54

Obstacles to Effective Communication 56

“T-Level” Communication Skills for IT Staff 58

Improving Business–IT Communication 60 Conclusion 61  •  References 61

Appendix A IT Communication Competencies 63

Chapter 6 BuIlDIng BeTTer IT leaDerS froM The BoTToM up 64 The Changing Role of the IT Leader 65

What Makes a Good IT Leader? 67

How to Build Better IT Leaders 70

Investing in Leadership Development: Articulating the Value Proposition 73

Conclusion 74  •  References 75

MInI CaSeS Delivering Business Value with IT at Hefty Hardware 76

Investing in TUFS 80

IT Planning at ModMeters 82

Contents vii

Section II IT governance 87

Chapter 7 CreaTIng IT ShareD SerVICeS 88 IT Shared Services: An Overview 89

IT Shared Services: Pros and Cons 92

IT Shared Services: Key Organizational Success Factors 93

Identifying Candidate Services 94

An Integrated Model of IT Shared Services 95

Recommmendations for Creating Effective IT Shared Services 96

Conclusion 99  •  References 99

Chapter 8 a ManageMenT fraMework for IT SourCIng 100 A Maturity Model for IT Functions 101

IT Sourcing Options: Theory Versus Practice 105

The “Real” Decision Criteria 109

Decision Criterion #1: Flexibility 109

Decision Criterion #2: Control 109

Decision Criterion #3: Knowledge Enhancement 110

Decision Criterion #4: Business Exigency 110

A Decision Framework for Sourcing IT Functions 111

Identify Your Core IT Functions 111

Create a “Function Sourcing” Profile 111

Evolve Full-Time IT Personnel 113

Encourage Exploration of the Whole Range of Sourcing Options 114

Combine Sourcing Options Strategically 114

A Management Framework for Successful Sourcing 115

Develop a Sourcing Strategy 115

Develop a Risk Mitigation Strategy 115

Develop a Governance Strategy 116

Understand the Cost Structures 116 Conclusion 117  •  References 117

Chapter 9 The IT BuDgeTIng proCeSS 118 Key Concepts in IT Budgeting 119

The Importance of Budgets 121

The IT Planning and Budget Process 123

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Corporate Processes 123

IT Processes 125

Assess Actual IT Spending 126

IT Budgeting Practices That Deliver Value 127 Conclusion 128  •  References 129

Chapter 10 ManagIng IT- BaSeD rISk 130 A Holistic View of IT-Based Risk 131

Holistic Risk Management: A Portrait 134

Developing a Risk Management Framework 135

Improving Risk Management Capabilities 138

Conclusion 139  •  References 140

Appendix A A Selection of Risk Classification Schemes 141

Chapter 11 InforMaTIon ManageMenT: The nexuS of BuSIneSS anD IT 142 Information Management: How Does IT Fit? 143

A Framework For IM 145

Stage One: Develop an IM Policy 145

Stage Two: Articulate the Operational Components 145

Stage Three: Establish Information Stewardship 146

Stage Four: Build Information Standards 147

Issues In IM 148

Culture and Behavior 148

Information Risk Management 149

Information Value 150

Privacy 150

Knowledge Management 151

The Knowing–Doing Gap 151

Getting Started in IM 151 Conclusion 153  •  References 154

Appendix A Elements of IM Operations 155

MInI CaSeS Building Shared Services at RR Communications 156

Enterprise Architecture at Nationstate Insurance 160

IT Investment at North American Financial 165

Contents ix

Section III IT-enabled Innovation 169

Chapter 12 InnoVaTIon wITh IT 170 The Need for Innovation: An Historical

Perspective 171

The Need for Innovation Now 171

Understanding Innovation 172

The Value of Innovation 174

Innovation Essentials: Motivation, Support, and Direction 175

Challenges for IT leaders 177

Facilitating Innovation 179 Conclusion 180  •  References 181

Chapter 13 BIg DaTa anD SoCIal CoMpuTIng 182 The Social Media/Big Data Opportunity 183

Delivering Business Value with Big Data 185

Innovating with Big Data 189

Pulling in Two Different Directions: The Challenge for IT Managers 190

First Steps for IT Leaders 192 Conclusion 193  •  References 194

Chapter 14 IMproVIng The CuSToMer experIenCe: an IT perSpeCTIVe 195 Customer Experience and Business value 196

Many Dimensions of Customer Experience 197

The Role of Technology in Customer Experience 199

Customer Experience Essentials for IT 200

First Steps to Improving Customer Experience 203 Conclusion 204  •  References 204

Chapter 15 BuIlDIng BuSIneSS InTellIgenCe 206 Understanding Business Intelligence 207

The Need for Business Intelligence 208

The Challenge of Business Intelligence 209

The Role of IT in Business Intelligence 211

Improving Business Intelligence 213 Conclusion 216  •  References 216

x Contents

Chapter 16 enaBlIng CollaBoraTIon wITh IT 218 Why Collaborate? 219

Characteristics of Collaboration 222

Components of Successful Collaboration 225

The Role of IT in Collaboration 227

First Steps for Facilitating Effective Collaboration 229 Conclusion 231  •  References 232

MInI CaSeS Innovation at International Foods 234

Consumerization of Technology at IFG 239

CRM at Minitrex 243

Customer Service at Datatronics 246

Section IV IT portfolio Development and Management 251

Chapter 17 applICaTIon porTfolIo ManageMenT 252 The Applications Quagmire 253

The Benefits of a Portfolio Perspective 254

Making APM Happen 256

Capability 1: Strategy and Governance 258

Capability 2: Inventory Management 262

Capability 3: Reporting and Rationalization 263

Key Lessons Learned 264 Conclusion 265  •  References 265

Appendix A Application Information 266

Chapter 18 ManagIng IT DeManD 270 Understanding IT Demand 271

The Economics of Demand Management 273

Three Tools for Demand management 273

Key Organizational Enablers for Effective Demand Management 274

Strategic Initiative Management 275

Application Portfolio Management 276

Enterprise Architecture 276

Business–IT Partnership 277

Governance and Transparency 279 Conclusion 281  •  References 281

Contents xi

Chapter 19 CreaTIng anD eVolVIng a TeChnology roaDMap 283 What is a Technology Roadmap? 284

The Benefits of a Technology Roadmap 285

External Benefits (Effectiveness) 285

Internal Benefits (Efficiency) 286

Elements of the Technology Roadmap 286

Activity #1: Guiding Principles 287

Activity #2: Assess Current Technology 288

Activity #3: Analyze Gaps 289

Activity #4: Evaluate Technology Landscape 290

Activity #5: Describe Future Technology 291

Activity #6: Outline Migration Strategy 292

Activity #7: Establish Governance 292

Practical Steps for Developing a Technology Roadmap 294

Conclusion 295  •  References 295

Appendix A Principles to Guide a Migration Strategy 296

Chapter 20 enhanCIng DeVelopMenT proDuCTIVITy 297 The Problem with System Development 298

Trends in System Development 299

Obstacles to Improving System Development Productivity 302

Improving System Development Productivity: What we know that Works 304

Next Steps to Improving System Development Productivity 306

Conclusion 308  •  References 308

Chapter 21 InforMaTIon DelIVery: IT’S eVolVIng role 310 Information and IT: Why Now? 311

Delivering Value Through Information 312

Effective Information Delivery 316

New Information Skills 316 New Information Roles 317

New Information Practices 317

xii Contents

New Information Strategies 318

The Future of Information Delivery 319 Conclusion 321  •  References 322

MInI CaSeS Project Management at MM 324

Working Smarter at Continental Furniture International 328

Managing Technology at Genex Fuels 333 Index 336

PREFACE

Today, with information technology (IT) driving constant business transformation, overwhelming organizations with information, enabling 24/7 global operations, and undermining traditional business models, the challenge for business leaders is not simply to manage IT, it is to use IT to deliver business value. Whereas until fairly recently, decisions about IT could be safely delegated to technology specialists after a business strategy had been developed, IT is now so closely integrated with business that, as one CIO explained to us, “We can no longer deliver business solutions in our company without using technology so IT and business strategy must constantly interact with each other.”

What’s New in This Third Edition?

• Six new chapters focusing on current critical issues in IT management, including IT shared services; big data and social computing; business intelligence; manag- ing IT demand; improving the customer experience; and enhancing development productivity.

• Two significantly revised chapters: on delivering IT functions through different resourcing options; and innovating with IT.

• Two new mini cases based on real companies and real IT management situations: Working Smarter at Continental Furniture and Enterprise Architecture at Nationstate Insurance.

• A revised structure based on reader feedback with six chapters and two mini cases from the second edition being moved to the Web site.

All too often, in our efforts to prepare future executives to deal effectively with the issues of IT strategy and management, we lead them into a foreign country where they encounter a different language, different culture, and different customs. Acronyms (e.g., SOA, FTP/IP, SDLC, ITIL, ERP), buzzwords (e.g., asymmetric encryption, proxy servers, agile, enterprise service bus), and the widely adopted practice of abstraction (e.g., Is a software monitor a person, place, or thing?) present formidable “barriers to entry” to the technologically uninitiated, but more important, they obscure the impor- tance of teaching students how to make business decisions about a key organizational resource. By taking a critical issues perspective, IT Strategy: Issues and Practices treats IT as a tool to be leveraged to save and/or make money or transform an organization—not as a study by itself.

As in the first two editions of this book, this third edition combines the experi- ences and insights of many senior IT managers from leading-edge organizations with thorough academic research to bring important issues in IT management to life and demonstrate how IT strategy is put into action in contemporary businesses. This new edition has been designed around an enhanced set of critical real-world issues in IT management today, such as innovating with IT, working with big data and social media,

xiii

xiv Preface

enhancing customer experience, and designing for business intelligence and introduces students to the challenges of making IT decisions that will have significant impacts on how businesses function and deliver value to stakeholders.

IT Strategy: Issues and Practices focuses on how IT is changing and will continue to change organizations as we now know them. However, rather than learning concepts “free of context,” students are introduced to the complex decisions facing real organi- zations by means of a number of mini cases. These provide an opportunity to apply the models/theories/frameworks presented and help students integrate and assimilate this material. By the end of the book, students will have the confidence and ability to tackle the tough issues regarding IT management and strategy and a clear understand- ing of their importance in delivering business value.

