June 18, 2007
How IT Assets come from Business Requirements
After twenty years of developing, managing, marketing and deploying IT, providers still have huge opportunities to miss the mark by giving the customer what the customer asked for instead of what the customer needed.
To see how much can still be missed in any new delivery, check this chart and ask whether the implementations you're familiar with came anywhere near covering what was important.
Key shockers to lookout for:
- Customers didn't know what they needed! How could they always be right?
- Providers weren't solving the right problem! Why would the quality matter?
- Most of all, requirements held no accounting for the difference between risk, complexity and difficulty -- so who knows when anything would actually "work"?
Posted by Malcolm Ryder at 11:35 AM | Comments (0) | TrackBack
January 21, 2007
ROI and The Rush Job
or, The Productivity of Production
Years ago, the only way to get custom-printed photos on a rush basis was either with a LOT of money -- or NOT a lot, through a pretty darn good photographer friend, emphasis on the friend. Smelling an opportunity, and not pld enough to eschew self-abuse, I broke into a really crowded field of commercial photographers by offering the unthinkable: "fast, cheap, or pretty: pick any three." For six months, I didn't charge premium or "rush" prices: I just didn't sleep, and I custom-printed photos for delivery by rush deadlines.
Don't try this trick at home! It jump-started my business, but the six months cost me a couple of years of longevity that Science says I won't get back. A negative ROI. In general, production organizations know this could happen to them, too, and they sanely stick to the rules: "fast, cheap or pretty; pick any TWO."
The problem is that customers sometimes don't care about the rules, especially if the customers hold the production organization captive. A typical example of this is an IT organization in a corporate setting. Although it seems irrational, IT routinely has to solve the dilemma of offering all three outcomes.
Susan Conway, in her article Keeping the Think Factory Humming in Optimize Magazine's January issue, actually offers a fairly straightforward idea -- that getting cheaper (through tools) allows more effort to getting faster (reducing cycle time) and thus becoming prettier (through enabling continuous improvement of quality). Running in that direction, from tools up to quality, there is an increasing "enablement" applied layer after layer to the circumstances that must generate value from production.
Although she calls that value "efficiency", it is both more than and different from that; and the deceptive linearity of her run-up doesn't point at how those layers, or links in the chain, actually get connected: namely, simultaneously, not sequentially. It's not the "links" themselves that make the difference, it's the connections between them that do -- the linkage.
For clarifying why this is true, an important reference to have is Goldratt's Theory of Constraints -- in which the notion of a weak link is explored as an effect, not as a cause. We make the link weak by what we do around it; it is not inherently so. Likewise, we make the link stronger. This prevents us from taking the "linking" effort for granted. More to my point, it calls out the simultaneity that must be addressed: all the links matter at the same time...
Let's take that idea to heart. As a producer, how do you do Fast, Cheap and Pretty all at once?
We might make a new Pontiac Solstice, which shows that it can be done. But the usual situation is that each target characteristic can influence the production differently and even dominantly versus the others; so it matters that we know what their co-existence really demands.
Typically, we feel that we already know what each individual characteristic is about, but how about their combinations?
For example, what's an exemplary instance of Fast plus Pretty? How about Muhammed Ali's left jab. Effectiveness, wrought from precision, which was wrought from discipline, which was wrought from training. It's the precision that is its key distinction -- the organizing principle that creates the linkage, and its value, between Fast and Pretty.
And away we go:
Fast + Pretty? the left jab. Precision is the secret. Relies on discipline (from the training).
Pretty + Cheap? the sari. Elegance is the result. Exploits pattern (from the technique for folding or wrapping).
Cheap + Fast? the omelette. Balanced to the occasion. Leverages the facility (of a standing "factory" -- the hot skillet).
In other words, if we knew we needed both fast and pretty, "precision" is a good aspect to pursue, and to get there, we're going to need the discipline of having been trained into consistency. And whether wrapping a sari, or doing math equations or calligraphy, the elegance of "less is more" relies on drawing the optimal pattern through technique. What about that omelette? Balanced, neither too much nor not enough for the appetite, you grow it quickly from very little, on the already hot pan. While that pan is hot, you just keep crankin' 'em out.
But back to bigger work, what is production up against? The point is to get one deliverable from combining all three characteristics. Like that incredible car from Pontiac. The prerequisite is you'll have to be organized to pull it off.
This illustration calls out the three key constraints in managing the connections of the production -- design, controls, and sources. They are fit and related amongst the initial objectives to be met.
For example, when we talk about "sourcing", we're concerned with the scale of production that we need from the process, and how much that is going to cost. We'll source production from a factory that gives us the desired economy of scale from its process.
The model also looks more directly at what we think each initial characteristic feature is, here more carefully identified. For example, "pretty" typically means that the production output has high compliance to specifications. Or when we say "fast", what we're usually talking about is how quickly the product can be provided every time it is requested.
And earlier, the path to noticing standardization was from training that creates "discipline". But now that we've noticed standardization and its place as a principle, we can recognize and include other key influences that are related to it, such as policies.
Pulling these constraints and principles more to the foreground, the following picture shows how Archestra's ActiveROI model similarly organizes management in IT production organizations to drive productivity for the business it supports. As seen here, ActiveROI describes the systemic relationship of the constraints of design, controls and sources through implementation of architecture (design), portfolios (sources), and policies (controls). Investing in this systemic management practice puts the organization on the footing for not just efficiency (a small piece of the puzzle) but for holistic generation of business value.
[See more on ActiveROI by searching Archestra. ActiveROI, originated by Malcolm Ryder and commercially developed at Renovance LLP, pops up in various disguises in your Google or Yahoo search results, but it should not be confused with marketing companies, other persons, or machine intelligence projects that like the name so much they use it too. For updates to the model, and for a list of its authorized promoters, search the Archestra archives exclusively, and/or contact M. Ryder at Archestra.]
Posted by Malcolm Ryder at 11:56 AM | Comments (0) | TrackBack
October 13, 2006
How to measure IT's contribution
Flashback from CFO: Magazine for Senior Financial Executives, Spring, 2005 by Malcolm Ryder
Regarding the notion of estimating how much revenue to allocate to every kind of corporate resource in proportion to each respective resource's contribution ("Revenue Is What Matters," Letters, Fall 2004), I have to wonder what purpose there is to that.
Not being an economist myself allows, perhaps, my view on this matter to spawn a useful question. Namely, without a definition of "contribution" there is no logic to the presumed "proportion," and don't we already know from real life that contribution means impact and that impact is defined by the system of measurement?
What most of us in IT and everyone in science have learned is that we can't talk about impact without talking about complexity, which means talking about interdependencies and frequently about the obscure order found within apparent chaos. If at Company X a $50 spreadsheet program in the hands of a $100K--per-year employee results in a discovery that generates $10 million in revenue, that's a great trick. And yet even if Company Y copies the same set of "resources," it probably won't get the same results.
The reason why accountants have not set or proved the so-called value of IT is because value is not generated by resources but instead by dynamics, and accountants don't measure dynamics. I agree that what is needed is a look at the answers already found in other disciplines.
For example, meteorologists measure systems and motion, such as high pressure, low pressure, and temperature, and from that they can attribute daily and even hourly impact to real causes instead of merely to gases. Likewise, coaches who actually know how to coach can tell you that the influence of the most talented player on the team can turn the team into a loser, where a much lesser talent can influence the team to win and so gets put on the field.
So the key is to break free of the notion of "resource" that is rooted in a concern for corporate property and learn to see that the elemental dynamics of situations are the real resources.
For most companies, the closest they come to this awareness now is their understanding that some company assets, like people and technology, must service something that they call processes, with processes representing the company's hypotheses of desirable dynamics. Logically, then, the process is the closest they come to defining the resource that should claim some of the credit for the revenue. What does the process cost, and how well is it managed?
Malcolm Ryder/Chief Strategist/Renovance LLP/
COPYRIGHT 2005 CFO Publishing Corp.
COPYRIGHT 2005 Gale Group
Posted by Malcolm Ryder at 9:56 PM | Comments (0) | TrackBack
September 23, 2006
Technology Information for Information Technology
Uncertainty is already hard enough on planning, but misinformation makes it doubly worse. For example,while academic and trade press journalism stirs the uncertainty with offbeat questions like "Does IT Matter?", irresponsible metrics like "IT spending as a percent of revenue" gather the kind of steam that lets people believe in the lip synching right up until the background recording is interrupted.
Business management orphans the lip-synch of metric myths. Good management makes IT better, and bad management makes it worse. Given that, guess what needs to be measured? Of course -- the management itself.
"IT" is not monolithic and for many reasons cannot be meaningfully "rolled up" into a single dimension of operational resource. We get the intellectual comfort of trying to do that from thinking about corporations as if they were buildings instead of systems, where we need to go out and buy X amount of concrete or X amount of nails. But because corporations are systems, their "composition" is more properly understood as the set of enabling terms of their behaviors. So as a business driver, technology is an environmental factor, more akin to regulations or geographies, where the challenge is this: to manage their potential impacts to levels of effectiveness and value by incorporating their inherent risks and opportunities into the company's operational behaviors.
Using a portfolio approach explicitly presents the logic of that incorporation. But here's a heads up. Who should control the portfolio? Don't be fooled by the apparently simple formula of having a CIO report to the CFO. Managing a portfolio is both a strategic discipline and a disciplined strategy. The goal is to achieve certain kinds of outcomes, but
the supporting process is to manage constraints. Just as you hold your CFO accountable for interpreting the financial environments both external and internal to the company, you'll need to hold a CTO responsible for interpreting the technology environments inside and out.
Posted by Malcolm Ryder at 9:47 PM | Comments (0) | TrackBack
August 12, 2006
Should we measure the ROI of IT?
Imagine not knowing whether spending on IT had any beneficial economic impact.
Should we measure the ROI of IT? Of course we should. But first we should learn how.
The ROI of IT is not difficult to understand. Confusion often begins with a poor articulation of the so-called "justification" for spending on technology. It's convenient to think of the justification as being synonymous with the return, but that hasn't prevented corporate America from deciding that it doesn't know what the ROI of IT is, has it?
The way out of the usual confusion is as follows:
1. Begin by understanding that you are spending on an *effect*, and that the technology is just a means. As the famous saying goes, "people don't buy drills, they buy holes."
2. Understand that "means" are not the same thing as "causes"... Despite automation, people decide what tools do. Decisions will either subvert or support the desired effect. Decisions create or destroy ROI.(See various writers, notably Paul Strassman, on the subject "Return on Management".)
3. Naturally, if the means have poor quality and are unsuitable to the task, they will inject either compensatory or remedial costs that will lower the potential overall economic benefit. But this "lowering" is because the potential extra cost of using the lesser-quality means is really a resource taken away from other more viable investment options. Returns are not found in budgets. Returns are found in portfolios.
4. Understand the actual role of IT. IT is simply a player on the bench. The game is won by the value of the plays. If you give your players the right assignments, then the play is run well and the impact of the play moves you to the goal. Assume that a poorly designed or inappropriate play will waste even a great player.
In sum, understand the difference between having IT that is good enough to enable the execution of the play, versus having plays good enough to win. You must invest in both, not one or the other. But IT does not cause the win. Except as regards IT's affect on the play, you cannot measure the ROI of IT with arithmetic; and since spending on IT is not usually the same decision as spending on strategy development, the correlation of IT spending against revenue or profit deltas is actually arbitrary for companies weak on strategy and IT architecture.
Posted by Malcolm Ryder at 10:16 AM | Comments (0) | TrackBack
July 24, 2006
ROI: Getting What's Coming To You?
One aspect of achieving real success from investment in operational resources is to utilize the proper collaboration of organizational roles to build a chain that really does deliver value and trigger opportunity for ROI.
An early segment of this chain is to convert assets to resources. Essentially, this means giving the assets an important job to do, and then ensuring that they are available when their turn comes up. Many organizations focus strongly on availability even if they don't realize that effort as the basic one of creating resources from assets. Typically it is motivated by the idea of controlling costs, and it isn't a huge leap to see effective allocation of assets as a cost control.
But getting past cost to ROI is another effort. As shown here, the effort involves generating capacity from the availability of the resources. In the mode of ActiveROI introduced through Renovance LLP a few years ago, the requirement is to recognize that cost can easily be sunk without the proper continuation of aligning for engagement with the requirements of environmental and customer demand. The picture here shows the division of responsibilities and attentions that drives the actual "return" on the investment. In this view, Managers take the availability (resource) supplied by Administrators and shape it to be used for certain purposes declared by Directors.
While these terms immediately invoke job titles, it is instead necessary to understand them as roles, with their distinctive responsibilities and perspectives, leveraged through collaboration. The point is to exercize the appropriate sensitivity at the designated points in the value chain.
The overall model of relationships is not only scalable to small or large efforts -- it is portable. On the one hand, the dynamic applies to producers taking internal assets on through to an offering for the customer. For example, a producer's offering could be a service. Meanwhile, on the other hand, customers are similarly spending assets to take services (products) as their initial resources, and using the same flow, then deriving their own ROI. In the flow, it becomes evident that Administrators of services create "service availability" that is actually the customer's resource, and the customer uses that resource and channels (manages) it through their desired mechanism to successfully address important objectives (directed priorities).
These same relationships are each also points of potential failure, so active attention to the relationships sustains the potential of the chain, and therefore the prospect of ROI.
Posted by Malcolm Ryder at 7:01 PM | Comments (0) | TrackBack
April 9, 2006
The ROI of Complexity
Imagine trying something so simple as opening a door, without the vast complexity of the brain to generate the action. And where opening the door is the kickoff of manuevers that generate greater and higher subsequent value, the investment in complexity is still mainly about enabling the necessary component simplicity. Without the complexity, the underlying manuever of critical value may simply not be available.
This indicates that the appropriate management response to complexity is probably not "reduction" but instead "direction" and "application"... that is, getting complexity to do the right thing. The importance of understanding the nature of the complexity is in finding out how to harness it so that it is directable and applicable. Changes to the complexity have the objective of making it manageable, with the understanding that manageability aims for direction and application.
Posted by Malcolm Ryder at 11:46 PM | Comments (0) | TrackBack
April 2, 2006
Business-IT Alignment: Revisiting ActiveROI
By the time the Y2K threat got serious in the corporate mindset, IT innovation had already reached a point of viability where replacing old stuff had to be taken as a serious alternative to patching it.
