Balancing IT Budgets to Support Operations and Innovation

April 22, 2008

Today’s IT planners face tremendous challenges. Requests for services frequently exceed the ability to deliver, compounding substantial application backlogs. Opportunities to outsource and offshore tasks and to deploy powerful yet disruptive technologies such as Web services are prompting comprehensive re-appraisals of the technical landscape. New regulations are also compelling large IT organizations (ITOs) to clearly document complex relationships between financial reporting processes and IT infrastructure. Any breach can have dire consequences.

These issues are exacerbating a fundamental IT planning challenge – to balance the proportions of the IT budget that support operations and innovation.

In the 1990’s, ITOs had enough money to invest at least 30 percent of the budget in innovation, while supporting the installed infrastructure. By 2001, recession had necessitated widespread cost reductions, which ITOs achieved by cancelling investments in innovation — as operating costs are not easy to reduce. Operations costs swallowed up over 80 percent of many IT budgets, thereby preventing investments to transform the infrastructure and reduce costs in the longer term.

But as IT budgets rebound, the problem continues, because investments one year incur operational expenses the next on the order of 20 percent per annum. Best practices suggest that a 40:60 ratio of innovation costs and operating costs can be achieved by prioritizing the IT investment portfolio to meet strategic goals, while eliminating project redundancies, and ensuring that, wherever possible, new projects support the reduction of long-term costs. For example, systems consolidation and standardization of the architecture can reduce operations costs by 10 percent.

How is the IT planning challenge resolved today?

With difficulty! IT planning involves an overwhelming volume of data – hundreds of applications and many thousands of artifacts in multiple locations. Complex interdependencies between distributed specialists, critical business processes, IT support services and the underlying technical infrastructure can be significantly disrupted by isolated actions and incidents.

Many organizations struggle to meet the IT planning challenge with MS Office tools. Subject matter experts own fragments of technical information, while organizational and functional data is maintained in ad hoc databases that lack the graphical user interfaces and visualization tools needed to show relationships between data classes (business, technical and financial information). In this context, a transparent and accurate window to the as-is landscape is the essential starting point for every IT project and planning exercise.

Conventional portfolio management tools

IT executives are turning to portfolio management practices and tools to demand returns on IT investments in terms of income, savings, strategic value and customer satisfaction. Portfolio management tools and processes are sufficiently “project-property” independent to be deployed across any project portfolio, including IT. Implementation typically delivers savings by identifying skill and resource dependencies across multiple projects, balancing project value and risk, making it easier to kill a project, and improving business/IT communications. A reduction in new investments of 15 percent – 20 percent can be achieved when portfolio management techniques are introduced in the IT organization, as 20 percent-30 percent of all projects deliver little or no business value.

Despite these reductions in the new investment budget, conventional portfolio management tools neglect technical aspects of IT projects, which greatly affect their implementation and successful deployment. IT projects are interdependent; they are easily disrupted by new technologies and their costs can be very difficult to allocate. Seemingly prudent short-term decisions to approve IT projects can result in unforeseen, long-term impacts on the enterprise architecture, and add tremendous costs.

For example, while the business case and skills/resource dependencies associated with outsourcing decisions may be clear, neglect of architectural dependencies may have highly detrimental consequences.

Conventional Enterprise Architecture Tools

ITOs are also purchasing stand-alone tools that help technical specialists manage IT dependencies in an increasingly complex technical landscape. Enterprise architecture tools are used to facilitate specialist viewpoints for a specific architecture, adapt the strategic target architecture to suit local geographic and reporting requirements, and trace dependencies between artifacts. Most point solutions provide modeling capabilities and a repository where models can be stored and linked.

Enterprise architecture tools are primarily used to document and publish a comprehensive view of the as-is and target landscape. The dependencies, costs and disruptions they analyze and reveal are rarely considered outside the technical arena and are typically bypassed in the portfolio management process. As a consequence, vital information is withheld from the investment process.

From Demand to Budget

The planning challenge is to integrate technical know-how from the architecture management arena into portfolio management to reduce operating expenses and facilitate innovation. This can be achieved with an integrated planning process that delivers full visibility of the dependencies in skills, resources and the architecture. An effective, integrated process encompasses value management, enterprise architecture management, demand management, application architecture management, and program portfolio management, enterprise strategy and master planning and release management.