Key Features of This Book

• A focus on IT management issues as opposed to technology issues • Critical IT issues explored within their organizational contexts • Readily applicable models and frameworks for implementing IT strategies • Mini cases to animate issues and focus classroom discussions on real-world deci-

sions, enabling problem-based learning • Proven strategies and best practices from leading-edge organizations • Useful and practical advice and guidelines for delivering value with IT • Extensive teaching notes for all mini cases

A Different ApproAch to teAching it StrAtegy

The real world of IT is one of issues—critical issues—such as the following:

• How do we know if we are getting value from our IT investment? • How can we innovate with IT? • What specific IT functions should we seek from external providers? • How do we build an IT leadership team that is a trusted partner with the business? • How do we enhance IT capabilities? • What is IT’s role in creating an intelligent business? • How can we best take advantage of new technologies, such as big data and social

media, in our business? • How can we manage IT risk?

However, the majority of management information systems (MIS) textbooks are orga- nized by system category (e.g., supply chain, customer relationship management, enterprise resource planning), by system component (e.g., hardware, software, networks), by system function (e.g., marketing, financial, human resources), by system type (e.g., transactional, decisional, strategic), or by a combination of these. Unfortunately, such an organization does not promote an understanding of IT management in practice.

IT Strategy: Issues and Practices tackles the real-world challenges of IT manage- ment. First, it explores a set of the most important issues facing IT managers today, and second, it provides a series of mini cases that present these critical IT issues within the context of real organizations. By focusing the text as well as the mini cases on today’s critical issues, the book naturally reinforces problem-based learning.

Preface xv

IT Strategy: Issues and Practices includes thirteen mini cases—each based on a real company presented anonymously.1 Mini cases are not simply abbreviated versions of standard, full-length business cases. They differ in two significant ways:

1. A horizontal perspective. Unlike standard cases that develop a single issue within an organizational setting (i.e., a “vertical” slice of organizational life), mini cases take a “horizontal” slice through a number of coexistent issues. Rather than looking for a solution to a specific problem, as in a standard case, students analyzing a mini case must first identify and prioritize the issues embedded within the case. This mim- ics real life in organizations where the challenge lies in “knowing where to start” as opposed to “solving a predefined problem.”

2. Highly relevant information. Mini cases are densely written. Unlike standard cases, which intermix irrelevant information, in a mini case, each sentence exists for a reason and reflects relevant information. As a result, students must analyze each case very carefully so as not to miss critical aspects of the situation.

Teaching with mini cases is, thus, very different than teaching with standard cases. With mini cases, students must determine what is really going on within the organiza- tion. What first appears as a straightforward “technology” problem may in fact be a political problem or one of five other “technology” problems. Detective work is, there- fore, required. The problem identification and prioritization skills needed are essential skills for future managers to learn for the simple reason that it is not possible for organi- zations to tackle all of their problems concurrently. Mini cases help teach these skills to students and can balance the problem-solving skills learned in other classes. Best of all, detective work is fun and promotes lively classroom discussion.

To assist instructors, extensive teaching notes are available for all mini cases. Developed by the authors and based on “tried and true” in-class experience, these notes include case summaries, identify the key issues within each case, present ancillary information about the company/industry represented in the case, and offer guidelines for organizing the class- room discussion. Because of the structure of these mini cases and their embedded issues, it is common for teaching notes to exceed the length of the actual mini case!

This book is most appropriate for MIS courses where the goal is to understand how IT delivers organizational value. These courses are frequently labeled “IT Strategy” or “IT Management” and are offered within undergraduate as well as MBA programs. For undergraduate juniors and seniors in business and commerce programs, this is usually the “capstone” MIS course. For MBA students, this course may be the compulsory core course in MIS, or it may be an elective course.

Each chapter and mini case in this book has been thoroughly tested in a variety of undergraduate, graduate, and executive programs at Queen’s School of Business.2

1 We are unable to identify these leading-edge companies by agreements established as part of our overall research program (described later). 2 Queen’s School of Business is one of the world’s premier business schools, with a faculty team renowned for its business experience and academic credentials. The School has earned international recognition for its innovative approaches to team-based and experiential learning. In addition to its highly acclaimed MBA programs, Queen’s School of Business is also home to Canada’s most prestigious undergraduate business program and several outstanding graduate programs. As well, the School is one of the world’s largest and most respected providers of executive education.

xvi Preface

These materials have proven highly successful within all programs because we adapt how the material is presented according to the level of the students. Whereas under- graduate students “learn” about critical business issues from the book and mini cases for the first time, graduate students are able to “relate” to these same critical issues based on their previous business experience. As a result, graduate students are able to introduce personal experiences into the discussion of these critical IT issues.

orgAnizAtion of thiS Book

One of the advantages of an issues-focused structure is that chapters can be approached in any order because they do not build on one another. Chapter order is immaterial; that is, one does not need to read the first three chapters to understand the fourth. This pro- vides an instructor with maximum flexibility to organize a course as he or she sees fit. Thus, within different courses/programs, the order of topics can be changed to focus on different IT concepts.

Furthermore, because each mini case includes multiple issues, they, too, can be used to serve different purposes. For example, the mini case “Building Shared Services at RR Communications” can be used to focus on issues of governance, organizational structure, and/or change management just as easily as shared services. The result is a rich set of instructional materials that lends itself well to a variety of pedagogical appli- cations, particularly problem-based learning, and that clearly illustrates the reality of IT strategy in action.

The book is organized into four sections, each emphasizing a key component of developing and delivering effective IT strategy:

• Section I: Delivering Value with IT is designed to examine the complex ways that IT and business value are related. Over the past twenty years, researchers and prac- titioners have come to understand that “business value” can mean many different things when applied to IT. Chapter 1 (Developing and Delivering on the IT Value Proposition) explores these concepts in depth. Unlike the simplistic value propo- sitions often used when implementing IT in organizations, this chapter presents “value” as a multilayered business construct that must be effectively managed at several levels if technology is to achieve the benefits expected. Chapter 2 (Developing IT Strategy for Business Value) examines the dynamic interrelationship between business and IT strategy and looks at the processes and critical success factors used by organizations to ensure that both are well aligned. Chapter 3 (Linking IT to Business Metrics) discusses new ways of measuring IT’s effectiveness that pro- mote closer business–IT alignment and help drive greater business value. Chapter 4 (Building a Strong Relationship with the Business) examines the nature of the business–IT relationship and the characteristics of an effective relationship that delivers real value to the enterprise. Chapter 5 (Communicating with Business Managers) explores the business and interpersonal competencies that IT staff will need in order to do their jobs effectively over the next five to seven years and what companies should be doing to develop them. Finally, Chapter 6 (Building Better IT Leaders from the Bottom Up) tackles the increasing need for improved leadership skills in all IT staff and examines the expectations of the business for strategic and innovative guidance from IT.

Preface xvii

In the mini cases associated with this section, the concepts of delivering value with IT are explored in a number of different ways. We see business and IT executives at Hefty Hardware grappling with conflicting priorities and per- spectives and how best to work together to achieve the company’s strategy. In “Investing in TUFS,” CIO Martin Drysdale watches as all of the work his IT depart- ment has put into a major new system fails to deliver value. And the “IT Planning at ModMeters” mini case follows CIO Brian Smith’s efforts to create a strategic IT plan that will align with business strategy, keep IT running, and not increase IT’s budget.

• Section II: IT Governance explores key concepts in how the IT organization is structured and managed to effectively deliver IT products and services to the orga- nization. Chapter 7 (IT Shared Services) discusses how IT shared services should be selected, organized, managed, and governed to achieve improved organizational performance. Chapter 8 (A Management Framework for IT Sourcing) examines how organizations are choosing to source and deliver different types of IT functions and presents a framework to guide sourcing decisions. Chapter 9 (The IT Budgeting Process) describes the “evil twin” of IT strategy, discussing how budgeting mecha- nisms can significantly undermine effective business strategies and suggesting practices for addressing this problem while maintaining traditional fiscal account- ability. Chapter 10 (Managing IT-based Risk) describes how many IT organizations have been given the responsibility of not only managing risk in their own activities (i.e., project development, operations, and delivering business strategy) but also of managing IT-based risk in all company activities (e.g., mobile computing, file sharing, and online access to information and software) and the need for a holistic framework to understand and deal with risk effectively. Chapter 11 (Information Management: The Nexus of Business and IT) describes how new organizational needs for more useful and integrated information are driving the development of business-oriented functions within IT that focus specifically on information and knowledge, as opposed to applications and data.

The mini cases in this section examine the difficulties of managing com- plex IT issues when they intersect substantially with important business issues. In “Building Shared Services at RR Communications,” we see an IT organiza- tion in transition from a traditional divisional structure and governance model to a more centralized enterprise model, and the long-term challenges experi- enced by CIO Vince Patton in changing both business and IT practices, includ- ing information management and delivery, to support this new approach. In “Enterprise Architecture at Nationstate Insurance,” CIO Jane Denton endeavors to make IT more flexible and agile, while incorporating new and emerging tech- nologies into its strategy. In “IT Investment at North American Financial,” we show the opportunities and challenges involved in prioritizing and resourcing enterprisewide IT projects and monitoring that anticipated benefits are being achieved.

• Section III: IT-Enabled Innovation discusses some of the ways technology is being used to transform organizations. Chapter 12 (Innovation with IT) examines the nature and importance of innovation with IT and describes a typical inno- vation life cycle. Chapter 13 (Big Data and Social Computing) discusses how IT leaders are incorporating big data and social media concepts and technologies

xviii Preface

to successfully deliver business value in new ways. Chapter 14 (Improving the Customer Experience: An IT Perspective) explores the IT function’s role in creating and improving an organization’s customer experiences and the role of technology in helping companies to understand and learn from their customers’ experiences. Chapter 15 (Building Business Intelligence) looks at the nature of business intelli- gence and its relationship to data, information, and knowledge and how IT can be used to build a more intelligent organization. Chapter 16 (Enabling Collaboration with IT) identifies the principal forms of collaboration used in organizations, the primary business drivers involved in them, how their business value is measured, and the roles of IT and the business in enabling collaboration.

The mini cases in this section focus on the key challenges companies face in innovating with IT. “Innovation at International Foods” contrasts the need for pro- cess and control in corporate IT with the strong push to innovate with technology and the difficulties that ensue from the clash of style and culture. “Consumerization of Technology at IFG” looks at issues such as “bring your own device” (BYOD) to the workplace. In “CRM at Minitrex,” we see some of the internal technological and political conflicts that result from a strategic decision to become more customercen- tric. Finally, “Customer Service at Datatronics” explores the importance of present- ing unified, customer-facing IT to customers.