But it wasn't just the technology that needed to be reconsidered. As it is almost automatically remarked in the business conversation about IT, related people and processes also were in the mix -- and here came the dot-com wave.
Among various other things that "e-business" did to reposition IT in the enterprise, it gave an old teaching instrument a new meaning.
You may remember the elementray school spelling aid "I before E except after C"... For it's new web-era use, I translated it to mean "infrastructure before engagement, except after customer." The problem new to the day was that the web was now allowing customers unprecedented aggressiveness in dis-intermediating the corporate mechanics that ordinarily actually provided services. Customers emerged who wanted "do it yourself" relationships, while others emerged who simply had no patience any more for companies that mired them in internal production technicalities.
Effectively, in both cases the customer's punchline was: "if your I.T. doesn't make me happy, change it or I'm gone."
The hugely superior economies of keeping existing customers versus gaining new ones made the most sense of my new translation. But the implications for IT organizations were not really so new. The point-of-view on IT's operational performance just shifted from I.T.'s "internal" customers (business units) to the company's "external" customers. Internal customers had already had this attitude for a while, and everybody knew it.
Still, despite external customers suddenly getting their hands directly on company infrastructure, it seemed brutally obvious that IT organizations should not be held responsible for managing external customers. (Otherwise, what were business units for?) So the message really needing to be drummed was that internal customers needed to be better empowered by IT.
By abstracting the basic management steps to that empowerment -- resources to operations to relationships -- the model I first proposed set a floor under a wide region of research, from which several key further items grew. Among those, a major one well-rehearsed by 2002 forecast the IT Organization agenda as in the article CIOs: Managing the business's IT Agency.
Then, what brought that agenda to the level of the full CxO group was the problem of linking IT performance to enterprise performance. This problem enjoyed a huge rise in importance due to the maturing acceptance of having enterprise applications automate essential operations cross-functionally, despite hair-raising complexity in integrations and change management. While I liked referring to the celebrity of the problem as "Enterprise Chance Management", it wasn't much of a joke since it was also becoming more obvious that business opportunity was relying more and more on IT-enabled responsiveness.
Given the huge level of investment recommended by Y2K, enterprise applications, and the internet, the business need to understand the value of its IT capacity hit a high point that called for a way to put the IT agenda into a model of being managed by the business. In reply, I created (and own) the ActiveROI model -- a construct signifying the generation of business value from IT resource optimization, achieved in a continuous and proactively matured discipline. Translating the model into practice methodology, the consulting firm Renovance, LLP went to market. Renovance's elaboration of methods for applying the ActiveROI model was indicated early on in the whitepaper, "ActiveROI: Achieving Business Processes and IT Infrastructure Alignment through Real-TIme Management". (As a consulting firm, Renovance developed and offered trademarked practice methodologies of my copyrighted model, in its lines of business.)
From a CIO's perspective, the ActiveROI model describes that the enterprise's engagement with the marketplace runs on an organizational platform created by architectural and portfolio management disciplines that can coordinate IT.
But overall, ActiveROI understands performance in terms of relationships and the services that maintain them, while it understands resources in terms of events and the investments that address them. The critical thing to note is that services and investments are the two most highly discretionary offerings of the executive management of the business -- effectively defining the identity of the business that will predispose its opportunity in the market. As explained by ActiveROI, this "drills down" to the IT agenda and its business alignment.
By way of ongoing explanations and by hosting comparisons and debate, Archestra will continue to elaborate the ActiveROI model and several of its already-in-progress successors or offshoots -- including Archestra Runtime by myself, and works that certain colleagues may finalize for presentation via Archestra in the future.
- Malcolm E. Ryder, April 2, 2006
Posted by Malcolm Ryder at 9:50 AM | Comments (0) | TrackBack
March 30, 2006
IT Investment versus Business Returns
Christopher Koch's blog for CIO.com featured the post Why Defend This Metric? (Thursday, January 05, 2006). The ongoing debate about how to quantify the business value of IT stays open, and at this point it seems the difficulty in answering the question is mainly because of the way the question is asked. Consequently, the debate deserves a turn in which the analysis might force a rephrasing of the question.
If a single metric could justify an investment, it would nonetheless actually have to account for several things, but the logic of how it does that is the most important aspect. Let's drill down.
First, the goal is to arrive at a fact that allows acceptance or rejection. This is about tolerance. The fact being sought is a piece of evidence that a significant difference has been demonstrated that is rationally attributable to a particular contributor -- in this case, "a business difference due to IT". The evidence may range from non-existent to very strong. But until there is agreement on the recognition of both the type of difference and its significance, there is no actual "executive" attention to what is acceptable.
Assuming that a type of difference and its significance have been defined and agreed upon as the axes of reference, a range of tolerance can be declared. But there is no point in attempting the declaration unless criteria have been explicitly established for identifying the boundaries of the tolerance.
Assuming that the range of tolerance is properly established, events that can represent the difference in question would have to be defined, and each type of event would have to be describable in terms of dynamics that normally correlate with the event. Those dynamics might be ones that "cause" an event or ones that "allow other causes to generate" the event. Since the difference between being a cause versus a prerequisite can be quite vast, the association proposed between a given event and a given dynamic must be rigorously distinguished -- in terms of the role of the actors (means) involved in the dynamic.
The reasons that explain why the actors have the roles that they exhibit must be exposed -- to allow recognition of where any behavioral or influential regularities originate, as well as irregularities.
Finally, opportunities for directing those actors -- which is the same as to say "for employing those means" -- must be identified and catalogued so that the exploitation of those opportunities can be examined both historically and in terms of operational policy and methods.
The ability to consistently coordinate these levels of description with each other, and to monitor their coordination, is clearly more a matter to be discussed as "competency" -- and the importance of that competency is in how decisions about what to do with information technology finally translate into significant business differences.
The proof of competency is measured in terms of real-time responses to business challenges. If those responses can be expressed as "scores" (just like a double-play in baseball can be scored in "outs" or hits can be scored in "bases"), then there can be a situational perspective brought to the utilization of the means, and the way that the scores are appreciated can be associated with the money spent on the involved means. When a win seems to require lots of base hits, and investment has been made in assuring hitting competency, the correspondence of the investment to the situation is easy to accept. But failure to hit well in those situations means little return on the investment. Likewise, failure to even be in those situations means little return on the investment.
In this sense, measuring performance against situations is obviously the correct way to measure IT investment. By comparison, measuring IT costs against total business income is apparently an arbitrary thing to do.
Posted by Malcolm Ryder at 5:35 PM | Comments (0) | TrackBack
March 3, 2006
Driving IT Bang for the Buck: Evolution, Improvement, or Innovation?
When we think of effective IT spending, we're focused on making the best current use of the money, given competing alternatives or emerging options. But increasingly, the basis of effectiveness in business spending on IT proves to be in how the business manages its reliance on IT.
Sometimes we don't have enough visibility of legitimate alternatives and options. The urgency of our attention to the purpose that justifies the spend means that this lack of perspective could be left unsolved. But for that reason, a diligent evaluation practice looks for opportunity costs that should be factored in. As part of this diligence, what remains to be emphasized even more is not how the IT will make the organization work, but rather how the organization is going to make the IT work.
I.
In the full cycle of management, the business first conceives and identifies why IT is needed before it makes any other decisions. To avoid taking the need for granted, this first decision means describing the business model in terms of what potentials are granted it by available IT. That is immediately followed with a forecast of how sustainable those potentials are -- which necessarily means identifying and selecting how to make them sustainable.
When that architectural aspect is clarified, the next part of the decision cycle must create a "delivery" organization that can constructively practice the architecture. This means two things:
- establishing the sources and resources that will produce the infrastructure from the architecture, and
- establishing the processes that will link IT production cycles to business operating cycles.
At that decision stage, reliable design and reliable production easily wind up being qualifying criteria used to distinguish the various opportunities, organizations and risks that the business will incorporate as the elements of realizing of its model.
Thus, investments in their incorporation aim to relate reliability to the goals of business. That aim immediately offers a perspective from which a high-level assessment of the current business investments might be done. Normally this makes us think of metrics; but as pictured below, the main point is to allow the perspective to stage comparisons and guide questioning. Here we might just catalog known commitments by critical business goals.
II.
Those commitments might then involve or indicate spending on IT. But, as described there and below, the associated "IT investments" are not about IT per se but rather about the application of IT. We can understand the idea of "application" by considering the purpose of the IT utilization.
- At the highest level of distinction, the business goals of incorporating the opportunities, organizations and risks are recovery, health or growth.
- Within each of those goals, sub-goals are development, maintenance, and change.
- And within each of the subgoals, another sub-level features assessment, design, and control.
Consequently, it is possible to ask questions at the management level such as, "Can we control the maintenance of our health?" or "Can we assess the development of our recovery?"
These are not IT questions -- but they are questions that present opportunities for IT to enable successful management outcomes. In turn, management is focused on enabling successful business outcomes.
Taking that framework of IT incorporation as the main perspective, it is easy to appreciate that business utilization of IT is nearly always altering something -- either a behavior or a current state.
The importance of how IT is managed, though, is in how well IT supports management's ability to intentionally change how the business can behave. (From here on we'll consider "change" in this larger context.)
III.
The observation just made emphasizes that we can and should compare the kinds of value offered by different classes of change, and then associate IT's effects to those values -- as contributions.
To demonstrate that, compare evolution, improvement and innovation.
Relative to each other, these kinds of change differently affect the state of the business:
- evolution permanently modifies the fitness of the business's model to the dynamics of the environment in which demand develops;
- improvement modifies the fitness of its conduct to the current and targeted demand;
- innovation modifies the fitness of its output to the needs of the environment's population.
According to perceived conditions regarding recovery, health or growth, business executives must determine when any of these three modes of change requires higher-priority attention. A timely reaction is mandatory, but proactive change is potentially strategic to optimizing the benefit versus risk of those conditions. That may result in new or extended initiatives to create the necessary related sponsorship and opportunity, including competencies and technical support that might drive spending.
To support a proactive stance, a good device to have would be a framework for envisioning, monitoring and ultimately predicting circumstances that we can agree will signify a need for change. Not coincidentally, those circumstances have the look and feel of key ideas offered within the business justifications for IT spending. That device might look like the following:
IV.
But given those considerations, executives and managers together should ask the "big picture" questions -- for example, whether an improvement initiative is the most likely candidate to produce better recovery, as opposed to an innovation initiative. At the same time, it is important to recognize that one kind of change may be an element of another kind and acquire priority that way. After all, form allows conduct, and conduct (i.e., production) allows product. As another more specific example, innovation may accelerate evolution, and improvement may create more opportunity (security, income, knowledge, etc.) for innovation. Thus, an improvement initative can strategically foster the goal of accelerated evolution. But likewise, the requirements for supporting an adopted innovation may obsolete improvement efforts dedicated to earlier production, eliminating that legacy cost while potentially releasing resources for new purposes.
These interrelationships are characteristic observations in portfolio management.
IT management must be focused on applying IT to business operations present and future. On the one hand, it is typical that an IT budget might be evaluated in terms of how much spending goes to "maintenance" versus "R&D" and so forth. Those generic classes correspond to how IT responds to the business requests for support.
But the rollup of dollars into those classes can easily obscure the more important and time-sensitive issue of whether the right things have been selected for maintenance, or the right things are being pursued through R&D. By calling for a distinction between wise spending and merely approved spending, we get to a conversation about how management leverages IT for the business -- as opposed to mere responses. In that conversation business and IT organizations together find the logical path to measuring the effectiveness of the decisions, and to measuring how much that effectiveness was worth.
The view that unifies their concerns is not one about how "IT investments create business value", but rather one that business value subscribes IT.
Posted by Malcolm Ryder at 8:16 AM | Comments (0) | TrackBack
February 22, 2006
What Kind of ROI Do You Need?
In the table below, investment objectives (target outcomes) are laid out to identify how the organization addresses its three major functional concerns: recovery, health and growth. Growth, health and recovery are top-level categories of investment -- a portfolio-level consideration.
But the view presented in this table is meant to convey something different. It assumes that every investment is understood to be a change to the status quo on some level. Moreover, the "return" on the investment is a qualty of various outcomes that, after being balanced against each other, clearly promotes a new overall state that is preferred to the pre-investment state. This would be true whether the main issue is growth, health, or recovery, so the understanding is less circumstantial and more essential.
In this scheme, preferential outcomes pertinent to the main goal would be declared (populating the table), and the influence of the investment (which after all is a catalyst) would be directed at those targets -- making management the critical success factor of the investment.
As laid out by the table's dimensions, four quadrants identify different general modes of activity by which the investment in question can be sub-categorized. The point here is that a single investment can be influential in multiple ways. Care should be taken to identify whether the intended influence is the most likely one; meanwhile, there may be more than one significant influence concurrently.
This second general level of identification allows two important considerations. One, it offers more direct association with other organization-wide priorities already given to these different ways. And two, it invites comparing the implications of the investment in question against pre-existing or alternative mechanisms -- ones that might themselves intend to change something to the same end or by the same mode. (These might be, for example: legacy processes; organizational partners; competing proposed investments; already-active projects; etc.)
In yet more detail, the 4x4 table generates up to sixteen different opportunities for outcomes that might be identified as significant attributes of the investment's influence. Examples are easy to come by: it's not difficult to envision Standards at the lower left and Innovation at the upper right; likewise, Collaboration at the upper left and Customization at the bottom right. While those examples are not intended here to be recommendations, nor pigeon-holed, they represent a level of decription that should apply to the definition of what kind of change is likely involved in the management of the investment. That is, management should look to see how many of these sixteen issues are logically associated with the activity that the investment will catalyze, and perform some forecasting as well as compatibility and risk assessments. (Or else! We all know that the law of unintended consequences is in effect...) Knowing what the investment will support or inhibit is basic to establishing the business case fror the investment.
Overall, the table makes no assumption about how much time elapses between the present state (or start) and the target future (or recognition of the achievement goal). Not only can influences occur simultaneously on multiple target attributes, but the cycle-time from stimulus to impact can vary widely from one attribute to the next. In fact, it is again management that will both predetermine and regulate the cycle times, and management that must plan the influences for real-time accountability -- as well as reconciliation and intervention, where necessary.
