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Microsoft Solutions Forum 2004: Monday,

Managing the IT Portfolio: Getting more value September 6, 2004


from IT investments.

Microsoft Solutions Forum 2004

Managing The IT Portfolio:


Getting more value from IT Investments

Monday, September 6, 2004

Professor Peter Weill


Director, Center for Information Systems Research (CISR)
MIT Sloan School of Management
Phone: (617) 253-2348, Fax: (617) 253-4424
pweill@mit.edu; http://mitsloan.mit.edu/cisr
1
© 2004 CISR MIT Sloan—Weill

MIT Sloan Center for Information Systems Research (CISR)


CISR gratefully acknowledges the support and contributions of its Research Patrons and Sponsors
 CISR Research Patrons
– BT Group – IBM Corporation MISSION
– DiamondCluster – Microsoft Corporation • Founded in 1974; CISR has a strong track record of
International, Inc. – Tata Consultancy practice-
practice-based research on how firms manage &
– Gartner Services—America generate business value from IT
– Hewlett-Packard Co. • Research is disseminated via electronic research
briefings, working papers, research workshops &
 CISR Sponsors executive education programs including CISR Summer
– Aetna Inc. – Intel Corp. Session “Current Issues in Managing IT”
– Allmerica Financial Corp.– International Finance http://web.mit.edu/cisr/SS03
– Allstate Insurance Co. Corp.
– AstraZeneca – Merck & Co., Inc.
Pharmaceuticals, LP – Merrill Lynch & Co., Inc. 2002–2003 TOPICS
– Banknorth, N.A. – MetLife • Effective IT Governance
– Biogen Idec – Mohegan Sun • Architecture-Driven Business Strategies
– Campbell Soup Co. – Motorola, Inc. • Infrastructure as Variable Cost
– Care USA – National Kidney • The IT Portfolio — Benchmarks & Performance
– Celanese Foundation (Singapore) • NSF Project on IT Impacts
– ChevronTexaco Corp. – Nomura Research • Business Models & IT Investments
– Det Norske Veritas Institute, Ltd. (Japan) • Assessing IT Architecture Outcomes
(Norway) – Pasco County, Florida • Managing IT-related Risk
– eFunds Corp. – Pfizer Inc.
Contact Information:
– EMC2 – PFPC, Inc. 3 Cambridge Center, NE20-336
– Gillette Co. – Qwest Communications Cambridge, MA 02142
– Guardian Life Insurance – Raytheon Company Ph. 617-253-2348, Fax 617-253-4424
E-mail cisr@mit.edu;
Co. of America – State Street Corp. http://web.mit.edu/cisr/www 2
– TRW Automotive, Inc.
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Rethinking IT Investments as IT Portfolio


Based on proven and familiar principles of financial portfolio
management
z Four Management Objectives for Investing in IT

z Creates an IT portfolio with four asset classes

z Each asset class has different risk return profiles

z The role of senior management is to align the IT


portfolio to strategy and balance for risk and return

z Top performing enterprises can get up to 40% more


value — IT Premium
– Diagnostic
3
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

What’s in the IT Portfolio


IT
IT Portfolio
Portfolio Total
Total IT
IT investments
investments including
including all
all technology,
technology,
services,
services, outsourcing and people dedicated
outsourcing and people dedicated to
to IT
IT
— broken into asset classes. Can view
—broken into asset classes. Can view as flowas flow
(i.e.
(i.e. annual
annual spend)
spend) or
or stock
stock (i.e.
(i.e. accumulated
accumulated
spend).
spend).

IT
IT Programs
Programs Groupings
Groupings of
of projects
projects linked
linked to
to business
business goals.
goals.

IT
IT Projects
Projects Set
Set of
of activities
activities creating
creating outcomes
outcomes
to
to aa budget
budget and timetable..
and timetable.
timetable

IT
IT Activities
Activities Core
Core IT
IT capabilities
capabilities (e.g.,
(e.g., specify,
specify, code,
code, acquire,
acquire,
test,
test, manage, design, integrate, negotiate, etc.)
manage, design, integrate, negotiate, etc.)

Source:
Source: drawn
drawn from
from Weill
Weill and
and Broadbent,
Broadbent, SIM
SIM and
and CIO
CIO 4
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Management Objectives
for Investing in IT
1. Reduce cost of doing business
- Transactional IT
2. Provide better information
- Informational IT
3. Gain competitive advantage or major innovation
- Strategic IT
4. Provide shared base IT capability
- IT Infrastructure
Any project may be a combination

Source: Weill & Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, 1998 5
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Rethinking IT as an Investment Portfolio


- asset class, risk and return, strategy
(Innovation)
(Major Change)
Increased control (Facilitation)
Better information (High Value Added)
Better integration (Interact with customers)
Improved quality Increased sales
Faster cycle time 13% Competitive advantage
20% Competitive necessity
Market positioning
INFORMATIONAL STRATEGIC
13%
Cut costs TRANSACTIONAL Business integration
Increase throughput Business flexibility
54% Reduced marginal
INFRASTRUCTURE cost of BU’s IT
Reduced IT costs
( ) = public sector standardization
Source: Weill & Broadbent “Leveraging the New Infrastructure: How market leaders capitalize on IT,”
Harvard Business School Press, 1998. Percentages reflect data collected in 2001/02 from 140 firms. 6
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

The New Infrastructure has Multiple Layers


Where to locate infrastructure & systems capabilities?

