Valuation of IT Initiatives – Business Case

This brief paper is based on concepts presented by www.isaca.org in their discussion of Val IT under the COBIT^© framework.  Val IT is a governance framework that consists of a set of guiding principles, and a number of processes conforming to those principles that help guide where IT spends money. If implemented correctly it will help answer the following questions.

Are we spending money in IT that matches what the business wants?

Does the business stakeholder feel they have influence on spending levels?

Are we managing risk and getting the right return on IT investment (ROI)?

Does the business “own” the risks?

Does our spending investment prove itself over the course of time and can we look back and ensure that the ROI was really met? 

A business case is not a one-time, static document.  It is an operational tool that must be continually updated to reflect the current reality and to support the portfolio management process.The framework provides guidance to: 

• Define the relationship between IT and the business with governance responsibilities,
• Manage an organization’s  portfolio of IT-enabled business investments, and
• Maximize the quality of business cases with emphasis on the definition of key financial indicators, the quantification of “soft” benefits and the comprehensive appraisal of the downside risk.

Definition of Guiding Principles

Guiding Principles are foundational concepts that will guide decision making as the company strives to achieve their future state.  Simply stated, a principle is defined as “a statement of organizational position that can be argued by rational people”.  The value of a “Principle based” Organization:

• Ensures that an organization’s position is determined by conscious decision making at the highest level.
• Aids in gaining alignment from all affected organizations and enables common goals to be achieved.
• Unproductive discussions based on unknown positions are drastically reduced.
• Projects are based on true alignment, not a set of unilateral non-validated assumptions. Several key points about principles:
  • Principles do not state what the current situation is; they state the desired positions to which an organization aspires.
  • There are clear reasons why the principle is valid for an organization

  Representative Guiding Principles

  • Investments will include the full scope of activities that are required to achieve business value.

  • Investments will include the full scope of activities that are required to achieve business value.

  • Investments will be managed through their full economic life cycle.

  • There are different categories of investments that will be evaluated and managed differently.

  • Delivery practices will define and monitor key metrics and will respond quickly to any changes or deviations.

  • Delivery practices will engage all stakeholders and assign appropriate accountability for the delivery of capabilities and the realization of business benefits.

Representative Processes

To obtain return on investment, the principles should be applied by the stakeholders of the IT-enabled investments in the following processes:

• Value governance

• Portfolio management

• Investment management

Value Governance

The goal of value governance is to optimize the value of investments by:

• Establishing the governance, monitoring and control framework

• Providing strategic direction for the investments

• Defining the investment portfolio characteristics

Portfolio Management

The goal of portfolio management is to ensure that the overall portfolio of IT-enabled investments is aligned with and contributing optimal value to the organisation’s strategic objectives by:

• Establishing and managing resources (e.g., IT, third-party, business)

• Defining investment thresholds

• Evaluating, prioritizing and selecting, deferring, or rejecting investments

• Managing through monitoring and reporting on portfolio performance

Investment Management

The goal of investment management is to ensure that a individual IT-enabled investments deliver optimal value at an affordable cost with a known and acceptable level of risk by:

• Identifying business requirements

• Developing a clear understanding of candidate investments

• Analyzing the alternatives

• Defining the components of the portfolio and documenting a detailed business case, including the benefit details 

• Assigning clear accountability and ownership

• Managing the through the full economic life cycle

• Monitoring and reporting on performance
  
  

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Virtualization: Management and Implementation

Many organizations are embracing virtualization technologies (VMs) and are actively moving toward large-scale implementations. This trend is still early in its adoption cycle, and analysts predict that the total VMs deployed in the next 2-3 years will be orders of magnitude greater than what was done in 2006. IDC estimates that 500,000 VMs will be shipped this year, but that the number of VMs shipped by 2009 will be a projected 1.9 billion. 

