it planning in the real world

There is an apho-rism in militarycircles that plans

are great, right upuntil the first shot isfired. A former-mili-tary-officer-turned-chief-information-officer (CIO) extendsit to IT with just a slight twist.He says that IT plans are great,right up until the first numberis put into next year’s budget.His main objection is that inmany companies, careful plan-ning falls by the wayside assoon as the budget rears itshead, and at that point, compro-mises must be made across theentire range of new investmentopportunities and ongoinglights-on activities. All of theplanning processes, business-ITalignment processes, perfor-mance data collection, andstrategic and tactical IT plan-ning become subsumed into theneed to fit into budget con-straints. The question nowbecomes, given effective plan-ning as a baseline, how can acompany develop an investmentstrategy to help it make the bestdecisions given the realities ofbudget constraints?

TURNING THE LIGHTS ON

As a context, many compa-nies spend 70 to 90 percent oftheir IT spend on the “lights-onbudget” (defined as all ITexpenditures other than newdevelopment projects), and therest on new projects. Oddly,management spends most of itsIT management effort on thenew projects (10 to 30 percent ofthe budget), leaving the largestshare of the IT budget largelyunexamined on a year-to-yearbasis. Clearly, there is a discon-nect here.

The reason for this is cultur-al: in most companies, the exist-ing lights-on expenses and activ-ities are part of an “entitlement”for the business, assumed tocontinue at a level that is greaterthan (or at least matches) theprevious year’s budget support.Consequently, managementspends most of its time worrying

about new investments(so as to choose thebest alternatives or atleast avoid any mis-takes on new invest-ments) and almostactively avoids exam-ining the quality andbusiness return of its

existing IT activities. Businessmirrors personal life: we worrymost about where to put newdollars and less about how thedollars we have already put awayare performing.

Management can reverse thisbehavior without scuttling all ofits IT management processesand without spending inordinateamounts of time examining thelights-on budget and IT activi-ties. By organizing the lights-onbudget into application, infra-structure, service, and manage-ment portfolios, and accountingfor 100 percent of lights-oncosts, management can trans-form a budgetary “black hole”into understandable components.Then, by assessing the compo-nents of these portfolios forbusiness impact, quality, andrisk, management can develop asensible investment strategy forreducing lights-on costs of

Information technology (IT) plans are great—untilyou have to grapple with next year’s budget.Then allyour careful planning gets tossed out the window.How can you develop an IT investment strategy thatreflects real-world budgets? © 2005 Wiley Periodicals, Inc.

Robert Benson,Tom Bugnitz, and William Walton

IT Planning in the Real World

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35© 2005 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.20133

underperforming IT assets andincreasing the performance ofthe rest of the portfolio.

By using and assessing port-folios and developing a sensibleinvestment strategy based onportfolio analysis, IT manage-ment can assign complete coststo each application and infra-structure service, thus makingthe total cost of IT understand-able to business management.

THE FOUR IT PORTFOLIOS

IT budgets typically reflectthe general ledger structure ofthe business, with categories likesalary, hardware, software, train-ing, travel, and the like. Whileuseful from an overall financialmanagement perspective, thesecategories are virtually uselessfrom an IT management per-spective. What is needed is a

way to collect costs into cate-gories and line items that pro-vide a basis for the financialmanagement of IT, and provide aframework for analyzing thebusiness impact of the invest-ments in IT.

To do this, all IT lights-onresources and expenditures areclassified into (1) applications,(2) infrastructure, (3) services,and (4) management portfolios(see Exhibit 1). Applications areoperated and supported for theuse of business organizations,infrastructure is provided to sup-port applications and services,and services are extended tobusiness organizations. All ofthese can be assessed as to ser-vice, quality, technical quality,and so forth. Both ongoinglights-on expenses and newinvestments in lights-on cate-gories, such as application

enhancements and infrastructureupgrades, are classified into thefour portfolio categories. Byadopting a portfolio view of themanagement resources and ser-vices associated with IT, weclearly identify what is beingmanaged in IT and, more impor-tant, what is being supplied tothe business through IT.

