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IT Portfolio Management

By Marion Dunn,2014-04-06 04:11
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IT Portfolio Management

    BADM 590 May 3, 2007 Term Paper

    IT Portfolio Management

    Professor: Dr. Michael J. Shaw

    Chung-Beom (Tony) Nam

    MBA cnam3@uiuc.edu

Abstract

    This paper presents the basic concepts of IT Portfolio Management (ITPM). To give a definition of the ITPM, I identify what the ITPM is and find the components of IT portfolio and other management tools related to the ITPM. Also, I research the IT Investment Frameworks such as the McFarlan Strategic Grid, the Cranfield Grid, and the Ross/Beath Framework, and find how to optimize the IT portfolio. In addition, as a case study example, I discuss how Intel have developed a practical process around ITPM that evaluates IT initiatives based on business value, IT efficiency, and its financial return.

    Keywords: IT Portfolio Management (ITPM), IT Portfolio, Project Portfolio Management (PPM),

    IT Investment, IT Return on Investment (ROI), IT Governance

    TABLE OF CONTENT

     Page

    I. Introduction ----------------------------------------------------------------------------------------- 2

    II. Definition of the IT Portfolio Management -------------------------------------------------- 3 1. What is the IT Portfolio Management (ITPM)? ------------------------------------------ 3 2. Four Components of IT Portfolio ------------------------------------------------------------ 3 3. Other Management Tools related to the ITPM -------------------------------------------- 4

    III. IT Investment Frameworks -------------------------------------------------------------------- 7 1. The McFarlan Strategic Grid ----------------------------------------------------------------- 7 2. The Cranfield Grid ------------------------------------------------------------------------------ 9 3. The Ross/Beath Framework -------------------------------------------------------------------10

IV. IT Portfolio Optimization ----------------------------------------------------------------------- 12

    1. IT Portfolio Management and IT Governance --------------------------------------------- 12 2. Business and IT Alignment --------------------------------------------------------------------13

    3. Best Practices for IT Portfolio Management ----------------------------------------------- 15

    V. Case Study: Intel ----------------------------------------------------------------------------------- 19 1. Balance between Strategic Objectives and Constraints --------------------------------- 19 2. Intel Case ----------------------------------------------------------------------------------------- 20

    VI. Conclusion and Next Study -------------------------------------------------------------------- 22

    References ---------------------------------------------------------------------------------------------- 24

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I. Introduction

    A lot of organizations spend millions or billions of dollars on Information Technology (IT) annually. There have been a number of attempts in past years to build or adapt frameworks for the evaluation of IT projects and the construction of asset classes, much like stocks, bonds, money market accounts, and annuities in the investment world.

    Business cases for IT investments are now the norm rather than the exception. However, projects are still considered individually as discrete investments. Likewise, there is often a segmentation between new application spending, the realm of project portfolio management (PPM), existing application maintenance, the realm of application portfolio management (APM), and infrastructure investment. As of yet, few organizations are looking holistically at the entire IT budget as a unified suite of investments. IT organizations apply many of the same tools the financial community uses to build and manage financial portfolios to maximize benefits.

    IT Portfolio Management, however, offers not only the opportunity to measure that return on investment (ROI), but also provides the process needed to optimize the return on the portfolio. Although the science of IT portfolio management is in its infancy, understanding the concepts and laying the groundwork now will allow for quicker adoption later as the tools and tenets become better defined over the coming years. The ultimate goal is delivering to the organization predictable and higher returns at the appropriate level of risk.

    Following, I lay out the basic concepts and definition of IT portfolio management, its relationship to other management processes, the IT investment frameworks, the IT portfolio optimization, and Intel case study.

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II. Definition of the IT Portfolio Management

     1. What is the IT Portfolio Management (ITPM)?

    IT portfolio management is the application of systematic management to large classes of items managed by enterprise IT capabilities. IT portfolio management started with a project-centric bias, but is evolving to include steady-state portfolio entries such as application maintenance and support, which consume the bulk of IT spending. The concept is analogous to financial portfolio management, but there are significant differences. IT investments are not liquid like stocks and bonds and are measured using both financial and non-financial yardsticks. So, because a purely financial view is not sufficient, IT investment is considered discretely. Return on investment potential may be considered for an individual investment, but the impact on the portfolio as a whole is often ignored. Investment allocation across segments is not targeted in advance, but is rather an outcome of project funding. Resource utilization and optimization, rather than outcome, may drive decisions. And perhaps most importantly, all investment classes are evaluated with the same set of criteria.

2. Four Components of IT Portfolio

The IT portfolio is the tangible manifestation of ITs plan to support the business in meeting its

    strategic goals. This portfolio is composed of:

    ? Current Investments - Existing application, programs, and processes are investments that must be managed, optimized, retired, or enhanced as appropriate over their life cycle. ? New Initiatives - These investments are added to the portfolio to add incremental value to the organization through cost savings, productivity gains, or business advantage. ? Externally Mandated Initiatives - In addition to the above, there are initiatives mandated by

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    regulatory, governmental, or industry rules that, although required, consume resources that could otherwise be spent on higher-value projects or initiatives.