Meanwhile, the table suggests one other aspect of the presumed value of an investment. For example, some investments have influence that is more on the immediate security (assurance) of the organization's economy while others weigh more on future possibilities. (The table indicates the former near the lower left, and the later near the upper right. In like fashion, other variants are indicated as well.) The table encourages us to look out for this, but in practice, it will be true only to the extent that management allows -- in exactly the same sense that a complex product will deliver its functional power only to the extent that it is allowed by its actual implementation.
The analogous idea of implementing an investment can be instrumental to understanding why the investment value should be anticipated in terms of managed change. "Implementation" is a model for controlling the influence of the investment across the various opportunities for economic impact. The picture below illustrates this idea of control, but makes it equally clear that control can be very complex and potentially very difficult.
Again, the value proposition of an investment is essentially a proposed change to the status quo. The change being pursued is a significant (beneficial) difference realized in stages (upper blue row, left-to-right) that progressively translate the difference from potential into reality. Each stage has inherent challenges to overcome, although the challenge may be great or small depending on the particular proposal and environment of stakeholders.
During that transition, issues perceived to affect the opportunity cost (associated with the investment) compete with the effectiveness of the change stages. These issues (lower blue row) may force adjustments of the change element in their respective phases, which can alter the scale, scope or logic of the initial proposal.
In general, this picture displays a principle that all value comes with risk, and that choosing value means choosing risk as well. Although not always detailed in the explanation of an investment, the built-in competition of risk factors with change progress is a predeterminant of the possible levels of return on the investment. Thus, active management is how return is generated to desired target levels.
Summarizing that active management, the four terms across the bottom of the picture, corresponding with the change phases, identify efforts in which the realization of the investment's value can break down. These terms also correspond with the four terms across the top of the picture that label the achievement objective of each change phase -- that is, what gets done without a breakdown.
In this discussion, return on investment is a phenomenon reliant on an organization's ability to take responsibility for the dynamics that create the path to deivering relevant benefits. The picture strongly reflects the experience of a manager of the investment navigating and balancing delivery opportunities and constraints. Those factors can easily be a blend of internal organizational issues and external environmental ones (markets, other stakeholders, etc.) -- which are not specified in the discussion but are not so difficult to locate in the scheme presented.
Seen as the result of a constellation of economic impacts, ROI is meaningful in the same way that the temperature of a given day or region is meaningful: it expresses a characteristic of an environment in which we might choose to operate, and it can strongly influence our choice depending on whether it inhibits our plans or not.
But the prevailing interest in ROI treats it as a specification of a building component of a protective shelter to be constructed in the environment -- and this is because we want the shelter to be the environment.
This disparity accounts for much of the confusion about whether ROI is a good measure for what should or should not be done -- because final outcomes (the reality of life in the environment) often do not match predictions. To steer clear of that confusion, the most important thing that management can do about ROI is to demonstrate what expectations about construction can logically be cost-effectively aligned with the requirements for strategically leveraging the expected environment.
This calls for managers to be the architects of return on investments -- and, well, they should be.
Posted by Malcolm Ryder at 6:19 AM | Comments (0) | TrackBack
February 11, 2006
Linking Economy to Profitability
After a five-year pendulum swing of spending to cutting to spending, we've managed to stretch across four chapters of the IT-Business relationship: Y2K, dot.bombing, BackToBasics, and now Compliance Versus TheTopLine.
In these chapters, the story of transitions also features patterns overlaying other patterns.
For example, over the phases, we'd see that:
- the role of an IT infrastructure was swinging from being a risk factor to a success factor, back to risk, and back again to success. Meanwhile...
-The business model credibility was swinging from supply-chain angst to demand chain angst, back to supply, and back again to demand.
With patterns like those to find and juxtapose, there is plenty of room for examination of cause-effect relationships in how technology evolution and architecture may have precipitated new phases or ended them.
No question, this examination must necessarily acknowledge both intended and unintended effects. Business reliance on IT is a double-edged sword and, as shown with space exploration, we get to know how to reach a place too soon-- but only later how to stay there, and sometimes almost too late.
Yet, respectful of the need for wariness, we can honestly look at each of the aforementioned phases and, with the clarity of 20/20 hindsight, see for each one the gigantic "DUH!" that shouldn't have had to be. Obsolecence, irrational speculation, anorexia, and opacity if not arrogance... all of them butt-kicking poisons from the business side, not the IT side.
Because of that, where the topic is "intention", there is another big story, too, about the glacial maturation of what must be considered "business intelligence" (BI). Although at the moment mired in the learning curves of collaboration and analytics, BI's ultimate goal of achieving a sufficiently comprehensive perspective is perhaps represented most clearly by models such as Kaplan and Norton's Balanced Scorecard and European systems for systematically including the measurement of intangible assets, such as Karl-Erik Sveiby's Monitor and Juergen Daum's. At any rate, the rush is on for businesses to actually get smarter through intelligence -- with the twist being in the emphasis on having the right kind of smarts.
So, lessons learned: while IT makes action almost too possible and makes info almost too widely available, these are relatively intrinsic qualities of IT -- characteristics that have the great potential to simply erupt without regard to management, and therefore are not reliable barometers of business value in IT. In turn, that means we can't build value management on the basis of those characteristics.
The real issue for management is not to "enable IT" to do those things but instead to harness and leverage IT's innate ability to be an enabler itself. Business management is the source of return on IT investment.
In that light, some interesting points surface:
- The characteristic dimension of the business focus on IT management is, except for professional developers, not technology development!
- Neither, despite all the rage and benefit, is "business-IT alignment" the essence of IT management's focus on the business; that is really a business management issue.
- However, abstracting and separating the business and the information technology, the common challenge of managing IT is that IT's impact on business activity is so intense. In IT's role as a business "enabler", the critical success factor is the degree to which IT impact organizes the business rather than dis-organizing it.
Business management must step through the logic of that success. The logic has at least these three pillars:
(1) From the business perspective, for IT to be nutritious and non-toxic, the basic business need is to deal with what it is about the business that IT aligns and how IT does that.
(2) The responsibility for managing IT's role belongs to the business, not to IT. Responsibility for appropriate production within the role belongs to the IT management organization.
(3) What business needs IT to do in the business, just as business needs other functional elements to do, is to align economy and profitability, so that having one of them doesn't diminish the other. The way IT does that is to optimize capacity.
I.
The way business uses IT for optimizing capacity is by modeling business management of IT's impact through processes and portfolios.
IT inherently offers the kind of speed and scale with which a business must build and sustain capacity in today's marketplace. With capacity as a mandatory "given":
- Processes are responsible for economy versus capacity; and,
- Portfolios are responsible for profitability versus capacity.
Managing the contribution that IT makes through processes and portfolios allows IT to align economy and profitability through the organizing of capacity.
The huge top-level significance of that observation is in its implications for strategy and change management. Strategy presumes to model the competitive advantage that the firm can capture from perceived opportunity, while change management presumes to stabilize organizational resiliency and thereby keep the business positioned for opportunity. But in the effort to balance risk versus value, strategy reflects demand, and change management reflects supply, while neither must actually include financial optimization to be logically valid. The fact is that they both are simply designs that are fully able to get "their" jobs done while being benignly neglectful of financial stress. The organization actually has to figure out whether it can use these designs, but if it can't use them it doesn't mean they are broken; rather, just inappropriate.
Thus, with IT being such a dramatic enabler of both strategy and change, managing IT should in particular target helping to fit the strategy or change to the organization's terms of self-sustainability. In this regard, Process helps ensure that capacity is effectively useful, Portfolios help ensure that capacity is effectively directed, and IT supports both of them to get it all done.
II.
One analogy for this is that capacity is the "stored energy" or "battery" of the business. IT is what charges the battery. Consumption of that power is where processes do their work (economy), but the application of the power is where portfolios do their work (profitability).
By another analogy, processes make capacity into skills, and portfolios make capacity into value commitments. Furthermore, between those two, management creates behaviors, from which actual outcomes derive. Since the behaviors can either propagate or negate the potential of the skills to address the commitments, the benefits of skills (economy) may or may not apply to the opportunity represented by the commitments (profitability). Business management, through generating behaviors, makes the link, using decisions to deliberately leverage the skills for the commitments. IT supports that management, by literally incorporating the decisions -- that is, by making them "actionable" (functional) and thus producing behaviors.
In short, IT must produce resources; managers must deploy them, and the business must commit them. This perspective guides the assessment of IT's relation to both performance and return on investment. IT-generated capacity can give managers of business behaviors more options, but the value of the capacity is not created by IT -- rather, by the business modeling of both the consumption and commitment of the capacity. High performance presumes successful execution of good models, but meantime the models must be relevant to the strategy. Finally, strategy must be sensitive to the possible capacity that IT can generate, without arbitrarily "assigning" value to the possibility.
III.
In what follows over the next several iterations of this document or in other followups, we can illustrate that concept in more ways, as well as more specifically. For example, business process management (BPM), business intelligence systems such as configuration management databases (CMDBs), and performance knowledge systems like operational performance management (OPM) bring implementations of information technologies to more directly bear on the model-oriented management that optimizes capacity.
But the immediate general statement to be made is that the business needs appropriate capacity to address its desired opportunity; and it uses IT to provide itself with not just capacity in general but specifically with appropriate capacity.
Understanding business from an IT perspective is of vital importance to IT providers who must come up with useful resources. In that regard, superior architects power superior IT providers.
But more important is the flip side: understanding IT from the business perspective means understanding what business management decides to do with IT. IT management must take its direction from business management. The directions it takes are mapped out in processes and portfolios.
Posted by Malcolm Ryder at 7:52 AM | Comments (0) | TrackBack
February 1, 2006
The Enterprise Logic of IT Investment
Managing the enterprise features such a high degree of complexity because by its nature the enterprise tries to grow amidst enormous possibilities of internal and external change.
The internal health of the organization, and the external growth of the business, both rely on great systemic coordination.
The overall view of the related dynamics is often shifting or obscure, and in learning to cope with the variations the enterprise focuses on how to adjust to the moment in ways that aim to sense future conditions and engineer future events.
The combination of increased awareness and increased ability protects its prospects for continued health and growth.
Visibility and controls are strong proactive correspondents to the desired awareness and ability. The enterprise's proactive stance on protecting its future opportunity is reflected in its vocabulary and institutions. It propagates its stance mainly through communications and procedures, and it formalizes those means in the way it promotes and tolerates management. But then it defends that formalization, and implements it, by deploying IT.
The high-level description of that enterprise management is fundamentally the same for most enterprises. In the following picture, the essential storyline of enterprise action is shown as a matrix of management topics that describe how the enterprise systemically associates its action with its expected challenges and desired outcomes.
Notes:
All of the terms in the illustration can be prefaced with the word "business". This is because the purpose of the idea or concern that each term represents is to support the business. As an example of how this applies, however: if "requirements" in the IT arena are under consideration, this illustration is about what the business needs to get from those requirements being handled in IT.
1. The semantic separation of Performance, Execution and Operation is crucial to understanding how the organization and its stakeholders recognize opportunities to affect the future. The table shows that each perspective has its own type of goal. Understanding the differences between the types of goals is superficially easy, since they tend to come from different sources. Only for example: standards may come from experts; requirements may come from partners or customers; and targets may come from executives or investors. If a change occurs to one of these goals, the point is to realize where it will have impact. Change to Standards will affect production. Change to Requirements will affect execution. Etc.
2. The Benefits column shows what the activity is intended to be all about. Additionally, it shows the critical linkage provided by process management and portfolio management. These two disciplines create the channel that converts operational investments into managed impact on business performance. (Shown in the Benefits column, the two disciplines are placeholders for the artifacts that they also represent; the enterprise typically wants to achieve and improve processes and portfolios as negotiable products or holdings, not just use them as conceptual models or tools.)
3. The difference between Production, Progress and Achievement is as follows: production is the shape of the activity; progress is the output of the activity; and achievement is the significance of the output in the context of what the organization is trying to deliver to its stakeholders. All three of these are factors that may be individually found "positive" or "negative" compared to expectations or plans. But that status may or may not directly correlate with the actual effect that the factor has on the economic prospects and risk prospects. The "systemic" nature of the enterprise is that success on one level increases the likelihood of sustainable success on the level above it. Negative factors decrease the stability of the enterprise, making it less able to proactively maintain suitable levels of desirable influence on future conditions.
4. Economic Prospects can be understood both literally and figuratively. To make this point clear, first assume for the sake of argument that all activity is about dollars. In this case, economy is about dollar consumption; capacity is about how powerful the available supply of dollars is versus spending needs; and profitability is about how many more dollars of better-than-previous-power have joined the supply. But in a second case, assume that all activity is about a different asset, such as "knowledge". In this case, economy would refer to the percent of the retained knowledge that has frequently high practicality; capacity refers to how much of it has frequently high relevance; and profitability would refer to how much more of the knowledge is usable by how many more users, compared to a previous time or population.
5. Risk Prospects identify the primary source of challenge to what the activity is trying to control. There are two kinds of comparisons to see here. One kind compares the Risk to the Measures, illustrating that the momentum and probable success of the as-measured activity is very sensitive to the risk. The other kind compares the Risk to the Benefit. The variability of the risk factors can alter the level of benefit and/or alter the degree to which the level of benefit matters to the economic prospect.
Posted by Malcolm Ryder at 2:42 PM | Comments (0) | TrackBack
January 24, 2006
The Creative Differences of Licensing
Ed Foster's Gripelog struck a loud sour note regarding the surprising and sometimes crippling difficulty of handling software licenses when the machines that run the software change. The gist of it is that licensees discover little to no "ownership" privileges, suddenly. Fair to say that the level of outrage against aggravating vendor pratices is a good working exhibit of "contempt".
But the issue is controversial because there is more than one way to look at it.
"License" means "permission". Unclear licenses are bad; deception is unethical; but that said, as for the presumed right to use software, the whole issue is about the fact that the owner of the software *grants* all the rights.
None of the following is about blaming the victim. BUT... the law says that the owner can charge more for granting more rights, and the law does not prohibit us from negotiating.
So at some point we have to come to grips with the fact that when we use a business to satisfy our needs, the satisfaction will take place on business terms. We have to avoid getting confused about what is unsafe as opposed to what is highly inconvenient. The level of support that we want is our responsibility to declare before we buy.
That still doesn't rescue us from predatory businesses, but we don't think skipping down dark alleys is very smart, and the standard is really the same when it comes to licenses.The best time to be aggressive versus a business is before we buy. Prevention costs 10% (or less) of the cost of a cure.