• Section IV: IT Portfolio Development and Management looks at how the IT function must transform itself to be able to deliver business value effectively in the future. Chapter 17 (Application Portfolio Management) describes the ongoing management process of categorizing, assessing, and rationalizing the IT application portfolio. Chapter 18 (Managing IT Demand) looks at the often neglected issue of demand management (as opposed to supply management), explores the root causes of the demand for IT services, and identifies a number of tools and enablers to facilitate more effective demand management. Chapter 19 (Creating and Evolving a Technology Roadmap) examines the challenges IT managers face in implement- ing new infrastructure, technology standards, and types of technology in their real- world business and technical environments, which is composed of a huge variety of hardware, software, applications, and other technologies, some of which date back more than thirty years. Chapter 20 (Enhancing Development Productivity) explores how system development practices are changing and how managers can create an environment to promote improved development productivity. And Chapter 21 (Information Delivery: IT’s Evolving Role) examines the fresh challenges IT faces in managing the exponential growth of data and digital assets; privacy and account- ability concerns; and new demands for access to information on an anywhere, any- time basis.

The mini cases associated with this section describe many of these themes embedded within real organizational contexts. “Project Management at MM” mini case shows how a top-priority, strategic project can take a wrong turn when proj- ect management skills are ineffective. “Working Smarter at Continental Furniture” mini case follows an initiative to improve the company’s analytics so it can reduce its environmental impact. And in the mini case “Managing Technology at Genex Fuels,” we see CIO Nick Devlin trying to implement enterprisewide technology for competitive advantage in an organization that has been limping along with obscure and outdated systems.

Preface xix

SupplementAry mAteriAlS

online instructor resource center The following supplements are available online to adopting instructors:

• PowerPoint Lecture Notes • Image Library (text art) • Extensive Teaching Notes for all Mini cases • Additional chapters including Developing IT Professionalism; IT Sourcing; Master

Data Management; Developing IT Capabilities; The Identity Management Challenge; Social Computing; Managing Perceptions of IT; IT in the New World of Corporate Governance Reforms; Enhancing Customer Experiences with Technology; Creating Digital Dashboards; and Managing Electronic Communications.

• Additional mini cases, including IT Leadership at MaxTrade; Creating a Process-Driven Organization at Ag-Credit; Information Management at Homestyle Hotels; Knowledge Management at Acme Consulting; Desktop Provisioning at CanCredit; and Leveraging IT Vendors at SleepSmart.

For detailed descriptions of all of the supplements just listed, please visit http:// www.pearsonhighered.com/mckeen.

courseSmart etextbooks online CourseSmart is an exciting new choice for students looking to save money. As an alter- native to purchasing the print textbook, students can purchase an electronic version of the same content and save up to 50 percent off the suggested list price of the print text. With a CourseSmart etextbook, students can search the text, make notes online, print out reading assignments that incorporate lecture notes, and bookmark important pas- sages for later review. www.coursesmart.com.

the geneSiS of thiS Book

Since 1990 we have been meeting quarterly with a group of senior IT managers from a number of leading-edge organizations (e.g., Eli Lilly, BMO, Honda, HP, CIBC, IBM, Sears, Bell Canada, MacDonalds, and Sun Life) to identify and discuss critical IT manage- ment issues. This focus group represents a wide variety of industry sectors (e.g., retail, manufacturing, pharmaceutical, banking, telecommunications, insurance, media, food processing, government, and automotive). Originally, it was established to meet the com- panies’ needs for well-balanced, thoughtful, yet practical information on emerging IT management topics, about which little or no research was available. However, we soon recognized the value of this premise for our own research in the rapidly evolving field of IT management. As a result, it quickly became a full-scale research program in which we were able to use the focus group as an “early warning system” to document new IT management issues, develop case studies around them, and explore more collaborative approaches to identifying trends, challenges, and effective practices in each topic area.3

3 This now includes best practice case studies, field research in organizations, multidisciplinary qualitative and quantitative research projects, and participation in numerous CIO research consortia.

http://www.pearsonhighered.com/mckeen
http://www.pearsonhighered.com/mckeen
http://www.coursesmart.com
xx Preface

As we shared our materials with our business students, we realized that this issues- based approach resonated strongly with them, and we began to incorporate more of our research into the classroom. This book is the result of our many years’ work with senior IT managers, in organizations, and with students in the classroom.

Each issue in this book has been selected collaboratively by the focus group after debate and discussion. As facilitators, our job has been to keep the group’s focus on IT management issues, not technology per se. In preparation for each meeting, focus group members researched the topic within their own organization, often involving a number of members of their senior IT management team as well as subject matter experts in the process. To guide them, we provided a series of questions about the issue, although members are always free to explore it as they see fit. This approach provided both struc- ture for the ensuing discussion and flexibility for those members whose organizations are approaching the issue in a different fashion.

The focus group then met in a full-day session, where the members discussed all aspects of the issue. Many also shared corporate documents with the group. We facilitated the discussion, in particular pushing the group to achieve a common understanding of the dimensions of the issue and seeking examples, best practices, and guidelines for deal- ing with the challenges involved. Following each session, we wrote a report based on the discussion, incorporating relevant academic and practitioner materials where these were available. (Because some topics are “bleeding edge,” there is often little traditional IT research available on them.)

Each report has three parts:

1. A description of the issue and the challenges it presents for both business and IT managers

2. Models and concepts derived from the literature to position the issue within a con- textual framework

3. Near-term strategies (i.e., those that can be implemented immediately) that have proven successful within organizations for dealing with the specific issue

Each chapter in this book focuses on one of these critical IT issues. We have learned over the years that the issues themselves vary little across industries and organizations, even in enterprises with unique IT strategies. However, each organization tackles the same issue somewhat differently. It is this diversity that provides the richness of insight in these chapters. Our collaborative research approach is based on our belief that when dealing with complex and leading-edge issues, “everyone has part of the solution.” Every focus group, therefore, provides us an opportunity to explore a topic from a variety of perspectives and to integrate different experiences (both successful and oth- erwise) so that collectively, a thorough understanding of each issue can be developed and strategies for how it can be managed most successfully can be identified.

ABoUT THE AUTHoRS

James D. McKeen is Professor Emeritus at the Queen’s School of Business. He has been working in the IT field for many years as a practitioner, researcher, and consultant. In 2011, he was named the “IT Educator of the Year” by ComputerWorld Canada. Jim has taught at universities in the United Kingdom, France, Germany, and the United States. His research is widely published in a number of leading journals and he is the coau- thor (with Heather Smith) of five books on IT management. Their most recent book—IT Strategy: Issues and Practices (2nd ed.)—was the best-selling business book in Canada (Globe and Mail, April 2012).

Heather A. Smith has been named the most-published researcher on IT management issues in two successive studies (2006, 2009). A senior research associate with Queen’s University School of Business, she is the author of five books, the most recent being IT Strategy: Issues and Practices (Pearson Prentice Hall, 2012). She is also a senior research associate with the American Society for Information Management’s Advanced Practices Council. A former senior IT manager, she is codirector of the IT Management Forum and the CIO Brief, which facilitate interorganizational learning among senior IT executives. In addition, she consults and collaborates with organizations worldwide.

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ACKNowLEDGMENTS

The work contained in this book is based on numerous meetings with many senior IT managers. We would like to acknowledge our indebtedness to the following individuals who willingly shared their insights based on their experiences “earned the hard way”:

Michael Balenzano, Sergei Beliaev, Matthias Benfey, Nastaran Bisheban, Peter Borden, Eduardo Cadena, Dale Castle, Marc Collins, Diane Cope, Dan Di Salvo, Ken Dschankilic, Michael East, Nada Farah, Mark Gillard, Gary Goldsmith, Ian Graham, Keiko Gutierrez, Maureen Hall, Bruce Harding, Theresa Harrington, Tom Hopson, Heather Hutchison, Jim Irich, Zeeshan Khan, Joanne Lafreniere, Konstantine Liris, Lisa MacKay, Mark O’Gorman, Amin Panjwani, Troy Pariag, Brian Patton, Marius Podaru, Helen Restivo, Pat Sadler, A. F. Salam, Ashish Saxena, Joanne Scher, Stewart Scott, Andy Secord, Marie Shafi, Helen Shih, Trudy Sykes, Bruce Thompson, Raju Uppalapati, Len Van Greuning, Laurie Schatzberg, Ted Vincent, and Bond Wetherbe.

We would also like to recognize the contribution of Queen’s School of Business to this work. The school has facilitated and supported our vision of better integrat- ing academic research and practice and has helped make our collaborative approach to the study of IT management and strategy an effective model for interorganizational learning.

James D. McKeen Kingston, Ontario

Heather A. Smith School of Business

June 2014

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S e c t i o n i

Delivering Value with IT

Chapter 1 Developing and Delivering on the IT Value Proposition Chapter 2 Developing IT Strategy for Business Value Chapter 3 Linking IT to Business Metrics Chapter 4 Building a Strong Relationship with the Business Chapter 5 Communicating with Business Managers Chapter 6 Building Better IT Leaders from the Bottom Up

Mini Cases ■  Delivering Business Value with IT at Hefty Hardware ■  Investing in TUFS ■  IT Planning at ModMeters

2

C h a p t e r

1 Developing and Delivering on the it Value Proposition1

1 This chapter is based on the authors’ previously published article, Smith, H. A., and J. D. McKeen. “Developing and Delivering on the IT Value Proposition.” Communications of the Association for Information Systems 11 (April 2003): 438–50. Reproduced by permission of the Association for Information Systems.

It’s déjà vu all over again. For at least twenty years, business leaders have been trying to figure out exactly how and where IT can be of value in their organizations. And IT managers have been trying to learn how to deliver this value. When IT was used mainly as a productivity improvement tool in small areas of a business, this was a relatively straightforward process. Value was measured by reduced head counts— usually in clerical areas—and/or the ability to process more transactions per person. However, as systems grew in scope and complexity, unfortunately so did the risks. Very few companies escaped this period without making at least a few disastrous invest- ments in systems that didn’t work or didn’t deliver the bottom-line benefits executives thought they would. Naturally, fingers were pointed at IT.

With the advent of the strategic use of IT in business, it became even more difficult to isolate and deliver on the IT value proposition. It was often hard to tell if an invest- ment had paid off. Who could say how many competitors had been deterred or how many customers had been attracted by a particular IT initiative? Many companies can tell horror stories of how they have been left with a substantial investment in new forms of technology with little to show for it. Although over the years there have been many improvements in where and how IT investments are made and good controls have been established to limit time and cost overruns, we are still not able to accurately articulate and deliver on a value proposition for IT when it comes to anything other than simple productivity improvements or cost savings.

Problems in delivering IT value can lie with how a value proposition is conceived or in what is done to actually implement an idea—that is, selecting the right project and doing the project right (Cooper et al. 2000; McKeen and Smith 2003; Peslak 2012). In addition, although most firms attempt to calculate the expected payback of an IT invest- ment before making it, few actually follow up to ensure that value has been achieved or to question what needs to be done to make sure that value will be delivered.

