META GroupMETA Group
Aligning IT and Business Through Value Management
Aligning IT and Business Through Value Management
Dale KutnickChairman andCo-Research Director
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
The IT Spending Roller Coaster
IT and business operations are becoming inextricably linked
IT costs as a percentage of revenue decline
More business functions externalized
Vendor consolidation accelerates
Shift in IT spending patterns and drivers
Cost reduction valued vs. revenue generation
Variable vs. fixed costs Measurable productivity
gains required Budget reductions will
be common in 2003 The “do more with less”
mindset dominates
IT costs as a percentage of revenue decline
More business functions externalized
Vendor consolidation accelerates
Shift in IT spending patterns and drivers
Cost reduction valued vs. revenue generation
Variable vs. fixed costs Measurable productivity
gains required Budget reductions will
be common in 2003 The “do more with less”
mindset dominates
Enterprise IT Expenditures
-5%
0%
10%
20%
30%
40%
’96-’97 ’97-’98 ’98-’99 ’99-’00 ’00-’01 ’01-’02
3.41%3.55%3.68%3.16%
2.68%2.48%
0.00%
1.00%
2.00%
3.00%
4.00%
’02’01’00’99’98’97
Cross-Industry: IT Spending as % of Revenue
% Change in IT Budget
2
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
The IT Portfolio
The pressure is increasing on IT for: Cost management Risk management Value management Global technology management Performance management Human capital management
The tempo of alignment is extreme: Budget cycles going from yearly to
quarterly to monthly Investment patterns and spending
plans must be adjusted to market conditions — down to daily
The IT portfolio must stay in dynamic alignment with business needs
The pressure is increasing on IT for: Cost management Risk management Value management Global technology management Performance management Human capital management
The tempo of alignment is extreme: Budget cycles going from yearly to
quarterly to monthly Investment patterns and spending
plans must be adjusted to market conditions — down to daily
The IT portfolio must stay in dynamic alignment with business needs
IT Expenditures Portfolio
No
n-D
iscr
etio
nar
y C
ost
s
Risk
Dis
cre
tio
na
ry P
roje
cts
Ris
ks
Val
ue/
Tim
ing
VentureVenture
GrowthGrowth
DiscretionaryDiscretionaryEnhancementsEnhancements
Non-Non-DiscretionaryDiscretionary
CoreCoreRTBRTB
TTBTTB
GTBGTB
The structure of the costs (fixed or variable) will become important, as within all LOBs in the enterprise
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Assessing Budget Goals
Organizations have focused on IT budgeting in terms of IT as a % of revenue, IT spend per employee, or IT annual budget growth rate
Today, organizations need to go beyond basic ratios and benchmark:
IT cost of goods IT cost structure IT portfolio alignment IT fixed cost vs. variable
cost IT spend agility
Organizations have focused on IT budgeting in terms of IT as a % of revenue, IT spend per employee, or IT annual budget growth rate
Today, organizations need to go beyond basic ratios and benchmark:
IT cost of goods IT cost structure IT portfolio alignment IT fixed cost vs. variable
cost IT spend agility
CulturalCulturalStyleStyle
IndustryIndustrySectorSector
ValueValueDisciplineDiscipline
PerformancePerformance
ProductsProducts
Metric
Mode Mission
Maturity
SizeSize CapabilityCapability
OrganizationOrganizationTypeType
Multivariate ManagementMultivariate Management
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Investing Based on Character of Organization Organizational structure
Autonomous: Stewardship investment strategy
Centralized: Dictatorial investment strategy
Risk acceptance Averse/medium/inclined
IT value creation strategy Value creation Value optimization Value preservation
Identify technical silo budget requirements
Critical vs. discretionary Third party vs. in-house Costs vs. quality vs. speed CAPEX vs. OPEX
Organizational structure Autonomous: Stewardship
investment strategy Centralized: Dictatorial investment
strategy Risk acceptance
Averse/medium/inclined IT value creation strategy
Value creation Value optimization Value preservation
Identify technical silo budget requirements
Critical vs. discretionary Third party vs. in-house Costs vs. quality vs. speed CAPEX vs. OPEX
To sustain value creation, IT organizations MUST be able to continually calibrate their performance against competitors and
market opportunities
Managing Asset Life CycleManaging Asset Life Cycle
ProjectSource
EA
LOB
HighT
ec
hn
ica
l C
on
dit
ion
Re-Evaluate/Reposition
Asset
Maintain/Evolve Asset
Retire/Consolidate
Asset
Re-Engineer/
Modernize Asset
Low
Poor
Year 2Year 3
Year 4 ...