Flexible product configuration is not always convenient; sometimes it's a desirable opportunity but that doesn't prevent it from being an unacceptable risk
Posted by Malcolm Ryder at 9:04 PM | Comments (0) | TrackBack
January 13, 2006
A Brief Survey of Gain
Why is it so often the case that when you get what you asked for it isn't what you wanted?
The easy answer is probably the correct one: you didn't ask for the right thing. Setting aside all matters of blame, the more important two points to consider are:
(1.) Why did you ask the way that you did? and...
(2.) What other way might you have asked?
An especially strong focus on this situation comes through using a portfolio manager. The amazing advantage of a managed portfolio is that it (normally) contains within it the logic that explains two things:
- how it is that what you ask for turns out to be what you want, as well as...
- why it makes sense to want what you need.
I.
Anyone raising children should be able to immediately appreciate the profound difference in the house that would occur if their kids had those two habits! And joking aside, this is really to the very point of portfolios: they implement maturity in the perspective on investment and gain.
A major ingredient of this maturity is the ability to distinguish different levels of commitment and expectations, and to logically match up commitments and expectations, consistently.
We can readily see this in the language that is typically used to describe events and conditions related to expectations and commitments -- but the irony is that in the heat of action we often lose our bearings and mismatch them:
One immediate "finding" from looking at the vocabulary is that it's a good idea to not confuse expense and cost -- and likewise to not confuse value and worth. By looking at what each of those items "will give" (third column) we can see that there's a difference and that one must ask for the right thing.
Our vocabulary chart seems to have a lot of redundancy in it, but one of its main points is to show that in a given situation we might easily think about gain in one way yet do something about it in a different way. What's the difference between why (before the fact) we pursue something and how (after the fact) we evaluate it?
II.
Another problem lies in potential confusion of what kind of commitment is being leveraged to serve the current purpose. Let's look at expense versus cost. What if, under the purpose of offering products or services, we're asked to "hold down cost"? That's not the same thing as being asked to "hold down expense".... Is something that is expensive necessarily costly? We can start to see in the vocabulary that the answer is "No" -- because the acquisition allowed by an expense might be something that greatly increases benefits, through ownership, and the benefits may be redeemable to lower overall cost.
Example: a person finds that a better car that is more expensive has reliability that, by allowing safe and flexible commuting over longer distances, increases opportunities to work for more money, which in turn can be used to lower outstanding debt or otherwise come to a better net balance. The reverse: a very inexpensive car has bad reliability, spends too much time not working well, and poses frequent risk and other limitations to reaching and keeping better work. Worst case, losing the job might also mean losing the car. In this latter scenario, "inexpensive" turns out to be pretty costly.
Such relationships start us thinking up the chain from expense to worth. How do we drive "good" value with cost? How do we drive "good" worth with value?
III.
On that point, what is the difference between worth and value? Simply defined, value is "a significant difference". But what is significant to one party or situation may not be to another. Worth puts the value in a context. Something may increase in value, but is the additional value producing high-priority benefits?
Example: a product or process might improve, but if it is not being used any more frequently by any more people then its additional value is not worth much. Different example: a party is trying to prove that a new approach is viable in a task; here, if the task outcomes show the slightest bit of improvement over the usual, that validates the approach, so that tiny increase in value has tremendous worth.
These are ideas that are not so much unusual or even news to us. Instead, the problem is that we often allow our familiarity with them to be sidestepped by decisions and actions that for some reason prescribe to notions and expectations that are not nearly as logical.
IV.
Observing a more rigorous vocabulary helps to clarify thinking. For example: if we think we need something to be valuable, we should know that what we are after is some kind of impact. This impact may or may not have anything to do with expense. But the point is that pursuing greater value does not automatically necessitate lowering (or raising) expense -- so we shouldn't expect expense to adequately talk about value. In some instances it might work out logically that expense will be a key factor of the opportunity to increase value, but that would be determined as a characteristic of the particular occasion for value-pursuit, not taken as a default principle of generating value. (Question: what does budget-compliance tell us about whether operations were effective? Answer: if anything, not much.)
Other scenarios as well should be more carefully understood. For example, can something that is very costly also be very worthy? Sure -- this is characteristic of the response to many emergencies, and in those cases it probably is true because whatever is very costly is also sufficiently valuable. On the other hand, we don't want everything to be an emergency, and it makes no sense to impose an evaluation system for emergencies onto non-emergency situations. Yet meanwhile, one situation that is not an emergency but is simply relatively "extreme" is common in the marketplace: it involves super-costly products (like the highest-end street-legal cars or virtuoso solo pianists), which virtually create business that otherwise would not exist.
Naturally, this thinking must also address ROI (return on investment).
Looking at the vocabulary chart, we see the left-most column naming commitments that "pay back" in accordance with objectives listed two columns to the right. When commitments are made , "returns" should be represented by the benefit provided towards the objective.
There is no special reason why the objective should ever be displaced as the reference for assessing the effects of making the commitment. However, this involves more than the benefits.
Following through with a commitment introduces other issues that, if tracked and weighed, might have characteristics that discourage or encourage a decision to make that same commitment again in the future. Knowledge of similar previous experience -- even that of other parties -- could have the same influence. It might therefore be that the "burden" experienced in certain commitments would compete with the basic objective in the process of justifying a decision to commit. The burden might set tolerances or precedents that must be forecasted and addressed "satisfactorily" before the follow-through is allowed to commence. Over time, attention to these "qualifiers" can dominate the perception of certain types of commitments -- especially for those that are recurring ones. A symptom of this is when the attention to the commitment is more about whether, compared to "the last time" or "usually", it is expected to be less problematic or moreso.
The execution of the follow-through to the commitment is a serious subject, but it still should not substitute its performance issues for the real objective of the commitment. If it does, it distorts the calculation of ROI.
V.
Instead, the objective is supposed to represent that a certain need has a sufficient priority to mandate supporting execution. The delivery of benefits to the objective should be assessed in terms of how much it helps the objective.
There may be competing objectives, however, and a limit to the overall capacity to address them all. So the correct way to approach things is to first decide whether the particular need is, at this time, really one that should be addressed -- and secondly, how aggressively it should be addresed.
In a portfolio, the corresponding move is to include or exclude investment categories in the portfolio. A category (which represents a need) has an objective, and investments are made within the category to help achieve the objective. Within the category, some investments made are better than others, from one time to another -- having to do with how effectively the selected sources of contributions to the category are executing as contributors.
By careful selection of contributors to carefully selected categories, we set up production of benefits that achieve objectives. But as cautioned in the vocabulary above, we need to be clear about what it is that we are really after, in order to ask for the right thing to make it happen.
Posted by Malcolm Ryder at 9:47 AM | Comments (0)
January 7, 2006
Execution as "Progress": The Four Types of Value in Performance
Here's an odd thought: if "execution" didn't change anything, then we wouldn't have to do anything to get where we want to be.
We just might not have any idea of when we'd get there.
But to know whether execution matters, it's mandatory to accurately determine whether progress is being made towards targets.
Experience has shown there's more to the problem, though: the target might be reached, and reached in the prescribed way, but the impact of that achievement might still not make the difference that was actually needed from the execution.
For getting the big picture of what matters, the most important issue is to know whether the right targets are in place. Having the big picture means knowing that the efforts thought to be "progressive" are solving the right problem.
I.
"Progress", a measurement of performance, is the concept that drives most management decisions about whether execution is "effective".
In practice, a target level of achievement is set, and "performance" pertains to the actual level obtained as measured against the target. Management continually adjusts execution to approach the target.
What a target really represents is a threshhold of change at which some necessary value is expected to be obtainable or obtained.
In other words, the target points to a working hypothesis of what kind of conditions need to be altered in order for the performer to intentionally arrive at a desired future state.
Granted, when things are going well and execution is usually reaching the target, the mentality about conditions is not so much that they are being "changed" as simply driven... Nonetheless the true importance of the target is that it originated in an awareness of some unwanted (if not harmful) condition that would likely prevail unless an effort was being made to change it for the "better"... That awareness is, after all, the motive.
But targets have a funny way of suppressing (or replacing) our memory of that baseline.
And from that point, the means go on to grab attention. Both the specific form of effort and the mode of the effort are variable factors in bringing about the change.
- By form, we mean the manner in which the effort practically incorporates the capability of resources and actors. For example, automation and manual labor are different forms of effort.
- But by mode, we mean the general but characteristic strategy of alteration being pursued by the execution. For example, persuasion is a different mode than force; gambling is a different mode than saving.
A forgotten motive and variable means can make the message in measured achievement deceptive. How does the performer know that the results this time are, through the same means, repeatable and relevant in the future?
II.
While measured against targets, execution is typically monitored in terms of actions versus requirements. Usually the actions are accompanied by attention to their associated risks and rewards. Management makes discretionary, circumstantial decisions based on tolerable balances of risk and reward.
But when we understand that the essential problem for execution is to change conditions, we can understand execution decisions more strategically -- as a matter of connecting choices (e.g., of resources, operations or relationships) to needs (which are what sets the context for strategic value).
From a strategic value perspective, we describe "progress" as being the satisfaction of need.
Thus, in considering the value of performance, one of the first key questions to address is, "what type of need is the desired future state presenting?" Getting the need properly defined must precede decisions about how to execute.
Then, needs are met through changes wrought by execution.
III.
Here we must look at the business as a performer, and at a way to generalize the concept of "needs" into practice.
The performer has four basic ways that it can address the environment in which it operates. These ways -- or modes of progress -- are used as working categories of opportunities that the performer thinks it must have in order to arrive at the desired future state:
- transform itself (e.g., transcend the environment)
- comply itself (e.g., match the environment)
- exploit circumstances (e.g., master the rules), or...
- adapt circumstances (e.g., change the rules).
Put simply, execution has no value per se, but instead is responsible for making those four things occur, whichever of them is selected as offering the best apparent likelihood of reaching the main goal.
IV.
In making that selection of what to execute for, we factor in necessary capabilities, thinking about the two basic ways that anything influences an intended change -- as either an inhibitor or a benefit.
What we want to be able to see is how different circumstances would inhibit or benefit the change needed for gaining the desired future state.
On the one hand, the means of execution are circumstances that will directly impact the intended change, so visibility of means is important to describing how the execution effort gets to create value.
But due to management, the most immediately significant circumstances around the execution effort are dictated by an objective that is attached to (and justifies) the effort. For example, supervision, resourcing, support and approvals are all aligned around the effort in order to make it bear directly on the objective successfully.
Speaking at the highest level of generality: when the purpose is to "improve" on a current state, the business as a "performer" has at least four objectives to work with.
For pro-actively generating value from the change-effort, the performer might...
enforce these:
- regulations (esp. involuntary); and/or...
- standards (esp. voluntary);
and/or develop these:
- modifications (incl. discretionary), and/or...
- new options (incl. contingent).
Generally, these four approaches tackle what are initially constraints on the current state. But they may be pursued with a special understanding -- namely, through execution the constraints can be exercised as opportunities.
That allows us to see the constraints as success factors for progress, but we have to answer the question, "for what kind of progress?"
V.
Answering that question, the framework below first assumes a "worst case scenario" about change, which is that change is usually going to be ad hoc, arbitrary or chaotic, unless explicit management is applied to it.
Considered against that assumption, management can generically distinguish each of the four approaches to execution. Each approach has a characteristic "default balance" not of risk versus reward but instead of inhibition versus benefit that it is expected to contribute to the performer's intended change-effort.
Through their typically lower or higher contribution of inhibition or benefit, the four approaches are positioned relative to each other in the framework. With that done, the illustration also maps them to the four basic modes of progress (i.e., types of value) available to the performer. In doing that, it suggests that each different approach "naturally" makes a contribution to certain types of value.
Likewise, certain approaches appear to be more appropriate to or successful for certain kinds of problems, while less so for others.
For example: If the performer can decide that the desired future state requires transformation, then "regulations" are less likely to be the place to look for key solution elements. However, transformation requires low levels of inhibition. And "modifications" are significant to transformation, while "options" are more aggressive.
The main purpose of this framework is to illustrate a mentality that allows logical analysis of how execution and value are linked. For certain managers or organizations, the details such as the four proposed modes of progress or execution approaches might be debated or even replaced with other items more closely matching their experience. But the most important management consideration with an overall view like this is that execution is in fact establishing a type of value that is truly relevant to the desired future state.
VI.
Supporting the desired type of value with execution comes with one other wrinkle. Each quadrant of the above framework offers a constraint to convert into an opportunity, but the conversion itself has a "default" or generic quality, which characterizes the quadrant's different approaches as follows:
- upper left: "conservative"
- upper right:"ambitious"
- lower left: "statutory"
- lower right: "radical"
This observation would be just a footnote, except that often the approval of execution plans is dependent on the political climate, habit or other tolerance that decision-makers have for certain styles of pursuit. Those issues could improperly insert themselves into the situation as the main reasons for "why" something should be done -- displacing the value proposition that identifies the performer's real goal or what outside observers would call "real progress"...
As a result, properly managing performance must include an aspect of assessment that first objectively describes the logic of the selected approach in terms of the value-goal, and only afterwards describes the feasibility of sustaining the approach. In that way, the most opportunistic or emotionally desirable approach might even get ruled out, but it is always more likely that the correct approach will be identified regardless of how difficult it is to execute. At minimum, this will prevent costly commitments to solving the wrong problem.
Posted by Malcolm Ryder at 6:49 AM | Comments (0) | TrackBack
November 11, 2005
Needs Are Not Requirements - A Failed Romance
This week, as in many others, our customary readings intersected in a question of whether business is the best way for customers to get what they need. Answer: maybe not!
In a handy coincidence, Joshua Greenbaum wrote that customers hate their software vendors, while Richard Snow wrote that vendors don't understand their customers.
It might be said that customers pay for a satisfying relationship without having the wherewithal to manage the relationship successfully. Here we have to separate the idea that the customer gets what they demand from that of their getting what they want. A lack of customer satisfaction is about needs, while getting what they are entitled to is about requirements. Unfortunately, needs and requirements are two different things.
Posted by Malcolm Ryder at 8:15 AM | Comments (0)
October 22, 2005
How to Spend Money
Managing money well always has the twin peaks of using a little to get a lot. The big aggravation comes from finding that standing on one peak so infrequently gives a clearer view of the other peak. And naturally, we find it difficult to be in two places at once.