Chapter 1 • Developing and Delivering on the IT Value Proposition 3

This chapter first looks at the nature of IT value and “peels the onion” into its different layers. Then it examines the three components of delivering IT value: value identification, conversion, and value realization. Finally, it identifies five general principles for ensuring IT value will be achieved.

Peeling the OniOn: Understanding it ValUe

Thirty years ago the IT value proposition was seen as a simple equation: Deliver the right technology to the organization, and financial benefits will follow (Cronk and Fitzgerald 1999; Marchand et al. 2000). In the early days of IT, when computers were most often used as direct substitutes for people, this equation was understandable, even if it rarely worked this simply. It was easy to compute a bottom-line benefit where “technology” dollars replaced “salary” dollars.

Problems with this simplistic view quickly arose when technology came to be used as a productivity support tool and as a strategic tool. Under these conditions, managers had to decide if an IT investment was worth making if it saved people time, helped them make better decisions, or improved service. Thus, other factors, such as how well technology was used by people or how IT and business processes worked together, became important considerations in how much value was realized from an IT investment. These issues have long confounded our understanding of the IT value prop- osition, leading to a plethora of opinions (many negative) about how and where technol- ogy has actually contributed to business value. Stephen Roach (1989) made headlines with his macroeconomic analysis showing that IT had had absolutely no impact on pro- ductivity in the services sector. More recently, research shows that companies still have a mixed record in linking IT to organizational performance, user satisfaction, productivity, customer experience, and agility (Peslak 2012).

These perceptions, plus ever-increasing IT expenditures, have meant business managers are taking a closer look at how and where IT delivers value to an organization (Ginzberg 2001; Luftman and Zadeh 2011). As they do this, they are beginning to change their understanding of the IT value proposition. Although, unfortunately, “silver bullet thinking” (i.e., plug in technology and deliver bottom-line impact) still predomi- nates, IT value is increasingly seen as a multilayered concept, far more complex than it first appeared. This suggests that before an IT value proposition can be identified and delivered, it is essential that managers first “peel the onion” and understand more about the nature of IT value itself (see Figure 1.1).

What is it Value?

Value is defined as the worth or desirability of a thing (Cronk and Fitzgerald 1999). It is a subjective assessment. Although many believe this is not so, the value of IT depends very much on how a business and its individual managers choose to view it. Different companies and even different executives will define it quite differently. Strategic posi- tioning, increased productivity, improved decision making, cost savings, or improved service are all ways value could be defined. Today most businesses define value broadly and loosely, not simply as a financial concept (Chakravarty et al. 2013). Ideally, it is tied to the organization’s business model because adding value with IT should enable a firm to do its business better. In the focus group (see the Preface), one company sees value

4 Section I • Delivering Value with IT

resulting from all parts of the organization having the same processes; another defines value by return on investment (ROI); still another measures it by a composite of key performance indicators. In short, there is no single agreed-on measure of IT value. As a result, misunderstandings about the definition of value either between IT and the busi- ness or among business managers themselves can lead to feelings that value has not been delivered. Therefore, a prerequisite of any IT value proposition is that everyone involved in an IT initiative agree on what value they are trying to deliver and how they will recognize it.

Where is it Value?

Value may also vary according to where one looks for it (Davern and Kauffman 2000; Oliveira and Martins 2011). For example, value to an enterprise may not be perceived as value in a work group or by an individual. In fact, delivering value at one level in an orga- nization may actually conflict with optimizing value at another level. Decisions about IT value are often made to optimize firm or business process value, even if they cause difficulties for business units or individuals. As one manager explained, “At the senior levels, our bottom-line drivers of value are cost savings, cash flow, customer satisfaction, and revenue. These are not always visible at the lower levels of the organization.” Failure to consider value implications at all levels can lead to a value proposition that is coun- terproductive and may not deliver the value that is anticipated. Many executives take a hard line with these value conflicts. However, it is far more desirable to aim for a value

What Value will be Delivered?

Where will Value be Delivered?

Who will Deliver Value?

When will Value be Delivered?

How will Value be Delivered?

FigUre 1.1 IT Value Is a Many-Layered Concept

Chapter 1 • Developing and Delivering on the IT Value Proposition 5

that is not a win–lose proposition but is a win–win at all levels. This can leverage overall value many times over (Chan 2000; Grant and Royle 2011).

Who delivers it Value?

Increasingly, managers are realizing that it is the interaction of people, information, and technology that delivers value, not IT alone.2 Studies have confirmed that strong IT practices alone do not deliver superior performance. It is only the combination of these IT practices with an organization’s skills at managing information and people’s behav- iors and beliefs that leads to real value (Birdsall 2011; Ginzberg 2001; Marchand et al. 2000). In the past, IT has borne most of the responsibility for delivering IT value. Today, however, business managers exhibit a growing willingness to share responsibility with IT to ensure value is realized from the organization’s investments in technology. Most companies now expect to have an executive sponsor for any IT initiative and some busi- ness participation in the development team. However, many IT projects still do not have the degree of support or commitment from the business that IT managers feel is necessary to deliver fully on a value proposition (Peslak 2012).

When is it Value realized?

Value also has a time dimension. It has long been known that the benefits of technol- ogy take time to be realized (Chan 2000; Segars and Chatterjee 2010). People must be trained, organizations and processes must adapt to new ways of working, information must be compiled, and customers must realize what new products and services are being offered. Companies are often unprepared for the time it takes an investment to pay off. Typically, full payback can take between three and five years and can have at least two spikes as a business adapts to the deployment of technology. Figure 1.2 shows this “W” effect, named for the way the chart looks, for a single IT project.

Initially, companies spend a considerable amount in deploying a new technology. During this twelve-to-sixteen-month period, no benefits occur. Following implementa- tion, some value is realized as companies achieve initial efficiencies. This period lasts for about six months. However, as use increases, complexities also grow. Information overload can occur and costs increase. At this stage, many can lose faith in the initia- tive. This is a dangerous period. The final set of benefits can occur only by making the business simpler and applying technology, information, and people more effectively. If a business can manage to do this, it can achieve sustainable, long-term value from its IT investment (Segars and Chatterjee 2010). If it can’t, value from technology can be offset by increased complexity.

Time also changes perceptions of value. Many IT managers can tell stories of how an initiative is vilified as having little or no value when first implemented, only to have people say they couldn’t imagine running the business without it a few years later. Similarly, most managers can identify projects where time has led to a clearer

2 These interactions in a structured form are known as processes. Processes are often the focus of much orga- nizational effort in the belief that streamlining and reengineering them will deliver value. In fact, research shows that without attention to information and people, very little value is delivered (Segars and Chatterjee 2010). In addition, attention to processes in organizations often ignores the informal processes that contribute to value.

6 Section I • Delivering Value with IT

understanding of the potential value of a project. Unfortunately, in cases where antici- pated value declines or disappears, projects don’t always get killed (Cooper et al. 2000).

Clarifying and agreeing on these different layers of IT value is the first step involved in developing and delivering on the IT value proposition. All too often, this work is for- gotten or given short shrift in the organization’s haste to answer this question: How will IT value be delivered? (See next section.) As a result, misunderstandings arise and tech- nology projects do not fulfill their expected promises. It will be next to impossible to do a good job developing and delivering IT value unless and until the concepts involved in IT value are clearly understood and agreed on by both business and IT managers.

the three COmPOnents OF the it ValUe PrOPOsitiOn

Developing and delivering an IT value proposition involves addressing three compo- nents. First, potential opportunities for adding value must be identified. Second, these opportunities must be converted into effective applications of technology. Finally, value

12–16 Months

EVA

Time

Get the House in Order

Harvest Low- Hanging Fruit

Make the Business Complex

Make Business Simpler

16–22 Months 22–38 Months 3–5 Years

FigUre 1.2 The ‘W’ Effect in Delivering IT Value (Segars & Chatterjee, 2010)

Best Practices in Understanding IT Value

• Link IT value directly to your business model. • Recognize value is subjective, and manage perceptions accordingly. • Aim for a value “win–win” across processes, work units, and individuals. • Seek business commitment to all IT projects. • Manage value over time.

Chapter 1 • Developing and Delivering on the IT Value Proposition 7

must be realized by the organization. Together, these components comprise the funda- mentals of any value proposition (see Figure 1.3).

identification of Potential Value

Identifying opportunities for making IT investments has typically been a fairly informal activity in most organizations. Very few companies have a well-organized means of doing research into new technologies or strategizing about where these tech- nologies can be used (McKeen and Smith 2010). More companies have mechanisms for identifying opportunities within business units. Sometimes a senior IT manager will be designated as a “relationship manager” for a particular unit with responsi- bility for working with business management to identify opportunities where IT could add value (Agarwal and Sambamurthy 2002; Peslak 2012). Many other com- panies, however, still leave it up to business managers to identify where they want to use IT. There is growing evidence that relegating the IT organization to a passive role in developing systems according to business instructions is unlikely to lead to high IT value. Research shows that involving IT in business planning can have a direct and positive influence on the development of successful business strategies using IT (Ginzberg 2001; Marchand et al. 2000). This suggests that organizations should estab- lish joint business–IT mechanisms to identify and evaluate both business and technical opportunities where IT can add value.

Once opportunities have been identified, companies must then make decisions about where they want to focus their dollars to achieve optimal value. Selecting the right projects for an organization always involves balancing three fundamental factors: cash, timing, and risk (Luehrman 1997). In principle, every company wants to under- take only high-return projects. In reality, project selection is based on many different factors. For example, pet or political projects or those mandated by the government or competitors are often part of a company’s IT portfolio (Carte et al. 2001). Disagreement at senior levels about which projects to undertake can arise because of a lack of a coher- ent and consistent mechanism for assessing project value. All organizations need some formal mechanism for prioritizing projects. Without one, it is very likely that project selection will become highly politicized and, hence, ineffective at delivering value. There are a variety of means to do this, ranging from using strictly bottom-line metrics, to comparing balanced scorecards, to adopting a formal value-assessment methodology. However, although these methods help to weed out higher cost–lower return projects, they do not constitute a foolproof means of selecting the right projects for an organiza- tion. Using strict financial selection criteria, for example, can exclude potentially high- value strategic projects that have less well-defined returns, longer payback periods, and more risk (Cooper et al. 2000; DeSouza 2011). Similarly, it can be difficult getting

Identification Conversion Realization IT

Value

FigUre 1.3 The Three Components of the IT Value Proposition

8 Section I • Delivering Value with IT

important infrastructure initiatives funded even though these may be fundamental to improving organizational capabilities (Byrd 2001).