Excellent Low
Te
ch
no
log
y
Co
sts
High
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
The IT Portfolio and Its Associated Programs
Introduce speed and flexibility in the core budgeting processes
Adopt an investment mindset and discipline Introduce a new funding model for IT as an
investment portfolio manager Adjust budget cycles to be a forecasting process
and not a backward-looking adjustment process Transition IT from cost center to value center Shift more toward variable costs Consider outsourcing as a strategic initiative
Introduce speed and flexibility in the core budgeting processes
Adopt an investment mindset and discipline Introduce a new funding model for IT as an
investment portfolio manager Adjust budget cycles to be a forecasting process
and not a backward-looking adjustment process Transition IT from cost center to value center Shift more toward variable costs Consider outsourcing as a strategic initiative
Business Impact: Technology is fundamental to modern business — IT organizations must integrate
with the business
Bottom Line
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Calculating and Communicating ITO Value ITO value is a balance
of net profit versus risk + change
Systemic risk management is required for both operational and project risk
Risk costs must be reduced through mitigation
Product pricing (value) is directly proportional to the risk taken
ITO value is a balance of net profit versus risk + change
Systemic risk management is required for both operational and project risk
Risk costs must be reduced through mitigation
Product pricing (value) is directly proportional to the risk taken
Sustainable Value/Risk Balance
The objective is to balance value/risk/change over time
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
Q1
Q3
Q5
Q7
Q9
Q11
Operational Risk Project Cost
Project Risk Value
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
The Value of the Product Is Reflective of the Risk Assumed Typical ITOs are:
Positioned as cost centers Risk averse or risk victims Perceived to add little or no
business value Leading ITOs:
Are profit centers Assume risk within IT scope Price products at market value,
not cost Contribute to the business
bottom line Product price is proportionate to
the risk level assumed
Typical ITOs are: Positioned as cost centers Risk averse or risk victims Perceived to add little or no
business value Leading ITOs:
Are profit centers Assume risk within IT scope Price products at market value,
not cost Contribute to the business
bottom line Product price is proportionate to
the risk level assumed
BusinessBusinessRiskRisk
ITOITORiskRisk
Co
st-
Co
st-
Ba
sed
Ba
sed
Co
st-
Co
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Ba
sed
Ba
sed
Ma
rke
tM
ark
et
- - B
as
edB
as
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Ma
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tM
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- - B
as
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as
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Va
lue
- V
alu
e-
Ba
sed
Ba
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Va
lue
- V
alu
e-
Ba
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Ba
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Time &Time &MaterialsMaterials
Time &Time &MaterialsMaterials
ServiceServiceLevelsLevels
ServiceServiceLevelsLevels
% of % of RevenuRevenu
ee
% of % of RevenuRevenu
ee
Pricing ModelPricing Model Risk OwnershipRisk Ownership
Market Pricing IT Products
Leading ITOs calculate the value of the ITO as its net profit contribution to the business bottom line
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Techtonics and Technomics Must understand the
key technology trends — “techtonics”
Develop common vision of “technomics”
Changing economics of technology that may impact its application
IT must provide full range of economic tradeoffs
Constantly changing
Must understand the key technology trends — “techtonics”
Develop common vision of “technomics”
Changing economics of technology that may impact its application
IT must provide full range of economic tradeoffs
Constantly changing
Wireless Evolution ofMobile Computing
’99 ’00 ’01 ’02 ’03 ’04 ’05
Sweet SpotCo
st
Consistent understanding is critical to establish value cases of IT opportunities
2002: Bandwidth (BW) Explosion2003+: Handheld Device & P/P Improvement2003/04: Mobile Middleware Maturity2004/05: Better BW Pricing & Wireless Coverage
Time
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Technomics for 2003/041. Communication prices up2. Data center consolidation3. Third-party sourcing4. Storage explosion 5. Licensing price structure6. Benchmark to reduce
costs, increase SLA, and demonstrate value
7. Too many technologies are driving management and people costs up
1. Communication prices up2. Data center consolidation3. Third-party sourcing4. Storage explosion 5. Licensing price structure6. Benchmark to reduce
costs, increase SLA, and demonstrate value
7. Too many technologies are driving management and people costs up
Consistent understanding of technomics is critical to establishing value of technology
Cost
Static
Dynamic
Single Dimension
Multiple Dimensions
Benchmark Business Value
Dimensionality
Frequency
Cost
Price
Performance
Process
Value
Value-Value-ConstrainedConstrained
Value-Value-MinimizedMinimized
Value-Value-CreatingCreating
Value-Value-ConstrainedConstrained
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Techtonics for 2003/04
1. Security Strong authentication
2. VPN maturation
3. Wireless computing Fixed wireless, not 2.5G
or 3G
4. Maturation of Web services for integration
5. User identity
6. Portals
1. Security Strong authentication
2. VPN maturation
3. Wireless computing Fixed wireless, not 2.5G
or 3G
4. Maturation of Web services for integration
5. User identity
6. Portals
Consistent understanding of techtonics is critical to establishing technological adoption road map
It’s Coming ... It’s Coming ...
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Economic Tradeoffs:Area of Non-Investments in 2003
PKI projects Strategic EAI Massive convergence
initiative Mobile infrastructure Ubiquitous CRM with
channels synchronization
PKI projects Strategic EAI Massive convergence
initiative Mobile infrastructure Ubiquitous CRM with
channels synchronization
Align techtonics and technomics with business value creation
Managing Product Life CycleManaging Product Life Cycle
ProjectSource
EA
LOB
HighT
ec
hn
ica
l C
on
dit
ion
Re-Evaluate/Reposition
Asset
Maintain/Evolve Asset
Retire/Consolidate
Asset
Re-Engineer/
Modernize Asset
Low
Poor
Year 2Year 3
Year 4 ...