Forced to choose? Most managers would say "no"... but mainly because the rule, not the exception, is that you lower costs first. This makes investment seem like a mindset you get to only as a reward for cost reduction -- literally, an afterthought. Other managers might say that the investment attitude (flirting as it does with innovation and uncertainty) is too frequently incompatible with their responsibilities to ensure efficiency and quality. Finally, it is not always yet too often true, that the issue of investment is boxed into the idea of research and/or development, under an umbrella of expectations where "losses" are decreed "acceptable" because they haven't reached "live" operations...
But daily management is not best simply cleaved into incompatible philosophies or unrelated departments in detente. Managing the relationship of cost to investment can be organized by starting with what they have in common, then proceeding with what their differences contribute.
The common operational aspect of cost and investment is that they are both a type of "expense"... The challenge is to have each type of expense translate into performance for the organization. While the expense perspectives are cost and investment, the performance perspectives are planning and operating.
As shown in the picture below, there are basic forms and subjects of management attention that could, but may not, characterize the translation in most organizations. Among them, the most important point to note is the general emphasis on assets that typifies cost issues, versus the emphasis on resources that typifies investment issues. From there, it is easy to recognize that the cost perspective works on an operating objective of minimizing the risks of asset availability; investment, meanwhle, works on maximizing the benefits of resource capacity. Naturally, this is expressed through a concern for cost recovery on the one hand, and investment returns on the other -- which sets up different viewpoints on the common significance and use of any "income"... But here, the more direct observation is that the expense objectives are operationally defended, proactively or even preemptively, on the cost side through allocations and on the investment side through assignments.
Management normally proceeds with an assumption that operations are directed according to plans, and this directive effort initiates with objectives of its own. Our framework shows that sensitivity to assets and their allocation is incorporated quite differently from sensitivity to resource assignments.
But this visibility offers some diagnostic advice regarding a rational relationship of cost and investment. For example:
- In general, moving expense management from planning to operating stages means anticipating impacts, while moving from cost to investment expresses productivity.
- When assets are placed into service as business resources, managing their service (responsibility to assignment) is the primary point of view on establishing their value. Accounting will not be an appropriate mode of analysis for validating benefit, and authorizations will not "cause" a benefit increase even though they may be a prerequisite of it.
By presenting a more carefully distinguished view of the forms and subjects of management attention to expenses, this framework also suggests a very careful re-examination of common notions in the organization like "cost justification" and "approval authorization" in order to determine whether their accepted use and meaning is really logically effective for managing expenses to the current strategic objectives.
Posted by Malcolm Ryder at 4:30 PM | Comments (0) | TrackBack
October 10, 2005
Charging ahead with the "Returns" on Investments
As business people in complex organizations, we've reached the point where we accept without argument the idea that change is a business constant. But when it comes to actually being prepared for change we still too often literally manage to be our own worst enemy. Unless re-examined specifically in terms of change, what we do can prevent or contradict what is necessary to satisfy need.
Getting in the mindset for constant change means figuring out how to be both flexible and agile; that is, on the one hand it's necessary to have many ways to handle a given situation, while on the other it's necessary to be able to handle many different situations.
Most of what we think of as "organization" is concocted to address those two issues. It's as basic as formulating the team to put on the game floor, in a way that anticipates the range of situations expected in the game. Several players may have to fill the same role, and any given set of players have to face a variety of problems.
So it's not surprising that organizational design - whether as processes or workgroups -- has taken and kept a planning spotlight continuously since Y2K, the onset of this period of relentless change.
The more critical the capabilities of flexibility and agility become for handling situations provoked by competition, the higher priority they must have in the range of investment opportunities.
But during this same period, the need to "optimize resources" has been equally urgent. Optimization has always really meant that somehow all resources must be managed in a way that has them doing the right thing at the right time, as continuously as possible. The major point of difference from earlier efforts in the period to later ones has been:
- how to define "the right thing", and
- how to associate the right thing with a presumed resource, without disrupting the progress of things that the resource had previously been supporting.
The first of those two items distinguishes entire businesses from each other.
However, the second of those two items presents a special political complexity very common across all different businesses. Often, the status of an ongoing business plan or situation is that "progress" is rated as sufficient while the "goal" or subsidiary objectives of the effort have not yet been met. Since resources are typically allocated through justifications based on earlier established goals and objectives, changes provoked by new priorities seem to violate the ROI of earlier commitments.
The tension between earlier projected ROI and new priorities encourages an expanded notion of what is meant by "returns". In circumstances of constant change, adaptability hovers above current business as a critical success factor and therefore must be dealt with as a fundamental need that generates followup organizational requirements. From that perspective, goals must be understood in terms of value gained amidst change, but likewise the capacity of the business to continue pursuing goals amidst change must have equal importance as an achievement.
Continuous change means that "progress" is still the center point of the view on investments -- but it is not simply boiled down to the effective refreshment rate of equivalent consumed assets. Progress calls for the subtle shift in thinking from "managing investments" to "managing returns."
If progress is measured against goals but also (and equally) against capacity, then the principle behind managing "returns" on investments should be based on relevant gains made in an approved manner. The question around this is one of how much it matters that the business is predicated on committment to that principle -- and the answers will likely reflect the differences amongst stakeholders.
A focus on compatibility with the appropriate manner of gain can easily be strategically prioritized across all stakeholders as protection against the risks to agility and flexibility -- and what we're finding now in the field is that it's not an optional move. For example, internet security and Sarbanes-Oxley are major re-organizational influences dictating the "manner of gain" behind business performance. They shine brightly as changes in the environmental tolerance of certain business behaviors -- and "mismatched" behavior can quickly shut down the possibility of leveraging the new opportunities that the business may have spotted. Other risks to agility and flexibility include inconsistencies in procedures, communications, and analyses -- which create availability, readiness and competency problems that prevent or disrupt the chance to engage opportunities. That explains why standards, certifications, and other capability maturities also qualify as valuable "returns" or investment objectives.
The idea of risk-weighting progress thus provides a rationale for the principle of balancing current opportunity "expense" against future opportunity "cost". But the problem remains to select the future opportunities.
Ordinarily, we get into probability assessments to develop a picture of the future environment and landscape, and therein to assume and vet certain opportunities. But without the proverbial crystal ball, establishing readiness now for future opportunities means focusing on categories of opportunity rather than on specific events, and focusing on essential competencies needed in the categories rather than on specific goals or effects. A category-level understanding of opportunity provides enough specificity to associate certain types of resources, yet provides enough generality for current resources to stay directed at today's requirements even while positioned meaningfully for the future.
To play out this stance, management can embrace the linking of resources to categories through integrating architecture and portfolio management practices. Meanwhile, investment techniques such as "real options" provide a superior logic to the conventional perspectives such as NPV, and allow organizations to understand the real source of ongoing value generation amidst change.
Posted by Malcolm Ryder at 7:48 PM | Comments (0) | TrackBack
September 18, 2005
IT Economic Impact Management
ROI continues to be interpreted in a variety of ways. The main reason for the differences is the variety in the definition of stakeholders and of beneficiaries. Users and providers are both stakeholders, but because IT is not accessible except through implementation, users must actually spend on the current and future effectiveness of both the IT deployment and the IT use. Deployment and use usually involve assumptions and concerns about how scale and scope can be exploited, and spending will take place on developing and defending those aspects. The key issue is whether the spending is both smart and well managed -- and the challenge is the complexity that characterizes utilization of most implementations in distributed, heterogeneous operations environments.
What becomes increasingly important is to understand where and how dollar inputs affect the states and events that have direct consequences of economic significance. The table below identifies four major areas (columns) of leverage by which economic impact can be optimized. Each area can be addressed individually; but the combined spending improvements of multiple areas allow more effective overall throughput of investments towards beneficial conditions having economic importance. While the reality is that high benefits can accompany high risks, most organizations want agility and continuity from an ability to minimize risks that divert attention and resources from pursuing benefits. In that regard, the economic throughput of spending-to-benefits can be seen as a combination of lower erosion and misdirection of investments during the lifespan of the dollar commitments aimed at fueling benefits.
Posted by Malcolm Ryder at 7:18 PM | Comments (0) | TrackBack
September 1, 2005
The Cost of Value
Walk into a meeting, say the word "value", and tally up the other words that people thought you meant.
If your results look like this:
- profit
- performance
- ROI
- economy (as in economical)
- impact
then you already know why the next thing you say about value might easily split the audience into different groups. This split readily occurs based on how much their concerns are:
- goal-oriented
- process oriented
- resource oriented
The interesting thing to note here, though, is that each group at the meeting actually blends together some level of sensitivity to each of those three concerns, and it's the blend that makes the difference in how they understand you when you say "value".
I.
As articulated by the picture below, the blending shows up in the form of three main questions or "attitudes" that people bring to discussions of value. Essentially, what happens is that new ideas that claim to have value are considered in light of what related changes to current affairs are thought to be requested. The three questions are mental placeholders for the assessment of the current affairs:
1. What should we be doing? This looks at the list of current obligations and questions things in terms of priorities.
2. How are we doing? This looks at the way things get done and questions whether those ways -- capabilities -- are effective enough (successful and appropriate).
3. What could we be doing? This looks at whether the assumptions that have driven current choices for engineering benefits are still more logical and exclusively relevant than other credible assumptions that would also represent opportunity.
From the picture, we can also understand how discussions can quickly focus on certain "levers" such as:
- how costly is a resource?
- how risky is a process?
- how beneficial is a goal?
These levers typically show up as hot-buttons -- "justifications", "success factors", and/or "criteria" -- in the consideration of a proposal. Our picture also shows that each lever (such as "cost") easily gets a shared audience (in the case of cost, both the "commitments" and the "progress" crowd). It is not always the case, though, that the audience identifies its shared concerns as readily as its differences.
II.
Addressing multiple stakeholders with a single proposition means investigating shared concerns as much as possible; having a logical approach to doing that should make the problem easier to solve.
But if we go back to the list of those synonyms provoked by saying the word "value", things initially seem to be all over the map.
To sort this out, we can use simple working definitions of each synonym, and use the definitions to map the synonyms to our picture.
- performance: a measured level of achievement towards a target outcome
- impact: the measured difference between the quality of the current state and the quality of the proposed future state
- profit: a net gain in assets beyond the total allocated cost of effort.
- ROI: the difference in resulting assets between the proposed consumption of a resource and the current consumption of that resource.
- economy (as in economical): the efficiency of converting a given level of assets into a given level of resources.
As we now see, some of the terms -- profit, ROI and economy -- are actually types of the other terms -- performance and impact.
Furthermore, performance and impact both refer to the change that has occurred between the current circumstances and the projected or forecast circumstances. They are generally similar. But we can see that performance is really a context-specific description of impact.
In the typical Archestra terminology, "value" is identified as "the importance of the difference". The point is to determine whether the proposed value will test "positive" for being not just "different" but "better" than what is already in hand. The different audience perspectives explore the idea of "important" or "better" in respectively different ways:
What type of "resource" is consumed or created?
- does it increase conformity to obligations?
- does it decrease obligations that are liabilities?
What is the significance of having the new kind of resource versus the old, OR of having the new mode of resource consumption versus the old?
- is it more manageable for the current efforts needing resources?
- does it enable a new or alternative effort
How does that significance logically support the desired future state?
- does it make the path to the future state easier or safer?
- does it provide a path where previously there was not one or where in the future there will need to be an alternative?
III.
Now it is more apparent that the range of issues under the topic of "value" covers a lot of ground that is not crossed by counting money.
But because so much of business is predicated on having the assets necessary to fuel future effort, the overall sense of value typically "rolls up" to an estimation of the change of assets. In fact, it is usually the case that the shareholders of a business will tolerate a wide range of goals and even frequent change of goals as long as the change of assets is "profitable". Perhaps unscientifically, both economy and ROI are assumed to always be underpinnings of profit unless proved otherwise. This finance perspective is in high contrast to the main issue for stakeholders, which is that the way the business does things should be consistent with protecting the operational effectiveness towards the goal.*
Consequently, it seems that shareholders are much more tolerant of change than are stakeholders.
The generalized implication is that when "value" is proposed in terms of effectiveness, stakeholders perk up to catch clues about capability; when "value" is proposed in terms of "advantage", shareholders perk up to catch clues about opportunity.
Although distinct, the points-of-view are not mutually exclusive. In fact, as our earlier picture shows, the factor in common across those two groups is "risk". Although everyone knows that it takes money to get anything done, when the subject is "value" the sense of a related cost is not so much about dollars as it is about the tolerance of uncertainty.
In short, the "cost" of value is risk.
* See an outstanding discussion on stakeholder versus shareholder orientation, in an article about "social enterprises" called
How Organizations Create Social Value, by Manda Salls.
Posted by Malcolm Ryder at 6:27 AM | Comments (0) | TrackBack
August 29, 2005
Balancing Governance and Strategy with Portfolios
I.
Old-timers and enthusiasts in the camera buff crowd know about the old twin-lens cameras. Back in the day, the camera had two lenses. One lens let you see what you wanted to take a picture of. The other lens let the film see what it was going to take a picture of. The problem was that because the lenses were in two different places, the film didn't always see the same thing that you saw; and the proof of that would come up in the actual picture produced.
If your business is spending a lot of time looking at things through the lens called "ROI", what follows below is for you.
II.
Strategy would be pretty uninteresting if it didn't promise to enhance the state of the business.
Of course, a lot of things can fit under the umbrella of "enhanced states"... Typically, strategy talks about a future condition making the business either more immediately valuable or more secure in its ability to become more valuable. So naturally, the circumstances that strategy tends to address include business inhibitors to resolve, or business opportunities to exploit. The business idea of value is in managing those resolutions and exploits in the desirable direction.
None of this is news, but sometimes it helps to restate the obvious as a way of bringing a line of thought back into focus. This is a good thing to do whenever discussions about something press the notion of that "something" being "strategic" or not.
Did someone say "value"? Much of the time, business discussions decide that something is strategic if it delivers "ROI" -- or at least the assumption is that it better deliver ROI if it is strategic.
This view makes it seem practically easy to distinguish the non-strategic from the strategic, while it allows that the problem of actually determining the ROI might still be a bit gnarly. But a neglected problem, in practice, is that at this very point in the train of thought people too often forget that the actual strategy might be pretty complicated, too.
Why is this a problem? Because, without the framework of the strategy, it is too easy to mistake ROI for actual strategic value. How can that be? Easy: the only payback that is by agreement "strategic" is payback that promotes the objectives defined in the strategy -- yet not consulting the strategy won't prevent getting a payback anyway.