Therefore, organizations are increasingly taking a portfolio approach to project selection. This approach allocates resources and funding to different types of projects, enabling each type of opportunity to be evaluated according to different criteria (McKeen and Smith 2003; Smith and McKeen 2010). One company has identified three different classes of IT—infrastructure, common systems, and business unit applications—and funds them in different proportions. In other companies, funding for strategic initia- tives is allocated in stages so their potential value can be reassessed as more information about them becomes known. Almost all companies have found it necessary to justify infrastructure initiatives differently than more business-oriented projects. In fact, some remove these types of projects from the selection process altogether and fund them with a “tax” on all other development (McKeen and Smith 2003). Other companies allocate a fixed percentage of their IT budgets to a technology renewal fund.

Organizations have come a long way in formalizing where and how they choose to invest their IT dollars. Nevertheless, there is still considerable room for judgment based on solid business and technical knowledge. It is, therefore, essential that all executives involved have the ability to think strategically and systematically as well as financially about project identification and selection.

effective Conversion

“Conversion” from idea/opportunity to reality has been what IT organizations have been all about since their inception. A huge amount of effort has gone into this central component of the IT value proposition. As a result, many IT organizations have become very good at developing and delivering projects on time and on budget. Excellent project management, effective execution, and reliable operations are a critical part of IT value. However, they are not, in and of themselves, sufficient to convert a good idea into value or to deliver value to an organization.

Today managers and researchers are both recognizing that more is involved in effective conversion than good IT practices. Organizations can set themselves up for failure by not providing adequate and qualified resources. Many companies start more projects than they can effectively deliver with the resources they have available. Not having enough time or resources to do the job means that people are spread too thin and end up taking shortcuts that are potentially damaging to value (Cooper et al. 2000). Resource limitations on the business side of a project team can be as damaging to con- version as a lack of technical resources. “[Value is about] far more than just sophisticated managerial visions. . . . Training and other efforts . . . to obtain value from IT investments

Best Practices in Identifying Potential Value

• Joint business–IT structures to recognize and evaluate opportunities • A means of comparing value across projects • A portfolio approach to project selection • A funding mechanism for infrastructure

Chapter 1 • Developing and Delivering on the IT Value Proposition 9

are often hamstrung by insufficient resources” (Chircu and Kauffman 2000). Inadequate business resources can lead to poor communication and ineffective problem solving on a project (Ginzberg 2001). Companies are beginning to recognize that the number and quality of the staff assigned to an IT project can make a difference to its eventual out- come. They are insisting that the organization’s best IT and businesspeople be assigned to critical projects.

Other significant barriers to conversion that are becoming more apparent now that IT has improved its own internal practices include the following:

• Organizational barriers. The effective implementation of IT frequently requires the extensive redesign of current business processes (Chircu and Kauffman 2000). However, organizations are often reluctant to make the difficult complementary business changes and investments that are required (Carte et al. 2001). “When new IT is implemented, everyone expects to see costs come down,” explained one manager. “However, most projects involve both business and IT deliverables. We, therefore, need to take a multifunctional approach to driving business value.” In recognition of this fact, some companies are beginning to put formal change man- agement programs in place to help businesses prepare for the changes involved with IT projects and to adapt and simplify as they learn how to take advantage of new technology.

• Knowledge barriers. Most often new technology and processes require employ- ees to work differently, learn new skills, and have new understanding of how and where information, people, and technologies fit together (Chircu and Kauffman 2000; Perez-Lopez and Alegre 2012). Although training has long been part of new IT implementations, more recently businesses are recognizing that delivering value from technology requires a broader and more coordinated learning effort (Smith and McKeen 2002). Lasting value comes from people and technology working together as a system rather than as discrete entities. Research confirms that high- performing organizations not only have strong IT practices but also have people who have good information management practices and who are able to effectively use the information they receive (Beath et al. 2012; Marchand et al. 2000).

realizing Value

The final component of the IT value proposition has been the most frequently ignored. This is the work involved in actually realizing value after technology has been imple- mented. Value realization is a proactive and long-term process for any major initiative. All too often, after an intense implementation period, a development team is disbanded to work on other projects, and the business areas affected by new technology are left to

Best Practices in Conversion

• Availability of adequate and qualified IT and business resources • Training in business goals and processes • Multifunctional change management • Emphasis on higher-level learning and knowledge management

10 Section I • Delivering Value with IT

sink or swim. As a result, a project’s benefits can be imperfectly realized. Technology must be used extensively if it is to deliver value. Poorly designed technology can lead to high levels of frustration, resistance to change, and low levels of use (Chircu and Kauffman 2000; Sun et al., 2012).

Resistance to change can have its root cause in an assumption or an action that doesn’t make sense in the everyday work people do. Sometimes this means challeng- ing workers’ understanding of work expectations or information flows. At other times it means doing better analysis of where and how a new process is causing bottlenecks, overwork, or overload. As one manager put it, “If value is not being delivered, we need to understand the root causes and do something about it.” His company takes the unusual position that it is important to keep a team working on a project until the expected benefits have been realized. This approach is ideal but can also be very costly and, therefore, must be carefully managed. Some companies try to short-circuit the value management process by simply taking anticipated cost savings out of a business unit’s budget once technology has been implemented, thereby forcing it to do more with less whether or not the technology has been as beneficial as anticipated. However, most often organizations do little or no follow-up to determine whether or not benefits have been achieved.

Measurement is a key component of value realization (Thorp 1999). After imple- mentation, it is essential that all stakeholders systematically compare outcomes against expected value and take appropriate actions to achieve benefits. In addition to monitor- ing metrics, a thorough and ongoing assessment of value and information flows must also be undertaken at all levels of analysis: individual, team, work unit, and enterprise. Efforts must be taken to understand and improve aspects of process, information, and technology that are acting as barriers to achieving value.

A significant problem with not paying attention to value recognition is that areas of unexpected value or opportunity are also ignored. This is unfortunate because it is only after technology has been installed that many businesspeople can see how it could be leveraged in other parts of their work. Realizing value should, therefore, also include provisions to evaluate new opportunities arising through serendipity.

FiVe PrinCiPles FOr deliVering ValUe

In addition to clearly understanding what value means in a particular organization and ensuring that the three components of the IT value proposition are addressed by every project, five principles have been identified that are central to developing and deliver- ing value in every organization.

Best Practices in Realizing Value

• Plan a value-realization phase for all IT projects. • Measure outcomes against expected results. • Look for and eliminate root causes of problems. • Assess value realization at all levels in the organization. • Have provisions for acting on new opportunities to leverage value.

Chapter 1 • Developing and Delivering on the IT Value Proposition 11

Principle 1. have a Clearly defined Portfolio Value management Process

Every organization should have a common process for managing the overall value being delivered to the organization from its IT portfolio. This would begin as a means of identifying and prioritizing IT opportunities by potential value relative to each other. It would also include mechanisms to optimize enterprise value (e.g., through tactical, stra- tegic, and infrastructure projects) according to a rubric of how the organization wants to allocate its resources.

A portfolio value management process should continue to track projects as they are being developed. It should ensure not only that projects are meeting schedule and budget milestones but also that other elements of conversion effectiveness are being addressed (e.g., business process redesign, training, change management, informa- tion management, and usability). A key barrier to achieving value can be an organiza- tion’s unwillingness to revisit the decisions made about its portfolio (Carte et al. 2001). Yet this is critically important for strategic and infrastructure initiatives in particular. Companies may have to approve investments in these types of projects based on imper- fect information in an uncertain environment. As they develop, improved information can lead to better decision making about an investment. In some cases this might lead to a decision to kill a project; in others, to speed it up or to reshape it as a value proposition becomes clearer.

Finally, a portfolio value management process should include an ongoing means of ensuring that value is realized from an investment. Management must monitor expected outcomes at appropriate times following implementation and hold someone in the organization accountable for delivering benefits (Smith and McKeen 2010).

Principle 2. aim for Chunks of Value

Much value can be frittered away by dissipating IT investments on too many projects (Cho et al. 2013; Marchand et al. 2000). Focusing on a few key areas and designing a set of complementary projects that will really make a difference is one way companies are trying to address this concern. Many companies are undertaking larger and larger tech- nology initiatives that will have a significant transformational and/or strategic impact on the organization. However, unlike earlier efforts, which often took years to complete and ended up having questionable value, these initiatives are aiming to deliver major value through a series of small, focused projects that, linked together, will result in both immediate short-term impact and long-term strategic value. For example, one company has about three hundred to four hundred projects underway linked to one of a dozen major initiatives.

Principle 3. adopt a holistic Orientation to technology Value

Because value comes from the effective interaction of people, information, and tech- nology, it is critical that organizations aim to optimize their ability to manage and use them together (Marchand et al. 2000). Adopting a systemic approach to value, where technology is not viewed in isolation and interactions and impacts are anticipated and planned, has been demonstrated to contribute to perceived business value (Ginzberg 2001). Managers should aim to incorporate technology as an integral part of an overall

12 Section I • Delivering Value with IT

program of business change rather than dealing with people and information manage- ment as afterthoughts to technology (Beath et al. 2012). One company has done this by taking a single business objective (e.g., “increase market penetration by 15 percent over five years”) and designing a program around it that includes a number of bundled tech- nology projects.

Principle 4. aim for Joint Ownership of technology initiatives

This principle covers a lot of territory. It includes the necessity for strong executive sponsorship of all IT projects. “Without an executive sponsor for a project, we simply won’t start it,” explained one manager. It also emphasizes that all people involved in a project must feel they are responsible for the results. Said another manager, “These days it is very hard to isolate the impact of technology, therefore there must be a ‘we’ mentality.” This perspective is reinforced by research that has found that the quality of the IT–business relationship is central to the delivery of IT value. Mutual trust, visible business support for IT and its staff, and IT staff who consider themselves to be part of a business problem-solving team all make a significant difference in how much value technology is perceived to deliver (Ginzberg 2001).

Principle 5. experiment more Often

The growing complexity of technology, the range of options available, and the uncertainty of the business environment have each made it considerably more difficult to determine where and how technology investments can most effectively be made. Executives naturally object to the risks involved in investing heavily in possible business scenarios or technical gambles that may or may not realize value. As a result, many companies are looking for ways to firm up their understanding of the value proposition for a particular opportunity without incurring too much risk. Undertaking pilot studies is one way of doing this (DeSouza 2011). Such experiments can prove the value of an idea, uncover new opportunities, and identify more about what will be needed to make an idea successful. They provide senior managers with a greater number of options in managing a project and an overall technology portfolio. They also enable poten- tial value to be reassessed and investments in a particular project to be reevaluated and rebalanced against other opportunities more frequently. In short, experimentation enables technology investments to be made in chunks and makes “go/no go” decisions at key milestones much easier to make.