There can be practical prob-lems in defining exactly whatshould appear in each portfolio.In services, this typicallyincludes help desks, workstationinstallation and repair, and con-sulting. Infrastructure is thecommunications, platforms, andsoftware needed to supportapplications and services. Man-agement is the set of activities,such as planning, budgeting, andHR, for the IT activities. Inapplications, the full set ofdeveloped and acquired applica-tions is included, although thedividing line between infrastruc-ture and applications can beblurred. (For example, e-mailmay be included in infrastruc-ture, but functions deliveredthrough e-mail or groupware,such as time reporting, may beconsidered an application. Infact, it doesn’t matter too muchwhether e-mail is classified asan application or as infrastruc-ture. What does matter is that e-mail is included in one of theportfolios, and therefore subject-ed to the analysis and manage-ment scrutiny that portfoliomanagement affords.)

It is important to keep theobjectives of this analysis insight. First, the portfolios shouldaccount for 100 percent of theIT activity. Second, portfoliosshould group similar items intosuitable portfolios in order topermit management analysis ofthe line items and the portfolioas a whole. Above all, the port-folios should be meaningful to

36 The Journal of Corporate Accounting & Finance

© 2005 Wiley Periodicals, Inc.

Exhibit 1

The Four IT Portfolios

management. Overall, the pur-pose is to afford management away to easily understand andanalyze the current expendituresand future investments in IT.Categorizing them into applica-tions, infrastructures, services,and management is a proven wayto accomplish this.

(For purposes of illustration,this article will focus on theapplications portfolio only. Thereader should note that the tech-niques described can be used forany of the IT portfolios, and infact may be useful for consider-ing “lights-on” activities outsideof IT, such as ongoing marketingactivities, portfolios of businessprocesses, etc.).

PORTFOLIO ASSESSMENT

The applications port-folio consists of everyapplication supplied by ITto the business organiza-tion. Portfolio assessmentengages business and IT man-agement in processes of identify-ing several key attributes foreach application:

• Cost: the annual cost todeliver the application to thebusiness, including comput-ing, networks, and support

• Alignment (Value): how wellthe application is aligned tothe company’s strategicintentions

• Dependency: to what extentis the business dependentupon the application

• Breadth: how widely theapplication is used through-out the business

• Quality Level: how well theapplication performs for thebusiness user, in terms ofaccuracy and functionality

• Service Level: how well theapplication performs for thebusiness user, in terms of

availability (is it availablewhen the user needs it?) andresponsiveness (does it per-form effectively timewise?)

• Technical Risk: the risks tothe business of increasedcosts (e.g., because supportstaff cannot be found for anobsolete language) andapplication failure (e.g.,because the vendor nolonger supports criticalapplication components)

A primary purpose of port-folio assessment is to evaluatethe company’s continuing invest-ment for each application (interms of maintenance and sup-

port) and the need for newinvestment in the application (interms of enhancement projects).The evaluation consists of com-paring application attributes suchas quality, value, and risk. Forexample, an application withpoor quality and high technicalrisk but high alignment (value)and dependency (the businesscritically depends on it) is a can-didate for replacement or furtherinvestment. On the other hand,an application with high qualitybut low alignment (value) anddependency may be a candidatefor abandonment or other cost-reduction actions.

CRAFTING AN INVESTMENTSTRATEGY

The underlying decision-mak-ing philosophy is that companyresources devoted to IT are finite.As a consequence, choices have

to be made among alternatives:there aren’t enough resources todo everything, so choices have tobe made as to which things willbe funded and which will not. Theright decisions are those thatimprove IT’s bottom-line impactand control IT spending.

The context for making theright decisions is resource allo-cation. When executing an appli-cations portfolio alignmentassessment, the resources are thelights-on budget allocated to theapplications, infrastructure, ser-vices, and management compo-nents of the company’s existingIT activities. Resources can befunds, staff, or both. In all cases,

the notion of a right deci-sion is directing the alloca-tion of finite resource allo-cations to activities thathave the greatest potentialbottom-line impact.

Many companies viewlights-on investment deci-sions as a set of “continue

or stop” decisions: for a givenapplication, as they look to thefuture, do they continue support-ing and operating it, or do theystop it, usually to be replaced by anew application? Rarely is theright decision this clear-cut, andthere are a number of investmentstrategies between “stop” and“go” that respond to the businessneeds of the organization whilemaximizing the bottom-lineimpact to the application.

These investment strategiesactually can cover a wide rangeof alternatives, based on parame-ters that are used to assess theoverall alignment of a lights-onactivity as mentioned above:cost, strategic alignment,dependency, breadth of use,service level, quality level, andtechnical risk. Using these vari-ables as data inputs, a companycan create a customized invest-ment decision strategy for IT

July/August 2005 37


The right decisions are those thatimprove IT’s bottom-line impact andcontrol IT spending.

that ensures the biggest bang forthe lights-on buck.