One of those lenses -- ROI or strategy -- is going to generate the picture you get, regardless of what the other lens sees. The trick is to put them in the right positions, and try to get them to agree.
III.
The real point of the exercise for projecting ROI is to maximize approval of the affordability of whatever effort is made. If "strategic" approval, or strategic justification, is the name of the ultimate game, then we must insist on being able to recognize value even if the net cost of the effort doesn't reach zero.
Through example, let's look closer at what this really means. Often there is a set of efforts that are just called "keep the lights on" efforts. These are not usually considered to be "strategic" efforts, although no rational executive would allow them to be ignored -- because of course if the lights are out then nothing else is likely to get done. Clearly, keeping the lights on is critical, and the value of doing that is enablement of something else. But what is the ROI of keeping the lights on?
The point is that ROI is an idea that should "inform" investment but probably should not dictate it. Something more important than ROI should be in control... namely, value. Meanwhile, the main thing to care about regarding investments is that a strategy must be invested in or it likely won't be realized.
IV.
Investments are commitments, so they link the strategy to the reality of managing the business.
With that said, the investment portfolio jumps into the scene.
But what is portfolio management? In "ROI and IT Investment", Tom Pisello of Alinean (via SearchCIO.com) states: "dollars are appropriately distributed between risky and stable investments according to a [portfolio owner's] profile and goals."
Heads up: the most important word in the whole definition is "appropriately"... Along with that, the key thing to understand is that a portfolio is not supposed to determine what is appropriate -- rather, it is supposed to ensure that commitments are in line with what has already been defined to be "appropriate".
Normally, that definition of "appropriate" will come from two sources: outcomes defined by strategy, and constraints defined by governance. What most businesses are after is outcomes that are opportunities, and constraints that are only minimally inhibitors.
This especially makes sense when the constraints and outcomes are aligned explicitly enough for managers to see and explain where their commitments can make the desired difference. The alignment will include prioritizations and trade-offs that decide how much opportunities and inhibitors are respectively allowed to influence actions.
In this situation, portfolios express what is "appropriate" by mapping the alignment of governance and strategy.
V.
Tom Pisello's key points about investing (i.e., commitment) logically start with the task of developing a view that also generates the elements of a strategy:
- Companies need an industry analysis to understand how new initiatives will achieve competitive gain.
As he sees it, IT governance then steps in, fulfilling two tall orders...
- CIOs have a solid grasp of business issues and communicate IT value across the executive team.
Then the portfolio steps in...
- Technology executives have a holistic view of all IT projects and resources across the enterprise.
It might at first seem unlikely that "communicating IT value" would be convincing without the accountability provided by a portfolio, so is this step out of sequence? No -- there is an even more fundamental value-based view to include before the portfolio is constructed: architecture. For the moment let's ourselves just assume that architecture is placed in the mix during governance.
The final two items from Pisello together describe a gatekeeper function:
- Companies take new investment analysis from that business-need perspective first.
- Companies need a foundation of credible third-party ROI analysis on current and proposed projects.
Notably, business-need establishes why a proposed investment should be analyzed at all, while ROI analysis can provide a take on what the economic impact of the commitment might be. However, this is radically different from determining the economic impact of the outcome. There may be no more important thing to understand about a portfolio than this distinction.
Governance and Strategy are two lenses of the same camera. In managing commitments, how does the portfolio assure alignment of governance and strategy?
VI.
We already noticed that architecture is the base level of description for "IT value". This is the case because the technology product and the management agenda together called "I.T." have a single essential purpose: to provide a structured operational environment designed for business functions. Without this purpose, IT is simply another collection of assets. With the purpose, IT is a resource.
But the ability to actively translate that environmental support into business functionality means modeling the assignment of the existing resources to meet the necessary business priorities and trade-offs. Effectively, the demand on the resources must be modeled.
Portfolios represent assets as resources, and represent needs as demand, and synchronize the two, bringing the influence of governance into alignment with the influence of strategy.
Posted by Malcolm Ryder at 10:53 AM | Comments (0) | TrackBack
August 5, 2005
Value Capture through Execution
What is the real point of an IT business case?
Most proposed changes to the IT infrastructure of a business are intended to make "execution" better. Better execution goes by many names: productivity, efficiency, resilience, intelligence, and more. Since a proposed change typically competes for attention and support against other proposals, the idea of "better" cannot be separated from the sense of what is "necessary"... This means that agreement on priorities must occur, and the black arts of winning agreement commence.
Certainly, the job of presenting a business case is to win the agreement, just as a prosecutor or defense lawyer is out to win. Yet in competition, these adversaries are unified in taking the same piece of strategic advice: "Don't confuse your issue with facts!" In other words, they openly give each other permission to exercise poetic license. But if your business decides to accept this modus operandi from its managers, then it should also just dispense with the requirement to argue in terms of ROI, as well.
In fact, the ROI bit is often misguided, anyway. If building engineers were held only to the standards that ROI calculators so often are, we've have to conduct the business mainly in large disposable tents. Why build a business case that won't stand up?
Instead of ROI, the business case should be argued on value. Strictly speaking, value is what you call the importance of a difference. If that importance is measurable in dollars then so much the better; but since the dollars come from the value, you first have to make the value . And just how is that done? A business case must be able to identify and convey the value generation. To do that, it has to start with a logical understanding of the phenomenon.
Let's start that with a solid working definition. Execution is: the pursuit of a goal, as based on certain enablers (means), in the context of desired types of achievement.
Organizing activity in terms of execution is the typical result of planning. Plans therefore might be prescriptions, formulas, methods, programs, or other designs for interaction and interdependency of activities.
According to the achievement level realized in execution, we say that a certain "performance" has occurred.
According to the importance of that performance in its context, we say that "value" has been generated.
The most straightforward example of a practical context is an objective. That brings us to the key point: that value accumulates towards an objective, and different types of value may collectively apply to a given objective. (For example, imagine watching various contributions of cash, supplies and services push up the red dye in the big "thermometer" poster used to advertise progress in a fundraising campaign...)
The objective represents a concern such as a perceived business need -- essentially, a strategically critical success factor of the way the business believes it must be or act in order to generate "business success". The most straightforward description of the business success is (when properly defined) the mission statement. Usually, a mission depends on several different things coordinating and cooperating effectively, which indicates that there is a variety of ways to add value. At any time, based on the collective effect of those things, the status of the pursuit may thus be deemed more-or-less "successful".
From that perspective, the proposal's idea about changing the way that the business is enabled to execute must always be, logically, about:
- improving the value of its performance, which means...
- improving the achievement of its underlying execution, which means...
- improving the effects of its enablement.
Therefore, any enablement option is meaningful because of its presumed and targeted effects; this describes the basic level of discussion of a business case for an enablement proposal.
Will the witness please answer the question!
Typically, enablement is seen as a deployment of resources, with the now classic categorization of resources being people/process/technology. Of course, there are other resources -- such as time, money and permission -- that are equally critical. But here, the main point is that investment in enablement will be directly attached to ways that resources are affected (moved, added, changed, combined, deleted), and those ways will be described in a plan. The resource view of the investment, however, is merely the left side of the proposal...
The right side must attach the investment directly to the execution that will drive "performance." How? Since value is derived from execution-in-context, and since the context is about what kind of difference is made, then what must be understood is the difference claimed to be addressed by the type of enablement proposed for funding.
As described by example of the following chart, this is a general perspective on planning and justification. The chart gives answers to the question "what is it about the business that the proposed enablement will affect, and how?" The answers to "what" are (across the top) aspects of the business for which improvement is a desired benefit. The answers to "how" are (down the left side) itemized issues that represent success factors addressed in the planning for performance.
In viewing this chart, it is important to remember that the overall business goal is not "value" but instead that the goal is a "mission success" -- a success that is predicated on the value added, by execution, towards business benefits. These benefits (across the top), which are high-priority for the business, are thus understood to be "objectives"... Finally, in our scenario, where the proposal is going to bring a "new" configuration of technology to the existing situation, the IT organization gains more power to enable the business -- which makes the IT organization more successful; therefore, the types of enablement that the proposal identifies are logically seen as "objectives" (down the left side) of the IT organization. This lets us understand why funding the proposal is an investment in both the business objectives and the IT objectives.
What's clear from the above is the investment idea of value for money. Each of the issues in the chart (such as exposure, efficiency or capacity) is an opportunity to generate value, using the support of funding. What's important about the detailed logic of the discussion is that "value" is not left casually misrepresented by so-called ROI. Instead, value is something showing explicitly why the proposal makes sense; and in turn, that provides more logical support for economic impacts that are associated with the proposal. Without establishing the logic of the value-generation, calculations of economic impact are speculative.
Punchline: ROI does not validate the business case; instead, the business case validates the ROI.
Posted by Malcolm Ryder at 3:08 PM | Comments (0)
August 4, 2005
How Maturity Models Drive Timely Value-Capture
The most basic problem of IT alignment with Business is the need for IT to improve business capabilities within the business's ability to pay.
Of course, the ability to pay is supposed to be a product of good capabilities, so... the question is this: how far in advance of its payoff can we afford the initial capability improvement?
This reminds me of the promise of cold fusion, wherein two key things are at stake. One, the nuclear reaction must produce more energy than it consumes. Two, the reaction must be manageable, as in non-destructive in room-temperature conditions.
In the business scenario, money is the energy, and change-impact is the risk of disruption, while the existing infrastructure is the "room temperature"... And there are big ambitions that come along with that scenario; but are they any more viable than cold fusion, or is it still mostly hype?
Here's one ambition: most capability improvement is "funded" in advance; let's imagine that the net economic gain from the ultimate improvement is as simple as subtracting its cost from the price of selling the capability.
Here's another: most risk of change-impact is prioritized by severity of interference posed to designated parties; let's imagine that the attractive new capabilities are usually really well siloed.
Now, when I snap my fingers, wake up… that hot new capability and its economic value boosting powers are the children of complexity and integration, not simplicity and separation. Why?
Likely, because the capability is, operationally, a process that is orchestrated and optimized across multiple functions, events, occasions, and/or organizations. That's a lot of opportunity for interference. And the net dollar gain tends to be reached by gradual accumulation of payback, not all at once. That's time during which the unexpected can happen.
So, while we're waiting for the dollar gain to pile up, we're carrying a lot of risk. There is an initial risk of disruption to existing conditions, and there is additional risk of discontinuity and error in the downstream run-time exercising of the new capability itself. Hmmm...
Naturally, we want some kind of quality measures to be in effect to minimize the risks -- particularly since taking the risks and losing will cost more money in the form of needed recoveries and remedies -- thereby eroding the presumed, potential, net gain.
Unfortunately, this game is much more about choosing the right risks than it is about avoiding them. The issue at hand is to choose the risks that must come with the desired changes, but to also manage those risks to the point where the probability of them hurting us is minimized. The risk doesn't go away; it just becomes more contained. That's the quality assurance.
What then about productivity? Generally, since a new capability comes with preconditions, and those preconditions are risky, then practically speaking, the capability becomes available to the extent that the risk is managed away from the scheme for productivity (in both the development and use of the capability). The question is, what is the level of manageability that can currently be exerted on the preconditions? The degree of manageability will impose a *constraint* on what kind and amount of influence the capability can have -- influence that directly drives the type and amount of value that can be generated. If value is generated in a smaller and slower way, there is not as much to redeem for economic gain, and it's not clear that the capability will ultimately generate "more energy than it consumes".
A maturity model directly addresses the problem of determining how to balance the risk, cost and productivity associated with making the new capability available.
The model proposes a universe of factors making up the full scope of complexity pertinent to the capability; those are the preconditions. Further, the model helps segment that universe of factors into various combinations. Different blends of factors -- featuring their types and intensities -- associate with the kind of influence the capability can render under their role as circumstances.
This segmenting allows a user of the model to think in terms of when a particular influence (that is, a possible outcome of the capability) needs to already be in hand, and to then begin investigating (in the segments) what it will take to reach that level from the current circumstances. And each kind of influence may turn out to require that a certain minimum degree of manageability be applied to its underpinning factors. In anticipating net gains, we can imagine what the capability's target influence might be worth, but the manageability behind it determines the cost and risk levels that will be active, making the influence feasible and viable or not.
As an example, let's say that the desired capability is "locomotion"... There are three interesting influences or aspects of that capability: speed, safety and reliability. The ability to generate maximum value (and associated economic gain) through this capability calls for all three aspects to be maximized. But initially, there simply may not be a realistic possibility of hitting all three at top levels. On the way from the initial development of the capability, one or two aspects may progress ahead of the others.
And what propels the progress? Here again there are multiple factors involved, such as capital, negotiating skills, science and technique, and other resources commonly needed for development. These development factors can, individually or in combination, affect the progress of support for speed, and/or safety, and/or reliability. The key issue is, what is the operational ability to apply these development factors against the different aspects of the locomotion capability?
It is always tempting to think of mastering the capability in terms of being expertly comprehensive. But this is not the basis of the capability's value to the business, and therefore it should not drive the roadmap for progress in mastering (i.e., maturing) the capability. Instead, a business-level prioritization must kick in.
Now let's say that for some reason the early desired use of the locomotion capability is for the purpose of shipping cargo. In this purpose, reliability, and possibly safety, might outweigh the importance of speed. But if the main purpose for the capability is to shorten personal travel time, then of course speed might at first outweigh safety and largely outweigh reliability.
Further, for example, if we're selling shipping, we can attribute dollar-importance to those factors (and their combinations) that most strongly enable that aspect of the overall locomotion capability. As a shipper, we might not prioritize speed, and instead look at the requirements and costs to develop and maintain reliability so that we can start shipping and billing for that sooner.
Later, with proceeds from our shipping business, we can invest in adding speed and perhaps expanding operations into personal transportation as well as shipping.
We shape our buildings, and then our buildings shape us. --Winston Churchill
Having been reshaped by our buildings, what should we expect when we build again? Through us, the previous building will have *indirectly shaped* the new building, and isn't that how our operations environment evolves?
What our example shows is how maturity models help to map out a managed evolution that creates value at each stage along the way.
Posted by Malcolm Ryder at 6:34 PM | Comments (0) | TrackBack
August 3, 2005
Business Cases: a pound of prevention
My colleague Sid Kemp, President of Quality Technology & Instruction, Inc., zeroes in on a "point of sale" aspect regarding ROI when he comments on my previous post ("ROI: the Echinacea of Change").