This chapter has explored the concepts and activities involved in developing and delivering IT value to an organization. In their efforts to use technology to deliver business value, IT managers should keep clearly in mind the maxim “Value is in the eye of the beholder.” Because there is no

single agreed-on notion of business value, it is important to make sure that both business and IT managers are working to a common goal. This could be traditional cost reduction, process efficiencies, new business capabili- ties, improved communication, or a host of other objectives. Although each organization

Conclusion

Chapter 1 • Developing and Delivering on the IT Value Proposition 13

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Peslak, A. R. “An Analysis of Critical Information Technology Issues Facing Organizations.” Industrial Management and Data Systems 112, no. 5 (2012): 808–27.

Roach, S. “The Case of the Missing Technology Payback.” Presentation at the Tenth International Conference on Information Systems, Boston, December 1989.

Segars, A. H., and D. Chatterjee. “Diets That Don’t Work: Where Enterprise Resource Planning Goes Wrong.” Wall Street Journal, August 23, 2010. online.wsj.com/article/SB100014240527 48703514404574588060852535906.html.

Smith, H., and J. McKeen. “Instilling a Knowledge Sharing Culture.” Presentation at the KM Forum, Queen’s School of Business, Kingston, Ontario, Canada, 2002.

Smith, H., and J. McKeen. “Investment Spend Optimization at BMO Financial Group.” MISQ Executive 9, no. 2 (June 2010): 65–81.

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Thorp, J. “Computing the Payoff from IT.” Journal of Business Strategy 20, no. 3 (May/June 1999): 35–39.

15

C h a p t e r

2 Developing IT Strategy for Business Value1

1 This chapter is based on the authors’ previously published article, Smith, H. A., J. D. McKeen, and S. Singh. “Developing IT Strategy for Business Value.” Journal of Information Technology Management XVIII, no. 1 (June 2007): 49–58. Reproduced by permission of the Association of Management.

Suddenly, it seems, executives are “getting” the strategic potential of IT. Instead of being relegated to the back rooms of the enterprise, IT is now being invited to the boardrooms and is being expected to play a leading role in delivering top- line value and business transformation (Korsten 2011; Luftman and Zadeh 2011; Peslak 2012). Thus, it can no longer be assumed that business strategy will naturally drive IT strategy, as has traditionally been the case. Instead, different approaches to strategy development are now possible and sometimes desirable. For example, the capabilities of new technologies could shape the strategic direction of a firm (e.g., mobile, social media, big data). IT could enable new competencies that would then make new busi- ness strategies possible (e.g., location-based advertising). New options for governance using IT could also change how a company works with other firms (think Wal-Mart or Netflix). Today new technologies coevolve with new business strategies and new behaviors and structures (see Figure 2.1). However, whichever way it is developed, if IT is to deliver business value, IT strategy must always be closely linked with sound business strategy.

Ideally, therefore, business and IT strategies should complement and support each other relative to the business environment. Strategy development should be a two-way process between the business and IT. Yet unfortunately, poor alignment between them remains a perennial problem (Frohman 1982; Luftman and Zadeh 2011; McKeen and Smith 1996; Rivard et al. 2004). Research has already identified many organizational challenges to effective strategic alignment. For example, if their strategy-development processes are not compatible (e.g., if they take place at different times or involve differ- ent levels of the business), it is unlikely that the business and IT will be working toward the same goals at the same time (Frohman 1982). Aligning with individual business units can lead to initiatives that suboptimize the effectiveness of corporate strategies (McKeen and Smith 1996). Strategy implementation must also be carefully aligned to

16 Section I • Delivering Value with IT

ensure the integration of business and IT efforts (Smith and McKeen 2010). Finally, com- panies often try to address too many priorities, leading to an inadequate focus on key strategic goals (Weiss and Thorogood 2011).

However, strategic alignment is only one problem facing IT managers when they develop IT strategy. With IT becoming so much more central to the development and delivery of business strategy, much more attention is now being paid to strategy devel- opment than in the past. What businesses want to accomplish with their IT and how IT shapes its own delivery strategy are increasingly vital to the success of an enterprise. This chapter explores how organizations are working to improve IT strategy develop- ment and its relationship with business strategy. It looks first at how our understanding of business and IT strategies has changed over time and at the forces that will drive even further changes in the future. Then it discusses some critical success factors for IT strategy development about which there is general consensus. Next it looks at the dif- ferent dimensions of the strategic use of IT that IT management must address. Finally, it examines how some organizations are beginning to evolve a more formal IT strategy- development process and some of the challenges they are facing in doing so.

Business and iT sTraTegies: PasT, PresenT, and FuTure

At the highest level, a strategy is an approach to doing business (Gebauer 1997). Traditionally, a competitive business strategy has involved performing different activi- ties from competitors or performing similar activities in different ways (Porter 1996). Ideally, these activities were difficult or expensive for others to copy and, therefore, resulted in a long-term competitive advantage (Gebauer 1997). They enabled firms to charge a premium for their products and services.

Until recently, the job of an IT function was to understand the business’s strategy and figure out a plan to support it. However, all too often IT’s strategic contribution was inhibited by IT managers’ limited understanding of business strategy and by busi- ness managers’ poor understanding of IT’s potential. Therefore, most formal IT plans were focused on the more tactical and tangible line of business needs or opportunities

New Capabilities

New Behaviors & Structures

N ew

T ec

hn ol

og

y

New Strate gie

s

Figure 2.1 Business and IT Strategies Co-evolve to Create New Capabilities

Chapter 2 • Developing IT Strategy for Business Value 17

for operational integration rather than on supporting enterprise strategy (Burgelman and Doz 2001). And projects were selected largely on their abilities to affect the short- term bottom line rather than on delivering top-line business value. “In the past IT had to be a strategic incubator because businesspeople simply didn’t recognize the potential of technology,” said a member of the focus group.

As a result, instead of looking for ways to be different, in the past much business strategy became a relentless race to compete on efficiencies with IT as the primary means of doing so (Hitt et al. 1998; Porter 1996). In many industries, companies’ improved information-processing capabilities have been used to drive down transaction costs to near zero, threatening traditional value propositions and shaving profit margins. This is leading to considerable disruption as business models (i.e., the way companies add value) are under attack by new, technology-enabled approaches to delivering products and services (e.g., the music industry, bookselling). Therefore:

Strategists [have to] honestly face the many weaknesses inherent in [the] industrial-age ways of doing things. They [must] redesign, build upon and reconfig- ure their components to radically transform the value proposition. (Tapscott 1996)

Such new business strategies are inconceivable without the use of IT. Other factors, also facilitated by IT, are further influencing the relationship between the business and IT strategy. Increasingly, globalization is altering the economic playing field. As countries and companies become more deeply interrelated, instability is amplified. Instead of being generals plotting out a structured campaign, business leaders are now more likely to be participating in guerilla warfare (Eisenhardt 2002; Friedman 2005). Flexibility, speed, and innovation are, therefore, becoming the watchwords of competi- tion and must be incorporated into any business or IT strategy–development process.

These conditions have dramatically elevated the business’s attention to the value of IT strategy (Korsten 2011; Weiss and Thorogood 2011). As a result, business executives recognize that it was a mistake to consider technology projects to be solely the responsibility of IT. There is, thus, a much greater understanding that business executives have to take leadership in making technology investments in ways that will shape and/or complement business strategy. There is also recognition at the top of most organizations that problems with IT strategy implementation are largely the fault of leaders who “failed to realize that adopting … systems posed a business—not just a technological—challenge” and didn’t take responsibility for the organizational and process changes that would deliver business value (Ross and Beath 2002).

Changing value models and the development of integrated, cross-functional systems have elevated the importance of both a corporate strategy and a technology strategy that crosses traditional lines of business. Many participants remarked that their executive teams at last understand the potential of IT to affect the top line. “IT recently added some new distribution channels, and our business has just exploded,” stated one manager. Others are finding that there is a much greater emphasis on IT’s ability to grow revenues, and this is being reflected in how IT budgets are allocated and projects prioritized. “Our executives have finally recognized that business strategy is not only enabled by IT, but that it can provide new business opportunities as well,” said another manager. This is reflected in the changing position of the CIO in many organizations over the past decade. “Today our CIO sits on the executive team and takes part in all

18 Section I • Delivering Value with IT

business strategy discussions because IT has credibility,” said a group member. “Our executives now want to work closely with IT and understand the implications of tech- nology decisions,” said another. “It’s not the same as it was even five years ago.” Now CIOs are valued for their insight into business opportunities, their perspective across the entire organization, and their ability to take the long view (Korsten 2011).

However, this does not mean that organizations have become good at developing strategy or at effectively integrating business and IT strategies. “There are many incon- sistencies and problems with strategy development,” said a participant. Organizations have to develop new strategy-making capabilities to cope in the future competitive environment. This will mean changing their current top–down method of developing and implementing strategy. If there’s one thing leading academics agree on, it’s that future strategy development will have to become a more dynamic and continuous pro- cess (Casadesus and Ricart 2011; Eisenhardt 2002; Kanter 2002; Prahalad and Krishnan 2002; Quinn 2002; Weill et al. 2002). Instead of business strategy being a well-crafted plan of action for the next three to five years, from which IT can devise an appropri- ate and supportive technology strategy, business strategy must become more and more evolutionary and interactive with IT. IT strategy development must, therefore, become more dynamic itself and focused on developing strategic capabilities that will support a variety of changing business objectives. In the future, managers will not align business strategy and IT at particular points in time but will participate in an organic process that will address the need to continually evolve IT and business plans in concert with each other (Casadesus and Ricart 2011).

Four CriTiCal suCCess FaCTors

Each focus group member had a different approach to developing IT strategy, but there was general agreement that four factors had to be in place for strategy development to be effective.

1. Revisit your business model. The worlds of business and IT have traditionally been isolated from each other, leading to misaligned and sometimes conflicting strategies. Although there is now a greater willingness among business manag- ers to understand the implications of technology in their world, it is still IT that must translate their ideas and concepts into business language. “IT must absolutely understand and focus on the business,” said a participant.

Similarly, it is essential that all managers thoroughly understand how their business as a whole works. Although this sounds like a truism, almost any IT man- ager can tell “war stories” of business managers who have very different visions of what they think their enterprise should look like. Business models and strate- gies are often confused with each other (Osterwalder and Pigneur 2010). A business model explains how the different pieces of a business fit together. It ensures that everyone in an organization is focused on the kind of value a company wants to create. Only when the business model is clear can strategies be developed to articu- late how a company will deliver that value in a unique way that others cannot easily duplicate (Osterwalder and Pigneur 2010).