Example: For simplification,a company may choose to look attwo parameters used to assess anapplication, its quality (a meas-ure of its accuracy, functionality,reliability, availability, etc.) andits dependency (how widely is itused in the organization, andhow important is the applicationif the organization is to effective-ly perform its function). Againfor simplification, assume thateach application is assessed on alow/medium/high scale for bothdependency and quality. Usingthose two variables, a companycan create a set of investmentstrategies that provide amore defensible rationalefor individual applicationinvestments. In this simplecase, the example companycan construct a five-levelinvestment strategy as fol-lows:

1. Dependency is LOW: Whycontinue investing in anynew functions for this appli-cation, and perhaps whykeep operating it at all? Theorganization doesn’t dependon it to any large degree, andregardless of the qualitylevel, it may not be animportant application. Thisis the ABANDON invest-ment strategy: consider get-ting rid of these applications.

2. Dependency is HIGH andQuality is LOW: These areapplications that would beplaced in the CRISIS catego-ry. The organization needsthem, but they are not oper-ating well. Resources needto be directed here to fix theproblems, possibly beforeother applications are evenconsidered.

3. Dependency is MEDIUM:The organization needs them,

but not critically. If there arequality issues, address themas resources become avail-able, but adding new func-tions or dedicating seriousresources to these applica-tions may have little pay-back. This is the NONCRIT-ICAL, STABILIZE category.

4. Dependency is HIGH andquality is MODERATE:These aren’t CRISIS appli-cations, but could use someimprovement. Perhaps it iscounterintuitive, but thecompany may choose toplace these in an IMPROVEONLY AS NEEDED catego-ry. Although the organiza-

tion needs them in a criticalway, they operate wellenough as is, and resourcesshould be directed to CRI-SIS applications first.

5. Dependency is HIGH andquality is HIGH: So what’s toworry about here? Again,although it is counterintuitive,a company may choose to putthese into a MONITOR FORQUALITY category, in whichthey make sure that the appli-cation continues at its high-quality level and take care ofproblems as they occur, butdon’t focus resources here asroutine matter.

Viewed in this way, a com-pany creates a framework formaking balanced investmentdecisions, with a consistent setof criteria, across an entire appli-cation or infrastructure serviceportfolio. In effect, a company is

using assessment to perform“investment triage” on the appli-cation portfolios: put resourceswhere they will stop the criticalbleeding and leave the minorcases for later.

Again, this is a simplifiedexample to demonstrate the con-cept of using alignment assess-ment data to construct investmentstrategies. By combining the othervariables in a similar structuredway, and filtering all elements ofthe application portfolio throughthe resulting framework, a compa-ny can create sophisticated invest-ment strategies that providegreater impact for the IT dollar.

The key point is to collectthe assessment data and useit as a way to develop aninvestment strategy for ITexpenses. By balancingcosts, quality, strategicimpact, and risk, companiescan make informed invest-ment decisions on theentire IT portfolio as they

would any investment portfolio,and change the culture from oneof anecdote and entitlement toone of asset performance andportfolio management.

ASSESSING IT PORTFOLIOS TOINCREASE BOTTOM-LINEIMPACT

The results of portfolioassessment are used in several keymanagement processes that leadto increased bottom-line impact.

Strategic IT Planning

Assessed portfolios are oneof two primary inputs to strate-gic IT planning, the other beingthe business’s strategic inten-tions. While the latter are thecritical drivers that result instrategic business and IT initia-tives, the portfolios also providekey information. For example:



The key point is to collect the assess-ment data and use it as a way todevelop an investment strategy for ITexpenses.

• Which applications are mostin need of replacement orenhancement? This can bedetermined, for example, bycomparing application valuewith quality and risk, andfinding the highest-valueand lowest-quality/highest-risk applications.

• Which applications areimpediments to carrying outthe business strategic inten-tions? This can be deter-mined by evaluating applica-tion alignment and qualityand finding the lowest-align-ment and highest-strategic-impediment applications.

• Which applications are mostlikely to causeincreased costs? Thiscan be determined byevaluating risk andfinding the highest-riskand highest-cost appli-cations.