Excellent Low
Te
ch
no
log
y
Co
sts
High
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Key Initiatives in 2003
Establish a road map for technology exit and adoption Introduce vendor management as a key IT initiative in
1Q03 Eventually distribute infrastructure and applications,
but centralize management and operations Design and validate security governance and policies
by 2Q03 Manage storage and communications demand and
costs Re-evaluate all vendor contracts (first half of 2003) on
yearly basis
Establish a road map for technology exit and adoption Introduce vendor management as a key IT initiative in
1Q03 Eventually distribute infrastructure and applications,
but centralize management and operations Design and validate security governance and policies
by 2Q03 Manage storage and communications demand and
costs Re-evaluate all vendor contracts (first half of 2003) on
yearly basis
Bottom Line
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
The Make-vs.-Buy Paradigm
Consider sourcing as a strategic alternative in your portfolio
Make sure the “house is in order” before embarking on sourcing strategies
Determine the goals to achieve and the measurements
Consider sourcing as a strategic alternative in your portfolio
Make sure the “house is in order” before embarking on sourcing strategies
Determine the goals to achieve and the measurements
Complement the internally focused processes with sourcing alternatives
PlanPlanPlanPlan BuildBuildBuildBuild RunRunRunRun
PlanPlanPlanPlan ProcureProcureProcureProcure ManageManageManageManage
OrganizationalOrganizational
StructureStructure
EvolutionEvolution
OrganizationalOrganizational
StructureStructure
EvolutionEvolution
Balanced ApproachBalanced Approach
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Outsourcing as Strategic Alternative
Select the right area to be managed by a third party
Explore market evolution for this area
Sort out sourcing options Assess vendor capabilities Define the type of contract
and the pricing options YOU want
Determine the performance indicators
Select the right area to be managed by a third party
Explore market evolution for this area
Sort out sourcing options Assess vendor capabilities Define the type of contract
and the pricing options YOU want
Determine the performance indicators
Integration of third parties into the IT road map will represent the major challenge in the coming years
Val
ue/
Ris
k P
rofi
leV
alu
e/R
isk
Pro
file
Capability/FocusCapability/Focus
ManagedManaged
DesktopDesktop
NetworkNetwork
Mgmt.Mgmt.
DataData
CenterCenter
ServerServer
Mgmt.Mgmt.
AppApp
Maint.Maint.
AppApp
Implement.Implement.
HelpHelp
DeskDesk
AppApp
on Demandon Demand
Sourcing Strategy ImplementationSourcing Strategy Implementation
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
Defining Goals and Measurements
Define goals upfront Cost cutting for commodity
types of services Cost avoidance for immature
or obsolete technologies Value creation for business
process outsourcing Define rules for accountability
and performance reviews Monitor performance daily Measure quality monthly Assess relationship quarterly Dynamically benchmark
Define goals upfront Cost cutting for commodity
types of services Cost avoidance for immature
or obsolete technologies Value creation for business
process outsourcing Define rules for accountability
and performance reviews Monitor performance daily Measure quality monthly Assess relationship quarterly Dynamically benchmark
Users pursuing outsourcing often explore sourcing options with cost cutting only in mind
Outsourcing Value ContinuumOutsourcing Value Continuum
Co
ntr
ibu
tio
nCapability
Cost ReductionCost Reduction& Avoidance& Avoidance
Service QualityService Quality& Customer Sat.& Customer Sat.
Value CreationValue Creation
IT DEMANDIT DEMAND
IT GOVERNANCEIT GOVERNANCE
IT SUPPLYIT SUPPLY
Value
Proposi
tion
Value
Proposi
tion
© 2002 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com. All materials are confidential and proprietary.
What Are the First Steps on the “Road to Alignment”?
Value-align Determine the elements of IT value for your business Develop value categories, link to assets, programs, projects
Investment-align Institute IT portfolio management Analyze level and type of costs as well as measurement indicators Create your portfolio management “scorecard” or “dashboard”
Process-align Determine the necessary processes that balance reactivity with
“proactivity” and allow flexibility Technology-align
Determine which technologies must be embraced or retired, which ones will be insourced, and which ones will be outsourced
People-align Develop a plan to transform the IT organization, based on the
technology road map
Value-align Determine the elements of IT value for your business Develop value categories, link to assets, programs, projects
Investment-align Institute IT portfolio management Analyze level and type of costs as well as measurement indicators Create your portfolio management “scorecard” or “dashboard”
Process-align Determine the necessary processes that balance reactivity with
“proactivity” and allow flexibility Technology-align
Determine which technologies must be embraced or retired, which ones will be insourced, and which ones will be outsourced
People-align Develop a plan to transform the IT organization, based on the
technology road map
Transformation Steps