2. Have strategic themes. IT strategy used to be about individual projects. Now it is about carefully crafted programs that focus on developing specific business

Chapter 2 • Developing IT Strategy for Business Value 19

capabilities. Each program consists of many smaller, interrelated business and IT initiatives cutting across several functional areas. These are designed to be adapted, reconfigured, accelerated, or canceled as the strategic program evolves. Themes give both business and IT leaders a broad yet focused topic of interest that chal- lenges them to move beyond current operations (Kanter 2002). For example, one retail company decided it wanted to be “a great place to work.” A bank selected mobile banking as a critical differentiator. Both firms used a theme to engage the imaginations of their employees and mobilize a variety of ideas and actions around a broad strategic direction. By grouping IT and business programs around a few key themes, managers find it easier to track and direct important strategic threads in an organization’s development and to visualize the synergies and interdepen- dencies involved across a variety of projects spread out across the organization and over time.

3. Get the right people involved. One of the most important distinguishing factors between companies that get high business value from their IT investment and those that don’t is that senior managers in high-performing companies take a leadership role in IT decision making. Abdication of this responsibility is a recipe for disas- ter (Ross and Beath 2002). “In the past it was very hard to get the right people involved,” said a focus group member. “Now it’s easier.” Another noted, “You don’t send a minion to an IT strategy meeting anymore; it’s just not done.” In this type of organization, the CIO typically meets regularly with the president and senior busi- ness leaders to discuss both business and IT strategies.

Getting the right people involved also means getting business managers and other key stakeholders involved in strategy as well. To do this, many com- panies have established “relationship manager” positions in IT to work with and learn about the business and bring opportunities for using technology to the table. Research shows that the best strategies often stem from grassroots innovations, and it is, therefore, critical that organizations take steps to ensure that good ideas are nurtured and not filtered out by different layers of management (DeSouza 2011). “We have two levels of strategy development in our organization,” said a focus group participant. “Our relationship managers work with functional managers and our CIO with our business unit presidents on the IT steering committee.” This com- pany also looks for cross-functional synergies and strategic dependencies by hold- ing regular meetings of IT account managers and between account managers and infrastructure managers.

4. Work in partnership with the business. Successful strategy demands a true partnership between IT and the business, not just use of the term. Strategy decisions are best made with input from both business and IT executives (Ross and Beath 2002). The focus group agreed. “Our partnerships are key to our success,” stated a manager. “It’s not the same as it was a few years ago. People now work very closely together.” Partnership is not just a matter of “involving” business lead- ers in IT strategy or vice versa or “aligning” business and IT strategies. Effective strategizing is about continuous and dynamic synchronization of capabilities (Smith and McKeen 2010). “Our IT programs need synchronizing with business strategy—not only at a high level, but right down to the individual projects and the business changes that are necessary to implement them properly,” explained another participant.

20 Section I • Delivering Value with IT

The Many diMensions oF iT sTraTegy

One of the many challenges of developing effective IT strategy is the fact that technology can be used in so many different ways. The opportunities are practically limitless. Unfortunately, the available resources are not. Thus, a key element of IT strategy is determining how best to allocate the IT budget. This issue is complicated by the fact that most businesses today require significant IT services just to operate. Utility and basic support costs eat up between 30 and 70 percent of the focus group members’ budgets. That’s just the cost of “keeping the lights on”—running existing applications, fixing problems, and dealing with mandatory changes (e.g., new legisla- tion). IT strategy, therefore, has two components: how to do more with less (i.e., driving down fixed costs) and how to allocate the remaining budget toward those projects that will support and further the organization’s business strategy.

With occasional exceptions, CIOs and their teams are mostly left alone to deter- mine the most cost-effective way of providing the IT utility. This has led to a variety of IT-led initiatives to save money, including outsourcing, shared services, use of software- as-a-service (SaaS), global sourcing, and partnerships. However, it is the way that IT spends the rest of its budget that has captured the attention of business strategists. “It used to be that every line of business had an IT budget and that we would work with each one to determine the most effective way to spend it,” said a manager. “Now there is much more recognition that the big opportunities are at the enterprise level and cut across lines of business.”

Focus group members explained that implementing a strategic program in IT will usually involve five types of initiatives. Determining what the balance among them will be is a significant component of how IT strategy delivers business value. Too much or too little emphasis on one type of project can mean a failure to derive maximum value from a particular strategic business theme:

1. Business improvement. These projects are probably the easiest to agree on because they stress relatively low-risk investments with a tangible short-to-medium-term payback. These are often reengineering initiatives to help organizations streamline their processes and save substantial amounts of money by eliminating unnecessary or duplicate activities or empowering customers/suppliers to self-manage transac- tions with a company. Easy to justify with a business case, these types of projects have traditionally formed the bulk of IT’s discretionary spending. “Cost-reduction projects have and always will be important to our company,” stated one member. “However, it is important to balance what we do in this area with other types of equally important projects that have often been given short shrift.”

2. Business enabling. These projects extend or transform how a company does business. As a result, they are more focused on the top-line or revenue-growing aspects of an enterprise. For example, a data warehouse could enable different parts of a company to “mine” transaction information to improve customer ser- vice, assist target marketing, better understand buying patterns, or identify new business opportunities. Adding a new mobile channel could make it easier for customers to buy more or attract new customers. A customer information file could make it more enjoyable for a customer to do business with a company (e.g., only one address change) and also facilitate new ways of doing business.

Chapter 2 • Developing IT Strategy for Business Value 21

Often the return on these types of projects is less clear, and as a result it has been harder to get them on the IT priority list. Yet many of these initiatives represent the foundations on which future business strategy will be built. For example, one CIO described the creation of a customer information file as “a key enabler for many different business units. . . . It has helped us build bench strength and move to a new level of service that other companies cannot match” (Smith 2003).

3. Business opportunities. These are small-scale, experimental initiatives designed to test the viability of new concepts or technologies. In the past these types of proj- ects have not received funding by traditional methods because of their high-risk nature. Often it has been left up to the CIO to scrounge money for such “skunk- works.” There is a growing recognition of the potential value of strategic innovation projects in helping companies to learn about and prepare for the future. In some companies the CEO and CFO have freed up seed money to finance a number of these initiatives. However, although there is considerably more acceptance for such projects, there is still significant organizational resistance to financing projects for which the end results are unpredictable (Quinn 2002; Weiss and Thorogood 2011). In fact, it typically requires discipline to support and encourage innovation exper- iments, which, by definition, will have a high number of false starts and wrong moves (DeSouza 2011). The group agreed that the key to benefiting from them is to design them for learning, incorporate feedback from a variety of sources, and make quick corrections of direction.

4. Opportunity leverage. A neglected but important type of IT project is one that oper- ationalizes, scales up, or leverages successful strategic experiments or prototypes. “We are having a great deal of success taking advantage of what we have learned earlier,” said one manager. Coming up with a new strategic or technological idea needs a different set of skills than is required to take full advantage of it in the mar- ketplace (Charitou and Markides 2003; DeSouza 2011). Some companies actually use their ability to leverage others’ ideas to their strategic advantage. “We can’t compete in coming up with new ideas,” said the manager of a medium-sized company, “but we can copy other peoples’ ideas and do them better.”

5. Infrastructure. This final type of IT initiative is one that often falls between the cracks when business and IT strategies are developed. However, it is clear that the hardware, software, middleware, communications, and data available will affect an organization’s capacity to build new capabilities and respond to change. Studies have found that most companies feel their legacy infrastructure can be an impediment to what they want to do (Peslak 2012; Prahalad and Krishnan 2002). Research also shows that leading companies have a framework for making targeted investments in their IT infrastructure that will further their overall strate- gic direction (Weill et al. 2002). Unfortunately, investing in infrastructure is rarely seen as strategic. As a result, many companies struggle with how to justify and appropriately fund it.

Although each type of project delivers a different type of business value, typi- cally IT strategy has stressed only those initiatives with strong business cases. Others are shelved or must struggle for a very small piece of the pie. However, there was a general recognition in the group that this approach to investment leads to an IT strategy

22 Section I • Delivering Value with IT

with a heavy emphasis on the bottom line. As a result, all participating companies were looking at new ways to build a strategy-development process that reflects a more appropriate balance of all dimensions of IT strategy.

Toward an iT sTraTegy-develoPMenT ProCess

Strategy is still very much an art, not a science, explained the focus group. And it is likely to remain so, according to strategy experts. Strategy will never again be a coherent, long-term plan with predictable outcomes—if it ever was. “Leaders can’t predict which combinations [of strategic elements] will succeed [and] they can’t drive their organiza- tions towards predetermined positions” (Quinn 2002). This situation only exacerbates the problem that has long faced IT strategists—that is, it is difficult to build systems, information, and infrastructure when a business’s direction is continually changing. Yet this degree of flexibility is exactly what businesses are demanding (Chakravarty et al. 2013; Luftman and Zadeh 2011; Korsten 2011). Traditional IT planning and budgeting mechanisms done once a year simply don’t work in today’s fast-paced business envi- ronment. “We always seem to lag behind the business, no matter how hard we try,” said a manager.

Clearly, organizations need to be developing strategy differently. How to do this is not always apparent, but several companies are trying ways to more dynamically link IT strategy with that of the business. Although no one company in the focus group claimed to have the answer, they did identify several practices that are moving them closer to this goal:

• “Rolling” planning and budget cycles. All participants agreed that IT plans and budgets need attention more frequently than once a year. One company has cre- ated an eighteen-month rolling plan that is reviewed and updated quarterly with the business to maintain currency.

• An enterprise architecture. This is an integrated blueprint for the development of the enterprise—both the business and IT. “Our enterprise architecture includes business processes, applications, infrastructure, and data,” said a member. “Our EA function has to approve all business and IT projects and is helpful in identify- ing duplicate solutions.” In some companies this architecture is IT initiated and business validated; in others it is a joint initiative. However, participants warned that an architecture has the potential to be a corporate bottleneck if it becomes too bureaucratic.

• Different funding “buckets.” Balancing short-term returns with the company’s longer-term interests is a continual challenge. As noted earlier, all five types of IT projects are necessary for an effective IT strategy (i.e., business improvement, business enabling, business opportunities, opportunity leverage, and infrastruc- ture). In order to ensure that each different type of IT is appropriately funded, many companies are allocating predetermined percentages of their IT budget to different types of projects (Smith and McKeen 2010). This helps keep continual pressure on IT to reduce its “utility costs” to free up more resources for other types of projects. “Since we implemented this method of budgeting, we’ve gone from spending 70 percent of our revenues on mandatory and support projects to spending 70 percent on discretionary and strategic ones,” said a manager. This

Chapter 2 • Developing IT Strategy for Business Value 23

is also an effective way to ensure that IT infrastructure is continually enhanced. Leading companies build their infrastructures not through a few large investments but gradually through incremental, modular investments that build IT capabilities (Weill et al. 2002).