Business G
Business Business
Business
Shared
Shared // Centrally
Centrally Unit
Unit 11 R
Unit
Unit 22
Coordinated
Coordinated A
V
•• Order
Order processing
processing
•• Customer
Customer portals
portals
I
•• Product
Product configuration
configuration T
•• Knowledge
Knowledge management
management Y
•• Shared
Shared && standard
standard •• Electronic
Electronic mail
mail
Firm-Wide Information applications
applications
•• Customer
•• Large
Large scale
scale processing
processing
Customer self
self serve
serve •• Shared
Shared customer
customer
Technology Infrastructure •• PC/LAN
PC/LAN service
service database
database
•• Vendors
Vendors
Publicly Available Infrastructure
•• Telecommunications
Telecommunications service
service providers
providers
(e.g. Internet, Telcos, Industry Nets) •• Industry
Industry services
services

Source: P. Weill, M. Subramani & M. Broadbent, “Building IT Infrastructure for


Strategic Agility,” MIT Sloan Management Review, vol. 44, no.1, Fall 2002. 7
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

IT Portfolios In Different Industries


Information
(15)
Strategic
(5)

Transactional (40)
Wholesale Information
Infrastructure (40) Financial Manu-
Retail, & All
Services facturing
Transport Services4

Health Care 5.2


Firm-wide $IT as a Percent Retail 2.5 Professional Utilities(18) 6.1%
of Expenses1 15.4 3.4 Logistics 6.2 Services 5.7
8.1 Resources (3) 1.9%
Gov’t (73) 8.6%
(Two year averages) Telecomm 6.5
(Number of Firms) (40) (53) (8+10) (5+18+6) 256

12% 20% 21% 12% 17% 17% 26% 11% 20% 13%
IT Investment2 14% 13% 14% 18% 13%
54% 54% 52% 45% 54%
(Number of Firms) (7) (98) (21) (14)
14 140
(140)
% of Total IT Outsourced 20012 15 16 23 13 16

13% 13% 22% 14% 16% 14%


IT Investment 1993–973
(54 businesses over 5 years) 13% 12% 13%
61% 52% 57%
3
1 MIT Source: Leveraging the New Infrastructure: How Market Leaders Capitalize on
CISR Survey of 256 enterprises for 2001/2002
2 MIT Sloan CISR study (Weill & Aral) based on a study of 140 Information Technology, Peter Weill & Marianne Broadbent, HBS Press, 1988.
4 Services include Professional, Scientific and Technical Services, Health Care
firms in 2002 using data from previous 3 years. NSF Grant
Number IIS-0085725
Services, Social Assistance, Accommodation and Food Services 8
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Synchronize Information
Technology Portfolios to Strategy
Business Strategy
Balance Cost &
Average Firm Cost Focus Agility Focused
Agility

20% 13% 20% 15% 14% 17%


IT Portfolio 13% 5%
Mix of 11%
13%
Investments 40% 15%
54% 42% 50% 58%

$IT compared to Average % of IT is 10-20% IT is around IT is 10-25%


industry avg. as % Revenues & lower than industry average higher than
of expenses or Expenses industry average industry average
revenues
Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market leaders capitalize on
IT,” Harvard Business School Press, June 1998. (Based on a study of 54 businesses in 7 countries over
five years and 140 firms studied in 2001/02.) 9
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Information Technology Portfolio &


Business Value
- performance of the 4 asset classes
Increased sales • 50% Fail
Increased control
• Shorter Time To Competitive advantage • Some Spectacular
Market
Better information
Better integration Competitive necessity Successes
• Premium Pricing Improved quality Market positioning • 2-3 Year Lead
• Superior Quality 13% • Premium Pricing
• Faster Cycle Time 20% • Higher Revenue
• Larger Margins Per Employee
INFORMATIONAL STRATEGIC /
• More Sales From
Customized
13% Products
Cut costs TRANSACTIONAL
Increase throughput
Business integration
54% INFRASTRUCTURE Business flexibility
• 25-40% Reduced marginal
Return cost of BU’s IT
• More Infra ⇒ Higher Growth Reduced IT costs
• Higher ROA
• Less Infra ⇒ Higher ROA Standardization
• Low Risk
Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998 and analysis of
147 firms using data from 1999-2002. All relationships are statistically significant. 10
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

IT Premium

How Some Firms Get $IT Value

40% More Value


These firms have:
z More top management commitment
z More integrated business and IT planning
z Less political turbulence
z Higher user satisfaction (e.g., IT Portfolio Health)
z More management experience with IT
(e.g., reengineering)
And thus an above industry average IT Premium*
*IT
*IT Premium
Premium == enterprise’s
enterprise’s ability
ability to
to gain
gain above
above industry
industry average
average returns
returns from
from IT
IT by
by better
better management.
management.

Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998. 11
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Why Some Firms Achieve More


Business Value -8 0
+8

1. Top Management Commitment to Information Technology


z Attend information technology council meetings themselves
and don't send a nominee.
z Work with the information technology group to specify
the required infrastructure in business terms.
z Require carefully considered business cases for investments
with measures and responsibilities identified.
z Support the strategic uses of information technology by providing
providing
seed funding not requiring traditional net present value financial
financial
justifications.
z Encourage post implementation reviews which are not
witch-
witch-hunts and facilitate the gathering and dissemination of the
lessons learned.
z Encourage, fund and actively support training in the use
of information technology.
Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998. 12
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Why Some Firms Achieve More


Business Value -8 0
+8

2. Integrating Information Technology with Business Planning


z Executive management consideration of the information and
technology implications of their business strategies.
z Regular high level briefings on the implication of information
technology industry developments.
z Accountabilities for achieving strategies which were clear and
documented.
z Articulation of the respective roles and responsibilities of business
business
and information technology management in achieving effective and
efficient systems and delivering business benefits. Managers werewere
named and held accountable.

Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998. 13
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Why Some Firms Achieve More


Business Value -8 0
+8

3. The Role of Organizational Politics & Political Turbulence


z Exhibit a strong sense of community, a feeling of shared interests
interests
and purpose and cooperation, amongst managers.This is reinforced with
reward systems and incentives that are based on a balance of firm
firm-wide
and local measures.

z Capture relevant data in one business area and willingly shared it


across the firm. Cross functional and business opportunities are
actively sought to improve service and reduce costs.

z Encourage cooperation via cross functional teams, secondments


and movement of personnel.

Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998.
14
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Why Some Firms Achieve More


Business Value -8 0
+8

4. The Role of User Satisfaction


Symptoms of problems are:
z Lack of confidence in the reliability and completeness of information
information
in the systems.
z Lack of a sense of relevance and accuracy of the information in the
systems by the systems users.
z A poor level of support provided to those using the systems.
Particular problem areas are often slow or less than helpful help
help
desks and slow or ill-
ill-prepared visits from technical personnel.
z Limited user understanding often stemming from inadequate or
poor quality training.
z Users feeling that the attitude and responsiveness of those who
provide support for systems is begrudging and unprofessional.
Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998. 15
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Why Some Firms Achieve More


Business Value -8 0
+8
5. The Role of Experience
z Redesign, simplification or reengineering of business processes
before a cent is spent on information systems.
z Maximize the reuse of business process and information systems
components.
z Every new information technology project that is not infrastructure
infrastructure
has a business person as champion with clearly identified
deliverables and responsibilities of the business and technology
provider.
z Infrastructure investments are treated separately from investments
investments in
applications to take account of their shared nature and long life.
life.
z Innovative use of information technology in the business units is
is
encouraged by the information systems group even if firm-
firm-wide
standards are not always followed. Integration can be achieved
later if successful.
Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market
leaders capitalize on IT,” Harvard Business School Press, June 1998. 16
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Why Some Firms Achieve More


Business Value
IT Premium Count

40 20

19 0

-1 -20

-21 -40
17
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Recommendations for Action


“Top Ten Leadership Principles”
1. Integrate the information technology portfolio with strategy process.
process.
2. Take a portfolio approach to information technology and balance risk
vs. return.
3. Determine the required service levels and outsource commodity
services to save costs while retaining architecture responsibility.
responsibility.
4. Appraise, justify and manage infrastructure separately.
5. Actively manage IT Premium.
6. Start with lower risk transactional systems.
7. Agree on indicators of business value and responsibilities for costs
costs
and benefits.
8. Do post implementation assessments to track costs and benefits.
9. Understand and manage information politics.
10. Implement transparent governance processes.
* Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How
market leaders capitalize on IT,” Harvard Business School Press, June 1998 18
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Supplementary Slides

19

Tracking the Impact of Information


Technology Investments
Impact Sought Sample Value Measures Responsibilities
„ Revenue growth Business
BUSINESS
BUSINESS UNIT
UNIT FINANCIAL
FINANCIAL BV
BV
„ Return on assets Management
s