I described a problem wherein false expectations are placed on the meaning of ROI, leading to its misuse. The question Sid asks us to consider: how do you make ROI most effective when it most matters?
Here's Sid's comment, en toto. He promises a very healthy elaboration of this in later efforts that span articles, workshops and other items.
"This article [Ryder's] assumes that return on investment does not measure value. Granted, forecasting value is very difficult. But I believe it is possible to forecast value, and then use an ROI calculation as ROI = (forecasted value)/(forecasted cost), adjusted for the time value of money.
What about value that is not quantifiable, called soft-dollar value? I recommend that each competing project be required to submit a business case in identical format following standardized development procedures that identify ROI, soft dollar value, alignment to business purpose, and a feasibility assessment.
- Project managers can assist the best possible executive decisions by performing this analysis and providing this information.
- Executives can provide PMs what they need by defining and communication the value they are seeking to deliver to customers and to the company and setting performance goals.
The business case -- including ROI -- can then be used to align projects so that they create optimal value. Executive evaluation of the business case can support the fact-based decision-making in project selection.
I would suggest that ROI is more like a heating pad for a strained muscle than Echinacea for a cold. Misapplied, ROI does more harm than good. If used as a single remedy, ROI is insufficient. If used properly, and in combination with other methods, ROI --like a heating pad -- is a useful part of the solution.
Sid Kemp,QTI, Inc. (Copyright 2005 QTI) "
This is clearly a good overview of organizing a use of ROI.
BUT... I can't resist running the pitch in slow-motion for a bit, to see the seams and spin of the ball. The two things that I think are worth special consideration are as follows:
1. How do you put a financial measure on "value"? Here, I'm using the customary Archestra definition of "value" as being "the distinction that makes the difference". Value is a state, and in most business instances it signifies "a desired state having given importance". This makes it clear that value can be represented by many modes of description, only some of which are numeric. When we attribute a dollar impact to value, we have to provide the reason for which -- and the logic by which -- that dollar amount was associated with the achieved state. In that logic, assumptions will have to be tested. This means that executive evaluations have to test the assumptions and determine their plausibility. (To consider the effects of not testing them, take a week off and Google the phrase "voodoo economics"...)
2. What is "soft value" ?? Here are two good ways to show it, the first of which is the head-knocking cartoon by S. Harris about assumptions, called "Then, A Miracle Occurs..." A lot of venture capitalists in the Dot-Bomb era saw, in effect, elaborate powerpoint versions of this cartoon titled (ahem) "Business Model" -- but to be fair, it hasn't gotten any easier to describe the miracle than it was in 1982 when M. M. Parker wrote his "Enterprise Information Analysis" paper in the IBM Systems Journal and presented a taxonomy for intangible benefits --turning the lights on with his observation:
"As a system grows and supports multiple functional areas... it can no longer be readily expensed to products or product lines because of its sphere of influence over the ... total management structure of the enterprise."
It's not the value that is soft! It's the measuring system. Today, most of what is in Parker's taxonomy is considered to be "key performance indicators" or "objectives".
NOW... Where this matters the most is against the idea of what it means to "create optimal value." The easy way to handle it is to rely on executives taking the responsibility to say up front what is most important -- because for the record that is what the company's management will consider to be most valuable. But that is not a forecast. And when executives (as managers) do that, are they referring to (a.) the formula (model) for success, or to (b.) the after-the-fact dollar-impact of the outcomes? The answer is, it can be both, therefore it is not necessarily the latter. (That said, I'll keep an eye out for how Sid Kemp forecasts value.)
Meanwhile, to understand how "valuable" soft or intangible stuff is, just name it explicitly, then plan on leaving it out, and then watch the credibility of the proposal's forecasts disintegrate. It starts to look like the soft stuff is actually at the hard core...
Forbes Magazine and Ernst&Young drilled down on this issue in the year 2000 with their Value Creation Index , making explicit the point that the high-performance companies have certain attributes that are the critical success factors of their performance and thus their corporate value. Companies without the attributes simply did not lead their markets nor their industries. Further, different markets and industries required different attributes.
And this is the point of their Value Creation Index: performance is something that can be modeled, and executing to the model is something that can be measured. The model makes certain kinds of execution important, but that is operational-level value. In the end, the importance of the impact of the execution is context-sensitive, and there is another level of value determined in that context. An objective, market or industry are each examples of context.
Value is firstly the importance of the impact. Assigning dollars (i.e., "worth") to that impact is a follow-up step that may or may not be done. To easily recognize this difference, consider that a non-profit organization takes grants (investments), executes, but then does not measure its value in dollars; rather, its value is in the outcomes that its constituents find beneficial. Donors understand this, and they are not looking for dollar "payback" to themselves as a "return" on their "investment".
So what about forecasting value? Forecasting execution and forecasting context are both essential to forecasting the likelihood of achieving desired value from targeted performance levels. A given performance level is more likely to generate certain levels of value, and less likely to generate others.
What must be understood is the requirements for reaching the performance levels necessary to the value targets.
Then, investment in meeting those requirements should occur.
Payback on those investments might be arranged to occur regardless of the performance level reached. But payback on the investment is not the same as the worth of the performance's value. Investors must understand the difference and make arrangements accordingly.
Posted by Malcolm Ryder at 11:54 AM | Comments (0) | TrackBack
ROI: The Echinacea of Change
The trial results are in. The University of Virginia most recently confirmed what has been repeatedly determined in earlier testing: that the most popular non-pharmaceutical remedy for the common cold simply doesn't have any scientifically evident positive effect.
Key commentators on the new results pointed out on NPR that because of the way colds work, there's no difference between the way a cold subsides with echinacea versus without -- and it won't subside any sooner. So, why do people take it anyway?
Clearly, some "benefit" is being obtained. It's just not the particular benefit that people use to "officially" justify their use. For the most part, people actually take echinacea because:
1. it's important to them to take action -- specifically, to do something therapeutic that they control themselves but that must therefore be low-risk;
2. their judgement of credibility about what to do is largely driven by the credibility that they attribute to people ("act-ors") who they personally know or identify with -- which includes friends who use the stuff;
3. and here's the zinger: they hear about people using it, so often that they have become suspicious of what it would mean to not try it.
What we know about the sum of these influences is that people will likely keep taking echinacea as long as it does not become inconvenient and does not prove to hurt them. OR... until something else comes along that fits those three conditions even better than does echinacea. (Likely, however, it will take equally successful "viral marketing" of the upstart challenger, to actually alter their preference.)
Of course, it's great when that cold you had finally goes away; and when it's over, it is easy to attribute the relief to whatever you were taking during the malady.
And right there is the lesson for business. In business, when confronting change, the top self-therapy has been "ROI", although over and over again it turns out that as a medicinal it has little to no impact on surviving a business change. The change commences, and progresses how it progreses, ROI or not. In the culture of a very high percentage of sustainable businesses, accepting and executing a controversial proposal is like catching a cold.
Why? Because, we treat it that way. Excepting when we already know we are being hurt by current conditions, we naturally resist change. But what testing proves is that ROI is frequently an attractive "additive" to change, like echinacea is to a cold, not because it "cures" the stressful situation but because it cures the anxiety about the situation.
This might not be such a bad thing, though. One could argue that feeling better about having a problem helps other parts of the recovery mechanism to be more effective. The biological benefit of lower distress is that valuable energy is not diverted from the mechanisms that prove to be directly critical to improvement. This is what the approval process is all about in business: stress reduction. And ROI's role is to improve approval.
So what's the harm? Well, as the famous saying suggests, give some people a hammer and they think all problems look like nails. If the use of ROI crowds out the use of what is really needed to solve the problem, then the real problem is not being solved.
The danger in mis-use of ROI is in applying it as if it was a measure of performance to distinguish competing opportunities. To show why this is true:
- begin with a definition of what "opportunity" means
- describe the difference between what life is expected to be like if the opportunity is realized versus not
- rate the probability that executing towards the opportunity is any harder than executing towards a different and no less interesting alternative
What comes out of that is:
- a direct consideration of how competency and scope relate to each other, and...
- a direct awareness that the viability of the opportunity only exists within those terms. These are not formulated by ROI.
For managers, the punchline here is that ROI should not be used to describe why it is important to do one proposal versus another. Instead, ROI should be used only to provide incentive to parties who might support proposals that need to be executed. As incentive, ROI can be a "success factor" -- but the actual value of doing the proposal is determined by how important it is to achieve the changed circumstances targeted by the proposal -- that is the true value of the proposal's objective.
With competing proposals, Choice A may have lower ROI than Choice B, but Choice B may still be more important! Said somewhat loosely for dramatic effect, it is Value, not ROI, that solves the problem. The challenge is to determine how to measure and represent value; stopping at ROI misses the point.
But what about that viral marketing for the newcomer? Look no further than Performance Management.
Posted by Malcolm Ryder at 7:50 AM | Comments (0) | TrackBack
July 28, 2005
Why performance evaluation must precede cost reduction
"Vision" and "Mission" intend to continuously guide organizations to a position and stance that is considered "optimal" for the business.
As defined by Princeton's Wordnet, optimal means "the most desirable possible under a restriction expressed or implied".
Certainly, companies consider "excessive costs" to be an expressed restriction -- but worse a restriction that actually represses desirable outcomes.
To understand how costs amount to a repression, cost must be seen in a variety of contexts.
Investments that create resources build capacity; capacity creates opportunity to respond, and response creates the differentiating impact measured as "value".
- But expenses that deplete resources or capacity or responsiveness risk altering the potential impact and can therefore erode or prevent value. (This might be expansions or alterations of property or systems that increase use by some but provoke inhibiting problems for most other users.)
- And excess capacity carries costs that are therefore unavailable as investments in other uses. (For example, consider funds that are allocated to maintaining systems that are not being used.)
- Likewise, expenses that intend yet fail to create capacity hold potential alternative investment hostage, decreasing opportunity to respond. (Here, think of projects that fail, or purchases that acquire the wrong thing.)
Since value is defined both by type and by level of impact, the question brought up by those circumstances above is this:
- Given the demonstrable use of current capacity, does the organization consider the value actually currently expected, which is the real value at stake, to be "the best possible position" ?
If the answer to that question is no, then what is the proper correction?
- Should managers concentrate on removing the risks to higher levels of that expected value?
- Or instead is there some other type of value (that is, some other differentiating impact) that should be installed as the target?
Although we can see that one of those choices should be taken, neither decision necessarily lowers costs!
Meanwhile, the only way to rationally answer either question requires that first we validate the currently targeted type of value as the correct type.
This brings up the issue of mission. A mission is simply a definition of an intent to produce a certain differentiating impact. If current capacity does not support a likelihood of succeeding at the mission, then the value promised by the mission is clearly at risk and potentially impossible.
When capacity mismatches mission, the only two corrective choices are to change the mission to fit the capacity or to increase the capacity.
The chief obstacle to those correctives is a contract or other formally binding agreement that does not allow adjustments without an additional expense that outweighs the related cost-benefit of making the adjustment.
Whether literal or metaphorical, the oneous "switching cost" can raise the cost of a capacity correction beyond practical acceptance, while leaving the capacity imbalance unresolved.
Further, in that way, the consumed-to-date portion of investment in the mismatched capacity becomes "sunk" cost, and the prevention of capacity reorganization increases the effective cost of some potential alternative opportunity (i.e., "opportunity cost").
Overall, what this means is that cutting costs is an action that actually needs to generate a return on investment greater than or equal to the amount of costs cut. Oversimplified, this says that a ten-dollar cost-cut needs to target a twenty-dollar gross benefit. Why? Because if the saved ten dollars is needed at all, it should become an investment working to earn its own way.
This "ROI of cost-reduction" will not materialize except through renegotiation of the agreements underlying the switching costs. Wherever the renegotiations don't offer stakeholders equivalent-or-better benefits compared to what they already have, the mission of the organization remains potentially compromised by stakeholder resistance.
This illustrates that change management is a prerequisite to the success of cost-reduction.
Then, to understand what must be changed and thereafter derive a cost strategy, stakeholder roles in the proposed new configuration of capacity must be mapped out such that their performance under the new agreements will logically produce a mission success suitable to replace the old (mismatched) mission results.
By comparing the proposed performance logic against the bases of current performance, change requirements emerge, and costs related to the changes surface, which allows adjustments of current costs to be made more rationally. Punchline: cost reduction is not an action: it is an effect.
Posted by Malcolm Ryder at 11:34 AM | Comments (0) | TrackBack
July 22, 2005
The ROI is dead; Long live the ROI
It makes perfect sense that CFOs would be the ones to consult about what is acceptable in measuring IT's economic impact.
Ultimately, the CFO determines the pace and level at which IT is funded.
This puts the CFO in a role that handles IT the way a real estate developer handles a commercial property. The expected value of the property is based on the utilization of the facilities and services that the property, appropriately prepared, will provide, protect and host.
That is, the impact of the "whole" property is taken as a new factor in the commerce of the area, while the commerce is the vehicle in which arrives the economic justification for approving the property. Ultimately, what is measured is the value of the commerce, with the property being simply a key enabler.
But that commerce is meanwhile constrained by zoning, competition, legal changes and weather. Properly acknowledged, these constraints are part of the considerations in the design of the property, but the property is not really expected to control or eliminate those constraints.
Let's look into what aspects of the CFO's view on IT are analogous to the above.
Some costs are purely about acquiring the property.
Acquiring the property is followed by preparing it.
Regulations and ambitions are negotiated into a development plan.
Construction and security commence.
Marketing is initiated in due course.
Occupancy is cultivated through rights and contracts.
Those steps cover the costs of creating the property and allocating/distributing it to users -- in other words, all of the asset deployment. Therefore, to package this group of costs even more tightly, let's call this group the resource delivery costs.
The upcoming financial issues are about the balance of maintenance and other upkeep (renovations, additions) versus income taken from the occupants. But from the developer's standpoint, that income need only "pay off" the delivery costs, and it might also pay back more than those costs.
Delivery provided a resource for the occupants. The occupants' situation was not to create the resource but to access it and utilize it. In the worst case scenario, the entire group of occupants fail to generate a net positive cashflow from their utilization. This case does not negate the fundamental potential for the property to return financial benefits greater than delivery costs. If all of the occupants were evicted, the property could be sold to a different management group, for the amount of its estate value, which is in effect its market value.