Large-scale corporate adoption is proving to be difficult

Difficulties in carrying forward the initial success of virtualization projects to the enterprise level usually lies in the organizational structure in which they are undertaken. Early projects are often initiated on non-production systems. While this approach demonstrates the technical effectiveness of the virtualization technology, it is not subject to the same challenges and constraints that exist in enterprise-wide undertakings, which typically include: 

• Asset Identification - not knowing what servers you have, their locations, owners, functional roles, applications, etc.
• Inconsistent IT Operations – Service Management and Service Delivery, as defined by ITIL ^© as well as considerations for security and access
• Technical Constraints - network connectivity requirements, storage requirements, controllers, peripherals, UPS requirements, etc.
• Business Constraints - availability targets, maintenance windows, application owners, compliance restrictions, Disaster Recovery relationships, etc.
• Workload Patterns - application loads, resource distributions, overall utilization versus capacity, metrics for chargeback, etc. 

The ultimate goal of any virtualization initiative is to establish the best possible virtualization roadmap, or “transfer function”, that is optimized for corporate goals, virtualization strategies, business constraints and IT infrastructure requirements. To generate an accurate roadmap, in a reliable manner that minimizes risk and maintains reliability, it is critical to: 

• identify all systems and applications within scope in the target environments
• audit these systems to enable scrutiny at a deep level – what really has been installed, patch levels, etc.
• qualify systems based on technical and business constraints
• profile systems to determine utilization patterns – performance and capacity managementoptimize against all of these areas to determine the best transformation 

Analyzing Business Constraints

Business constraint analysis deals with a more subjective but equally important realm of information. Because of this subjectivity the proper analysis of business constraints are often overlooked in initial virtualization implementations. VM vendors do not generally touch upon this more critical aspect of server consolidation. 

Large-scale virtualization initiatives and analysis, must revolve around business constraints. This often stems from the fact that business constraints cannot necessarily be removed by throwing money at them, as opposed to technical constraints, which can often be removed by a system upgrade (the cost of which is modeled in the analysis rules in a “remediation cost” field). If you are prohibited from moving an application between locations, from combining certain applications on the same networks, or combining highly-available applications on the same server as non-critical ones, then no amount of money or effort will make these constraints go away.

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Outsourcing Analysis and Avoiding Failure

In today’s economy, businesses face enormous hurdles no matter what their particular business endeavor.  Competition from larger, more established firms, globalization, the looming potential for technological obsolescence and the need to keep costs under control can make management of most companies an extreme challenge. Focusing on the core business can be difficult especially when growth – and success – force management to shift its attention from the market and ‘getting ahead’ to the company’s own, internal structures. A strategic tool for CEOs is business process outsourcing. Through the process of outsourcing, analysts say, companies can regain focus on their particular business, become more efficient and even rival the systems and control level of larger companies in outsourced processes and most importantly focus their efforts on the value-added functions of their business.  According to many respected reports, it certainly can help a company’s bottom line.  However, there are many factors to consider before venturing into the burgeoning world of outsourcing.

Mistakes typically made with outsourcing

•  Trying to outsource a function that has high costs, minimal processes, and is causing considerable management angst; at least try to take the excess costs out before you outsource.  Don’t give someone else your savings margin.

•  Not developing a business case and strategy on what to outsource, thereby making it difficult to assess cost and process improvement proposals from vendors.

• Not establishing a method of performance measurement upfront during the contract phase.

• Failing to consider the long-term relationship dynamics.

• Not planning upfront how the relationship might end.

• Failing to understand and manage this new organization dynamic.

• Failure to explicitly define boundaries, with clearly defined roles and responsibilities.  Never outsource one piece at a time without a master plan.

• Outsourcing imposes discipline on your organization. Adapting to the rigorous processes required by an outsourcer may be difficult in some corporate cultures.

• New laws will essentially make security breaches at your outsourcer equivalent to security breaches at your own company.

Standard Conflict Management Practices and Tools

Outsourcing customers and providers usually enter into agreements with optimistic intentions and expectations.  Customer executives look forward to quality service, new thinking, extraordinary responsiveness, and a vendor that shows both a partner-like caring about the customer’s success and an intuitive understanding of the business.  Making outsourcing relationships work takes a lot more than good faith and committed people, and too few such arrangements actually come anywhere near reaching their desired goals.  Even with the best of intentions, relationships can end up in with diminishing returns for both parties.

Once in this downward spiral, customers and vendors are headed down the spiral to failure.  Both seem to get stuck in negative perceptions and behaviors.Technorati