„ Revenue per employee


act
Im p

C Dilution
„ Time to bring new product to mkt. BUSINESS
BUSINESS UNIT
UNIT OPERATIONAL
OPERATIONAL
of Impact
T

„ Sales from new products BV


BV
of I

„ Product or service quality


ion

B
ut

Dilution
Time to implement a
Dil

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

Source: P. Weill & M. Broadbent “Leveraging the New Infrastructure: How market leaders capitalize on IT,”
Harvard Business School Press, June 1998. 20
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

Portfolios of Top Performers are Different1


Information

Strategic

Transactional
Wholesale
Infrastructure Finance, Retail, Information
Insurance Manufacturing Transport & Services All2

12% 20% 21% 12% 17% 17% 25% 11% 20% 13%
All Firms
[N=140] 14% 13% 14% 17% 13%
54% 54% 52% 47% 54%

11% 19% 25% 11% 18% 13% 27% 9% 20% 13%


Top Performers
[N=49] 12% 13% 13% 17% 13%
58% 51% 56% 47% 54%

3 Year Relative IT Spend3 -10% +3% +7% +11% +4%

1 MIT Sloan CISR study (Weill & Aral) based on a study of 140 firms in 2002 using data from previous 3 years. NSF Grant Number IIS-0085725.
2 Average industry adjusted portfolios of the top 1/3 performers on ROA, % Margin & Revenue Growth.
3 IT as % of Net Sales (3 year average)/Industry average IT as % of Net Sales (3 year average).

21
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Risk-Return Profiles in the IT Portfolio


Ability to reduce risk &
Type of IT Risk Return Characteristics increase return through better
IT premium (ITP)

High risk, huge potential Strong ITP significantly


Strategic
upside and 50% failure rate reduces risk of failure

Moderate risk due to long life Strong ITP increases


Infrastructure and business and infrastructure capability and
Increasing technical uncertainty flexibility for a given cost
Risk
Moderate risk due to difficulty Strong ITP provides
Informational of acting on information to management process to
create business value capitalize on the information

Lowest risk with solid Strong ITP marginally


Transactional
return of 25-40% reduces risk

IT
IT Premium
Premium == enterprise’s
enterprise’s ability
ability to
to gain
gain above
above industry
industry average
average returns
returns from
from IT
IT by
by better
better management
management
Source: P. Weill & M. Broadbent Leverage the New Infrastructure: How market leaders capitalize on IT,
Harvard Business School Press, June 1998.
22
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill


Microsoft Solutions Forum 2004: Monday,
Managing the IT Portfolio: Getting more value September 6, 2004
from IT investments.

MIT Sloan Center for Information Systems Research (CISR)


CISR gratefully acknowledges the support and contributions of its Research Patrons and Sponsors
 CISR Research Patrons
– BT Group – IBM Corporation MISSION
– DiamondCluster – Microsoft Corporation • Founded in 1974; CISR has a strong track record of
International, Inc. – Tata Consultancy practice-
practice-based research on how firms manage &
– Gartner Services—America generate business value from IT
– Hewlett-Packard Co. • Research is disseminated via electronic research
briefings, working papers, research workshops &
 CISR Sponsors executive education programs including CISR Summer
– Aetna Inc. – Intel Corp. Session “Current Issues in Managing IT”
– Allmerica Financial Corp.– International Finance http://web.mit.edu/cisr/SS03
– Allstate Insurance Co. Corp.
– AstraZeneca – Merck & Co., Inc.
Pharmaceuticals, LP – Merrill Lynch & Co., Inc. 2002–2003 TOPICS
– Banknorth, N.A. – MetLife • Effective IT Governance
– Biogen Idec – Mohegan Sun • Architecture-Driven Business Strategies
– Campbell Soup Co. – Motorola, Inc. • Infrastructure as Variable Cost
– Care USA – National Kidney • The IT Portfolio — Benchmarks & Performance
– Celanese Foundation (Singapore) • NSF Project on IT Impacts
– ChevronTexaco Corp. – Nomura Research • Business Models & IT Investments
– Det Norske Veritas Institute, Ltd. (Japan) • Assessing IT Architecture Outcomes
(Norway) – Pasco County, Florida • Managing IT-related Risk
– eFunds Corp. – Pfizer Inc.
Contact Information:
– EMC2 – PFPC, Inc. 3 Cambridge Center, NE20-336
– Gillette Co. – Qwest Communications Cambridge, MA 02142
– Guardian Life Insurance – Raytheon Company Ph. 617-253-2348, Fax 617-253-4424
E-mail cisr@mit.edu;
Co. of America – State Street Corp. http://web.mit.edu/cisr/www 23
– TRW Automotive, Inc.
© 2004 CISR MIT Sloan—Weill Center for Information Systems Research

Professor Peter Weill