By systematically exam-ining all applications, alwaysfocusing on the highest- andlowest-scoring applications inthe assessment categories, andby taking action as a part ofstrategic IT planning, manage-ment ensures that its IT invest-ments will have maximum bot-tom-line impact. In particular,the process combines the portfo-lio assessment information withthe company’s strategic inten-tions. This ensures that the appli-cations most in need of attentionand with the greatest connectionto achieving the company’s mostimportant strategic intentionswill get appropriate attention inthe strategic planning process.

Annual Plans and Budgets

Assessed portfolios are aprimary input to the develop-ment of annual IT budgets. It’ssimilar to the use of assessments

in strategic planning: companiesare interested in reducing theunnecessary costs of applica-tions in general, and the costs ofpoorly performing applicationsin particular. For example:

• Which applications are per-forming poorly, not aligned,and not effectively used?

• Which applications are sup-ported beyond their value?That is, which applicationshave low business value buthigh support costs?

• Which applications requireadditional support? That is,which are the high-value

applications with poorquality?

By systematically examiningall applications in the annualbudget process, managementensures that the lights-on costsare effectively controlled.

TOOLS FOR MANAGEMENT

Assessed portfolios givesmanagement critical tools toincrease bottom-line impact, byusing them in the strategic andannual planning processes.

• Prioritize new investments.Prioritization applies to proj-ects, not applications per se.However, it is a valid man-agement question whetherany new enhancement proj-ect should be done againstsystems with low valueand/or low dependency. The

business case documentationfor such projects shouldspecifically refer to the rea-son for enhancing a systemthat has low value or lowdependency.

• Understand the allocation ofresources in both new invest-ments and in ongoing lights-on expenses. Through evalu-ating existing lights-oninvestment in applications,management can determinethe appropriateness of thelevel of investments. Thiscan result in re-deployingunnecessary lights-on invest-ments into projects.

• Set targets for resources inthe lights-on budget, interms of service and quali-ty, and in terms of cost andcost reduction. Over time,management can establishtargets that have the effectof identifying wheremoney should be spent,and limits on money spent

in low-value and low-dependency areas.

• Evaluate the performance ofportfolio elements. By sim-ply understanding how wellevery application functions,and the relationship tostrategic intentions and toservice/quality/risk, manage-ment has a much greaterinsight into the effectivenessof the IT spend. This pene-trates the “black hole” of thelights-on budget.

• Cull the lights-on portfoliosof low-quality or poorly per-forming or overly costly ele-ments. Eliminating unneces-sary and ineffectiveexpenses is critical to bot-tom-line impact.

• Establish a strategy for therenewal of lights-on portfo-lio elements. This places thestrategic IT planning processinto context. Together with

July/August 2005 39


By systematically examining all appli-cations in the annual budget process,management ensures that the lights-on costs are effectively controlled.

business strategic intentions,this strategy enables man-agement to assure that thenew investments will maxi-mize the impact on the bot-tom line.

ASSESSED IT PORTFOLIOSCRITICAL

The global CIO of a For-tune 10 company remarked

about assessed portfolios: “[I]fwe don’t have this information(e.g., about alignment, servicelevel, quality, cost, and risk),how can we manage IT?”Specifically, how can a compa-ny maximize bottom-lineimpact without the ability tofocus spending, in both ongoinglights-on and new projects, onthe most important things con-nected to the bottom line? Obvi-

ously, they can’t. In order toensure the total IT spend willproduce the best bottom-lineresult, a company must consis-tently and persistently (1) devel-op the highest-impact IT invest-ment alternatives, (2) select thehighest-impact investments, and(3) eliminate underperformingexisting IT activities. AssessedIT portfolios enable a companyto do this.



Robert Benson is a principal with the Beta Group, a consulting firm with clients in the United States andthroughout the world. He is an affiliate professor of computer science at Washington University and part-time professor of information management at Tilburg University in the Netherlands. He is the coauthor ofInformation Economics: Linking Information Technology and Business Performance and Information Strat-egy and Economics: Linking Information Systems Strategy to Business Performance. He can be reached [email protected]. Tom Bugnitz is the president of the Beta Group. He is a frequent speaker and writeron technology management and an adjunct professor of computer science at Washington University. Hecan be reached at [email protected]. William Walton is a principal with the Beta Group. Prior to join-ing the Beta Group, he spent 17 years with the Gartner Group, where he developed IT measurement ser-vices and associated analytical methods. He can be reached at [email protected].

it planning in the real world

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