• Relationship managers. There is no substitute for a deep and rich understand- ing of the business. This is why many companies have appointed IT relationship managers to work closely with key lines of business. These managers help business leaders to observe their environments systematically and identify new opportunities for which IT could be effective. Furthermore, together relationship managers can identify synergies and interdependencies among lines of business. One organization holds both intra- and interfunctional strategy sessions on a regular basis with busi- ness managers to understand future needs, develop programs, and design specific roadmaps for reaching business goals. “Our relationship managers have been a sig- nificant factor in synchronizing IT and business strategies,” said its manager.

• A prioritization rubric. “We don’t do prioritization well,” said one participant. IT managers have long complained that it is extremely difficult to justify certain types of initiatives using the traditional business case method of prioritization. This has led to an overrepresentation of business improvement projects in the IT portfolio and has inhibited more strategic investments in general capabilities and business opportunities. This problem is leading some companies to adopt multiple approaches to justifying IT projects (Chakravarty et al. 2013; Ross and Beath 2002). For example, business-enabling projects must be sponsored at a cross-functional level on the basis of the capabilities they will provide the enterprise as a whole. Senior management must then take responsibility to ensure that these capabili- ties are fully leveraged over time. Infrastructure priorities are often left up to IT to determine once a budget is set. One IT department does this by holding strategy sessions with its relationship and utility managers to align infrastructure spending with the organization’s strategic needs. Unfortunately, no one has yet figured out a way to prioritize business opportunity experiments. At present this is typically left to the “enthusiasms and intuitions” of the sponsoring managers, either in IT or in the business (DeSouza 2011). “Overall,” said a manager, “we need to do a better job of thinking through the key performance indicators we’d like to use for each type of project.”

Although it is unlikely that strategy development will ever become a completely formalized process, there is a clear need to add more structure to how it is done. A greater understanding of how strategy is developed will ensure that all stakeholders are involved and a broader range of IT investments are considered. The outcomes of strategy will always be uncertain, but the process of identifying new opportunities and how they should be funded must become more systematic if a business is going to real- ize optimum value from its IT resources.

Challenges For Cios

As often happens in organizations, recognition of a need precedes the ability to put it into place. IT leaders are now making significant strides in articulating IT strategy and linking it more effectively with business strategy. Business leaders are also more open

24 Section I • Delivering Value with IT

to a more integrated process. Nevertheless, some important organizational barriers that inhibit strategy development still remain.

A supportive governance structure is frequently lacking. “Now that so many s trategies are enterprisewide, we need a better way to manage them,” explained one manager. Often there are no formal structures to identify and manage interdepen- dencies between business functions and processes. “It used to be that everything was aligned around organizational boundaries, but strategy is now more complex since we’re working on programs with broader organizational scope,” said another. Similarly, current managerial control systems and incentives are often designed to reward thinking that is aligned to a line of business, not to the greater organiza- tional good. Enterprisewide funding models are also lacking. “Everything we do now requires negotiation for funding between the lines of business who control the resources,” a third stated. Even within IT, the group suggested it is not always clear who in the organization is responsible for taking IT strategies and turning them into detailed IT plans.

Traditional planning and budgetary practices are a further challenge. This is an often-neglected element of IT strategy. “Our business and IT strategies are not always done in parallel or even around the same time,” said a participant. As a result, it is not easy to stay aligned or to integrate the two sets of plans. Another commented, “Our business plans change constantly. It is, therefore, common for IT strategies to grow far- ther and farther apart over time.” Similarly, an annual budgeting process tends to lock an organization into fixed expenditures that may not be practical in a rapidly changing environment. IT organizations, therefore, need both a longer-term view of their resourc- ing practices and the opportunity to make changes to it more frequently. Even though rolling budgets are becoming more acceptable, they are by no means common in either IT or the business world today.

Both business and IT leaders need to develop better skills in strategizing. “We’ve gotten really good at implementing projects,” said an IT manager. “Strategy and inno- vation are our least developed capabilities.” IT is pushing the business toward better articulation of its goals. “Right now, in many areas of our business, strategy is not well thought through,” said another manager. “IT is having to play the devil’s advocate and get them to think beyond generalities such as ‘We are going to grow the business by 20 percent this year.’” With more attention to the process, it is almost certain to get better, but managers’ rudimentary skills in this area limit the quality of strategy development.

Over and over, the group stressed that IT strategy is mainly about getting the balance right between conflicting strategic imperatives. “It’s always a balancing act

Barriers to Effective IT Strategy Development

• Lack of a governance structure for enterprisewide projects • Inadequate enterprisewide funding models • Poorly integrated processes for developing IT and business strategies • Traditional budget cycles • Unbalanced strategic and tactical initiatives • Weak strategizing skills

Chapter 2 • Developing IT Strategy for Business Value 25

Conclusion

Effective strategy development is becoming vital for organizations. As the impact of IT has grown in companies, IT strategy is finally getting the attention it deserves in business. Nevertheless, most organizations are still at the earliest stages of learning how to develop an effective IT strategy and synchronize it with an overall business strategy. Getting the balance right between the many differ- ent ways IT can be used to affect a business is a constant challenge for leaders and one on

which they do not always agree. Although there is, as yet, no well-developed IT strat- egy–development process, there appears to be general agreement on certain critical suc- cess factors and the key elements involved. Over time, these will likely be refined and bet- ter integrated with overall business strategy development. Those who learn to do this well without locking the enterprise into inflexible technical solutions are likely to win big in our rapidly evolving business environment.

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C h a p t e r

3 Linking IT to Business Metrics1

1 This chapter is based on the authors’ previously published article, Smith, H. A., J. D. McKeen, and C. Street. “Linking IT to Business Metrics.” Journal of Information Science and Technology 1, no. 1 (2004): 13–26. Reproduced by permission of the Information Institute.

From the first time IT started making a significant dent in corporate balance sheets, the holy grail of academics, consultants, and business and IT managers has been to show that what a company spends on IT has a direct impact on its performance. Early efforts to do this, such as those trying to link various measures of IT input (e.g., budget dollars, number of PCs, number of projects) with various measures of business performance (e.g., profit, productivity, stock value) all failed to show any relationship at all (Marchand et al. 2000). Since then, everyone has prop- erly concluded that the relationship between what is done in IT and what happens in the business is considerably more complex than these studies first supposed. In fact, many researchers would suggest that the relationship is so filtered through a variety of “conversion effects” (Cronk and Fitzgerald 1999) as to be practically impossible to demonstrate. Most IT managers would agree. They have long argued that technology is not the major stumbling block to achieving business performance; it is the business itself—the processes, the managers, the culture, and the skills—that makes the differ- ence. Therefore, it is simply not realistic to expect to see a clear correlation between IT and business performance at any level. When technology is successful, it is a team effort, and the contributions of the IT and business components of an initiative cannot and should not be separated.

Nevertheless, IT expenditures must be justified. Thus, most companies have concentrated on determining the “business value” that specific IT projects deliver. By focusing on a goal that matters to business (e.g., better information, faster transaction processing, reduced staff), then breaking this goal down into smaller projects that IT can affect directly, they have tried to “peel the onion” and show specifically how IT delivers value in a piecemeal fashion. Thus, a series of surrogate measures are usually used to demonstrate IT’s impact in an organization. (See Chapter 1 for more details.)

More recently, companies are taking another look at business performance met- rics and IT. They believe it is time to “put the onion back together” and focus on what

28 Section I • Delivering Value with IT

really matters to the enterprise. This perspective argues that employees who truly understand what their business is trying to achieve can sense the right ways to per- sonally improve performance that will show up at a business unit and organizational level. “People who understand the business and are informed will be proactive and … have a disposition to create business value every day in many small and not-so-small ways” (Marchand et al. 2000). Although the connection may not be obvious, they say, it is there nevertheless and can be demonstrated in tangible ways. The key to linking what IT does to business performance is, therefore, to create an environment within which everyone thoroughly understands what measures are important to the business and is held accountable for them. This point of view does not suggest that all the work done to date to learn how IT delivers value to an organization (e.g., business cases, productivity measures) has been unnecessary, only that it is incomplete. Without close attention to business metrics in addition, it is easy for IT initiatives and staff to lose their focus and become less effective.

This chapter looks at how these controversial yet compelling ideas are being pursued in organizations to better understand how companies are attempting to link IT work and firm performance through business metrics. The first section describes how business metrics themselves are evolving and looks at how new management philosophies are changing how these measures are communicated and applied. Next it discusses the types of metrics that are important for a well-rounded program of business measurement and how IT can influence them. Then it presents three differ- ent ways companies are specifically linking their IT departments with business met- rics and the benefits and challenges they have experienced in doing this. This section concludes with some general principles for establishing a business measurement pro- gram in IT. Finally, it offers some advice to managers about how to succeed with such a program in IT.

Business MeasureMent: an Overview

Almost everyone agrees that the primary goal of a business is to make money for its shareholders (Goldratt and Cox 1984; Haspeslagh et al. 2001; Kaplan and Norton 1996). Unfortunately, in large businesses this objective frequently gets lost in the midst of people’s day-to-day activities because profit cannot be measured directly at the level at which most employees in a company work (Haspeslagh et al. 2001). This “missing link” between work and business performance leads companies to look for ways to bridge this gap. They believe that if a firm’s strategies for achieving its goal can be tied much more closely to everyday processes and decision making, frontline employees will be better able to create business value. Proponents of this value-based manage- ment (VBM) approach have demonstrated that an explicit, firmwide commitment to shareholder value, clear communication about how value is created or destroyed, and incentive systems that are linked to key business measures will increase the odds of a positive increase in share price (Haspeslagh et al. 2001).

Measurement counts. What a company measures and the way it measures influence both the mindsets of managers and the way people behave. The best measures are tied to business performance and are linked to the strategies and business capabilities of the company. (Marchand et al. 2000)

Chapter 3 • Linking IT to Business Metrics 29

Although companies ascribe to this notion in theory, they do not always act in ways that are consistent with this belief. All too often, therefore, because they lack clarity about the links between business performance and their own work, individuals and even business units have to take leaps of faith in what they do (Marchand et al. 2000).

Nowhere has this been more of a problem than in IT. As has been noted often, IT investments have not always delivered the benefits expected (Bensaou and Earl 1998; Holland and Sharke 2001; Peslak 2012). “Efforts to measure the link between IT investment and business performance from an economics perspective have… failed to establish a consistent causal linkage with sustained business profitability” (Marchand et al. 2000). Value-based management suggests that if IT staff do not understand the business, they cannot sense how and where to change it effectively with technology. Many IT and business managers have implicitly known this for some time. VBM simply gives them a better framework for implementing their beliefs more systematically.