By analogy, IT has an estate value; it has inherent functionality that can be put to many different uses.
But as "developed" property, the IT infrastructure represents the managed configuration of the property, which underlies (encourages and supports) the benefits from its usage. Thus the managed property configuration has what I'll call the projected maximum resource value.
In real life, because occupants (users) and property managers are quite variously effective in their handling of the property, their changes can cause the equation for the final impact on the value of the commerce to deliver different answers.
Consequently, there is no directly causal relationship between the resource delivery cost and the commercial potential -- and obviously then neither between the asset and the final economic impact.
There is, however, a logical relationship. Logically, what should be understood and tracked is how the asset functions in the dynamics that result in the final economic impact. Initially entering those dynamics, is the asset an inhibitor, catalyst, accelerator or what? That is, what does the asset "do to" the outcome of the formula for final economic impacts?
The question is meaningless until the formula is available. Focusing on the dynamics must precede assessments of the assets. The dynamics are described at minimum in two dimensions.
- One: managing the purpose of resource utilization, and managing the actual utilization itself, is layered on top of managing the resource delivery and managing its underlying development. The logical linkages between these four layers of management are one dimension of the dynamics.
- Two: the other major dimension is the set of opportunities and constraints on each layer. Those factors determine what each layer can offer to its linkage with other layers.
The general challenge is to identify and exercise the controls that establish linkages and that select the opportunities and constraints actually being addressed in the linking.
Final economic impact is going to be the result of the throughput of these interlinked layers -- as applied to the prevailing conditions into which the final output arrives.
Accordingly, predicting economic impact involves assumptions about future states at each layer of management in the dynamics.
This means that the final representation of so-called "financial performance" (ROI) is a probability of a value.
Most of the attention to the economics happens when something is proposed that will ask internal workforce or work-partners of the company to:
- modify the infrastructure (engineering)
- modify the control of the infrastructure (maintenance),
- modify the ability to change the infrastructure or its control (management),
- modify users' leverage of the infrastructure (administration)
Keeping in mind that we see the infrastructure as a resource, the following diagram's framework of considerations represent coverage of opportunities to track the logic of potential economic throughput:
Financial and methodological commitments, which can support each major assumption about value throughput, should be called out and reality-checked for the opportunity and limitations that their current states present. These are, for better or worse, the controls on the throughput. By making them explicit, the overall dynamics of the investments become clarified as a set of requirements whose fulfillment can be measured. In this sense, achieving the desired throughput is a visibly active performance on the part of the company.
Posted by Malcolm Ryder at 11:04 PM | Comments (0) | TrackBack
July 20, 2005
Managing versus Measuring: IT's Value to Business Performance
At CIO Decisions Magazine, Thorton May serves up results of an excellent survey of approaches being used to understand the value of IT to the business.
In general, the results indicate that the practicing managers of corporate IT range hugely in their established opportunity and intent for representing the way IT impacts business performance.
The survey does not investigate what lies behind the opportunities, so we don't get into the availability of time and tools that create the "business-perspective" visibility on IT. However, it is axiomatic that the way you look for something determines most of what you can see. In that regard, "formulas" that represent IT influence are more important than the tools and time used to apply them.
The four most important "takeaways" of Thornton's discussion are:
- IT is pervasive in the business the same way that management is pervasive, so it may be illogical to try to isolate "IT value" as a single global variable except in the various specific contexts (occasions) of IT usage.
- There is a difference between "value" and "performance"
- Measurements representing IT influence are not always numeric.
- Too much measurement is more bad than good.
One possible cause of the persistent confusion about value in IT is that the effort to connect IT Value to Business Performance doesn't make sense until after the connection of IT Performance to Business Value has been established.
If IT outputs are first associated with conditions that the business defines as important to the business, then a logical representation of "IT performance" exists. IT execution can be measured in those terms of performance, thus a picture emerges of when, how and why IT contributes to the enablement threshholds that the business agreed are needed for business functions to have their shot at meeting business goals.
Thus having the "business value" of IT performance defined, managing IT execution is a straightforward effort to have IT performance meet business needs. As a start, this is exactly what should be represented by a service level agreement (SLA).
Then, the performance of the business is nothing less than the results obtained from the business's execution of functions enabled by IT's performance. Presumably, the business has some functional targets to hit, which will be how business execution will be rated for its value to the business.
The biggest issue emerging from this is the need to separate the business's achieved capacity of enablement from the business's achieved competency of capacity utilization. IT can provide the capacity of enablement, but (contrary to the mythology of automation) IT simply cannot make the business use the enablement wisely.
If the business does not have working definitions of those two things, that furthermore unfailingly distinguish them from each other, there is no reason to believe that IT's influence on the business performance can be logically designed, tracked or analyzed. Naturally, this also means that no attempts to determine ROI are actually meaningful; instead, they are simply sophisticated statistical fictions prone to being evangelized or rejected by company politics.
The only exception to that assertion is the case of IT actually preventing a business function from being executed -- a huge issue driven by the way that the business relies on IT. In this case, we think in terms of a "negative contribution" -- one that is usually either unexpected or not officially tolerated. But in this case, what is important is to not suddenly have a double-standard of measurement methodology. If the contribution measurement philosophy is based on describing how IT relates to intended consequences, then the description must also neutrally cover how IT relates to unintended consequences. As we do this, it is important to neutrally separate IT's relation to desirable consequences and undesirable consequences.
This neutral and comprehensive perspective, which prevents arbitrariness in political tolerances, forms the basis of understanding otherwise neglected issues such as opportunity costs incurred by the influence of one IT implementation versus another. Since the business is responsible for deciding on those tradeoffs, it is clearly a matter of management and strategy more than of IT per se. When "negative contributions" occur, they must be defined and recognized -- as the results of:
- either bad decisions or bad enforcement that should not be politically written off;
- or bad luck (such as natural disasters or external attacks) that probably should be politically written off.
Posted by Malcolm Ryder at 8:11 AM | Comments (0) | TrackBack
May 11, 2005
Investing in Returns on Infrastructure
ROI doesn't just come to the party with an invitation in hand. Instead, it must be brought to the party by the host. The activities for making that happen are numerous and even predictable to an extent, but there is no one-size-fits all methodology. Instead, opportunities for actively cultivating ROI are found in various levels and dimensions of management. Several of these, associated with production infrastructures, are surveyed below.
Getting the value of Processes
Process integration in effect dynamically prioritizes the selection of supporting resources to consume for the purpose of assuring focus on the value proposition (goal) of the process. Then the integrated processes also provide efficiency in actually provisioning those resources on demand.
The immediate payoff of that one-two punch is effective navigation of the complexity of the operations infrastructure, allowing sustained productivity and expansion of capacity for productivity. The effectiveness can be verbally expressed as "getting the right thing to the right place at the right time for the right reason." Placing a value on that effectiveness sets one term of the "ROI" of implementing the integrated processes. The other term is the cost of executing the implementation.
Value
Value is defined as the significance of a difference.
The most important aspect of evaluating the difference is to distinguish between whether things have just gotten different versus whether they have actually gotten "better". This means that the only real meaning of an ROI calculation must logically come from the original definition of what represents "better".
Typical examples of "better" are:
- faster cycle time
- lower opportunity cost
- increased re-usability of employed resources
- greater scale of process availability
But even those examples are arbitrary unless they are causally (logically) associated with a higher-level business performance need – such as competition, compliance, reorganization or growth.
Cost
Meanwhile, cost must also be properly defined. When what is being considered is "expense", cost seems obvious – but a line-item expense does not automatically include consideration of: the cost of the funds; nor the unavailability of those same funds to other purposes (that may also either earn more money or spend more); nor the additional expense of maintaining the target outcome of the initial expense; nor the disposition of the expense amount against the time period, and/or the changes, of the demand for the funds.
In general, those additional considerations (and more) are assumed to be covered by the "expense approval" process. The key observation here is that the presumed final value of a proposed expense may be irrelevant to the importance of using the funds, unless that value is clearly competitive with (and probably superior to) other options of equal spending opportunity. In order to know what the best calculable choice should be, a minimum level of real-time business intelligence is required to support decision-makers. Decision makers should look for expenses that actually represent effective total costs.
Value versus Cost in ROI
The relationship of cost to value will show that overall operational improvement should take place as a matter of optimizing procedures at a target scale within the constraints of cost-effectiveness, for a defined goal.
Optimization, scale, and constraints can all be separately modeled and then interrelated in deployment. For example, workflow running at an enterprise scale under a policy is a demonstration of modeled relations comprising an operation.
The investment in this includes:
- all measures taken to conduct the goal-seeking.
The return in this includes:
- the impact of the amount of the goal achieved by the effort, versus the impact of the prior "as is" conditions.
A related way to represent the visibility of the ROI is through a portfolio within which any given category of investment is handled with business process management.
Architecture
The purpose of architecture is to bring cost-effectiveness to sustaining the quality of the process throughout the lifetime of the demand on the process.
This means that the quality of the process must be defined. The definition normally starts with the selection of outcomes to attribute to the influence of the process, followed by determination of requirements for supporting those outcomes, and then by identifying utilization of resources to attend to the requirements.
This shows that quality is about fit-to-purpose, which makes quality variable in two ways:
- relative fit against variations of purpose
- absolute fit to a fixed purpose
Associating "investment" and "architecture" is logical because both have the aim of establishing a foundational environment for producing against requirements. The production methodology utilized at any time is literally based on the foundation, but this makes sense only because the foundation is a resource supply. So the logic of the foundation (i.e., investments or architecture) is in the way it offers "resources" on-demand.
Assets
By definition, a resource is an asset that has an assigned job. This means that the "assets" used to make up the investment or architecture must be subject to some function that converts the asset into a resource. (The question of whether the resource is passive or active in its assignment at any given time is a different issue, one that is not essential to the distinction of whether the asset is a resource or is not a resource.)
When committing an asset as a resource, economy of scope, not economy of scale, is the main economic issue in the allocation of the asset.
In investment and in architecture, the purpose of the resource is to be consumed by the assignment – which makes the economics of the resource a matter of how much of an intended effect can be generated by the consumption before the resource is exhausted. This makes the pattern or mode of consumption a key factor, since there is the problem of whether the consumption wastes the resource or not. The flip side of the consumption pattern is the quality of the asset that allows itself to be consumed in the role of being a resource.
Thus, a formulation very basic to the calculation for ROI is the statistical correlation of the engineered quality of the asset to the probable impact of a given consumption mode. For example, an old VW Beetle in the hands of a highly competent adult driver will likely be a more "productive" combination than a Ferrari in the hands of an inexperienced teen.
BUT, the economics problem is not to know what is the capacity of the asset to support some level of demand for one effect (economy of scale).
Instead the problem is to know what breadth of effects can be and may need to be supported by the asset (economy of scope).
That is, the qualities of the asset must offer a degree of versatility that is appropriate only to the controllable range of "necessary" patterns of resource consumption that it will host. This brings out another issue, which is the use of control mechanisms (disciplines) and judgments of necessity (priorities, or in effect, policies).
Modeling ROI
So the ROI is really a calculation that refers to an outcome based on a set of four interrelated and variable aspects:
- quality (engineered) of the base asset
- security of the asset’s assignment to a role (making it a resource)
- control of the consumption imposed on the resource
- predictability of the requirement for consumption.
We can generally say that to start things off a "cost" (via either build or buy) develops the availability of the asset. However, that cost is a long way from being a predictor of the ultimate "benefit". The expectation of the benefit is most often predicated on making all of the four variables as little variable as possible. This so-called "optimization" might raise confidence levels, but it also makes the fully interconnected set of aspects more rigid, and therefore less likely suitable to conditions outside of the declared tolerances. Thus, in conditions of change and uncertainty, the optimized set is more risky. Consequently, the next concern becomes to make this risk affordable, or (to emphasize the point) "tolerably disposable" – which is what is really at the heart of the goal of "agility".
That concern pressures the entire set of variables to be obtainable at the lowest cost and/or at the highest "billable" rate of employment. The main problem here lies in the case where the beneficiary of the set must also be the supplier – in which case, on the way to determining ROI, the (approved) expense of self-provision must be subtracted from the presumed income of the benefit to discover if agility is in the cards.
Assuming affordability, it follows that this is a point at which focus should be placed mainly on the competency necessary to generate the benefit.
"Competency" is the ability to meet necessary performance levels under circumstantial demand. Differently, "capabilities" are persistent mechanical components of the competency. Ideally, constituent capabilities can be improved to drive greater competency. In this perspective, the supporting capabilities need to be exchangeable without altering the target competency, because relative improvement in capability may come through either modifying (upgrading) old capabilities or replacing them with different new ones.
Capability improvements are generally viewed as either increased "effectiveness" or increased "maturity". But the two are not similar. While effectiveness normally indicates "strength of impact", maturity normally indicates "consistency of required impact", which is really in other words "quality".
Risk vs. Benefit in ROI
With that observation, the concern of "capability maturity models" is recognizable as being about specified quality levels, with higher levels actually representing less risk as opposed to more effectiveness.
This natural objective of increasing "capability maturity" is to bring more ability to define (and limit) the range of variability in the four interrelated aspects of driving targeted (i.e., pre-specified) operational benefit.
The greatest significance of that change in ability is that by reducing the likelihood of waste against the target, it increases the probable value-contribution of predefined resources and predefined patterns of resource consumption.
However, since more rigidity in the production also increases operational risk under conditions of uncertainty, the logical strategic addition to this improvement is to contain the extent of the risk by limiting the scope of predefined production assigned to the set of variables. That is, "modules" of production capability will be defined.
In most cases, this turns into an approach of achieving greater overall operational scope by combining (integrating) several high-quality modules of production, each having a distinctive functional responsibility treated as a constituent capability.
Once these modules are defined, their utilization drives their economic impact, which is not the same as the ROI of the processes that they support. Again, the greatest importance of these modules (or optimized capabilities) is in how much more the impact of their utilization results in achievement of goals when compared with the use of the current-state infrastructure to pursue those same goals.
Investing in the Return
Summing up, the "return" on an investment is described as:
- how much improvement has been obtained in…
- the ability to carry the risk that is inherent in…
- requirements for supporting the process of…
- meeting targeted levels of performance in…
- pursuing a defined goal.
Posted by Malcolm Ryder at 11:05 AM | Comments (0) | TrackBack