Key components in the integrated planning process include the following:

Value management encompasses the definition and assignment of policies, strategies and goals, and the formulation and measurement of the balanced scorecard and key performance indicators (KPIs). Formulated goals are inputs for the management of demands and the enterprise architecture, while the evaluation and prioritization framework is the input for program portfolio management.
Enterprise architecture management encompasses the formulation of strategic demands (as inputs to demand management), analysis of the application portfolio, the definition of standards and consolidation of architecture and migration plans across projects (as inputs to application architecture management).
Business demand management involves documentation of demands from the business lines and the enterprise architecture, and their consolidation as defined projects with associated business benefits. In an integrated process, projects with architectural impact are transferred to the application architecture function for detailed estimates, while those with no architectural impact are directly transferred for budget prioritization and assignment.
Application architecture management commences with a thorough analysis of the as-is architecture, which is ideally achieved by referencing a current, consistent and complete IT inventory. Target architectures and alternative scenarios for each defined project can then be devised in gap analysis to inform architecture decisions and transformation planning. Detailed plans (with cost estimates, risks and dependencies) are then transferred to program portfolio management.
In integrated systems, program portfolio management involves the consolidation of all project dependencies (skills, resources and architecture), project evaluation and program assignment, bottom up prioritization of projects inside each program, and top down prioritization of programs to release budgets.
Enterprise strategy and master planning defines the evolution of business/IT alignment by relating the core artifacts of the business architecture with those of the application architecture. It enables IT strategy planners to explore tactical options and ensure that flexibility in the IT architecture is accommodated. Master plan information is used to ensure that solution architectures are compliant with planned changes to the landscape and that new introductions into the landscape remain within the IT strategic corridor.
In release management, the technical architecture for applications, components and standard platforms, otherwise managed on a strategic and tactical level in enterprise architecture management, is specified at a level of granularity that allows technicians to install and maintain. It includes planning and governance of the hand-over from IT strategy to the development/build environment and supports the deployment process of applications, components and standard platforms.

Collaborative System

IT planning takes place in a rapidly changing business environment and involves an overwhelming volume of data – hundreds of applications and many thousands of artifacts in multiple locations. Complex interdependencies between distributed specialists, critical business processes, IT support services and the underlying technical infrastructure can be significantly disrupted by isolated actions and incidents.

Though most business managers inherently know that well-orchestrated teams can have a dramatic impact on the success of a business, organizations often struggle to create and execute the strategic IT plan, because this work involves tight coordination of decision makers with diverse interests, budgets and reporting lines, especially between the IT organization and business divisions. Given the complexity, collaboration is a necessity to ensure transparency and accelerated productivity in project planning cycles.

The good news is that with the latest software solutions for IT planners, enterprises are finally in a position to take control of IT activities across the board from initial decision making to design and implementation to operations management. The missing piece has been the bridge linking the thinking and vocabulary of the business with that of IT and allowing both to work from the same content and collaborate without endless meetings or armies of consultants. The payoff is tremendous: Businesses can finally begin to dig their way out of huge recurring expenses and reallocate more spending to high return projects.

About Erik Masing: Erik Masing is co-founder and CEO of alfabet, the standard software provider for strategic IT planning and management. Erik has led alfabet since its foundation in 1997 in Berlin Germany, into what is today recognized by leading industry experts and analysts as a market leader with operations across Europe and the US. The company has 70 employees and a user community of 15.000 IT professionals in over 40 countries.

Prior to alfabet, Erik founded and led two other companies, bmp management consulting GmbH and mip AG, which paved the way for the foundation of alfabet. From 1991 to 1993 he served as a Senior Manager for the Defence and Hi-Tech sector at HBS Consulting Partners.

Erik Masing has received numerous awards of distinction for business innovation. In 2000 he received an “Elite of the Future” award by the German Economist magazine and 2001 he and alfabet co-founder Dr. Oleg Kovrigin were selected for the Ernst & Young “Entrepreneur of the Year” award. Mr. Masing is also a member of BITKOM, ENF (Elite Network Foundation) and is a member of the advisory council for economic affairs for the CDU political party in Germany.

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