    ? Infrastructure Investment - Underlying many of the applications is a set of shared

    infrastructure assets. The degree of segregation of these assets or their linkage to associated applications or business processes varies to a wide degree by organization. However, they are part of the IT investment portfolio and must be evaluated and managed as such.

3. Other Management Tools related to the ITPM

    3.1. Project Portfolio Management

    By using techniques like categorization, financial, inventory, and risk and benefits analysis combined with tools, companies can prioritize which projects best fit their goals. Within PPM, common evaluation criteria allow for project arbitration and project-to-strategy alignment. Resource management and productivity management tools ensure that approved projects are adequately staffed with the right numbers of the right people, and project management tools ensure that schedules are met and expected benefits delivered.

    Key goals of PPM include:

    ? Elimination of Redundancy - Collecting information about projects underway or under

    consideration can identify redundant or overlapping efforts.

    ? Better Resource Allocation - Maintaining a single repository for projects and their

    requirements can let the organization better allocate and schedule resources, avoiding the need to bring in external, and potentially more expensive, resources to deliver on committed schedules and goals.

    ? Common Repository for Business Value Metrics - Associated with each initiative or project will

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    be a set of business-oriented metrics and a business case outlining expected business value. These goals can be reviewed by all appropriate participants in the initiative, maximizing continued focus on value and a higher likelihood of value realization.

    The initiatives managed by the PPM organization become the engine of value growth, the way that the organization rebalances the IT investment portfolio, and the way that the IT reacts to changes in business focus or market dynamics.

    3.2. Application Portfolio Management

    Application portfolio management provides a way to create business-oriented metrics around our existing applications by linking existing applications and components with concurrent costs to manage and maintain current business processes, business value, and business metrics. The repository of information created by application portfolio management tools and processes feeds into overall IT planning so that:

    ? Maintenance and renewal decisions are made with sound business backing. Overlaps can be

    identified, systems can be consolidated, and opportunities for savings through application sunset can be identified, freeing funds to be spent on new business enhancing applications. ? Proper disaster recovery and business continuity planning can occur. Critical applications are

    identified and prioritized over less critical ones. Service levels can be defined based on business impact and business value supported. Resources are used both most efficiently and most effectively.

    ? Better outsourcing agreements for both sides. APM repositories, as a source of truth about

    applications in use, will allow better visibility by both a potential or current outsourcing partner and by the application-owing client. Such an inventory can be used to establish a fair

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    and equitable base for contract pricing, to set quality and complexity benchmarks at contract inception that will aid year-over-year comparisons to note improvement/declines and to answer strategic, ad hoc questions about the applications.

     3.3. IT Asset Management and Infrastructure Management

    Much in the way that APM inventories existing applications and ties them to business processes, IT asset management (ITAM) inventories network-attached hardware and installed licensed software and links them to underlying contracts, depreciation schedules, and maintenance agreements. The potential benefits of ITAM include:

    ? License compliance - Tracking installed software (also using auto-discovery technology) and matching it against records of licensed software. This can both mitigate the risk of unexpected costs resulting from a compliance audit and help reduce costs by identifying unused licenses. ? Better maintenance and replacement requirements - Aging hardware or software that is

    approaching the end of its useful life and needs replacement can be identified. ? Improved utilization - Identifying existing assets is the first step to better capacity and utilization planning. Underused assets can be identified avoiding redundant purchases. Options to scale or reuse assets can be exercised.

    As the underlying infrastructure and the architecture behind it are part of the IT investment portfolio, they must be managed as such. Investment decisions must be made based not solely on cost and cost savings possibilities but also on the infrastructure as a component that can reduce IT risk, increase business flexibility, or enable business value through better execution of new application development and rollout.

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III. IT Investment Frameworks

     1. The McFarlan Strategic Grid

    The first practical IT investment framework is the McFarlan Strategic Grid presented by Warren McFarlan in the early 1970s. The grid was designed to determine the overall positioning of the IT organization in relation to organization goals. In this matrix, IT is positioned on two dimensions that look at:

    ? The strategic impact of existing systems - Systems are ranked on their relative importance to

    the maintenance of the current structure, business, and processes. One way to look at this ranking would be to examine the maximum permitted period of downtime. The higher the ranking on strategic impact, the lower the permissible period of outage.

    ? The strategic impact of applications under development - Systems are ranked on their ability to

    act as change agents that affect the way that organizations will do business in the future. By definition, these systems will initially have minimal operational impact, as they support only a small portion of the organization’s processes or revenue. However, they have the potential to

    grow into operationally critical systems in the future. (see Figure 1)

    The four quadrants are defined as:

    ? Strategic - For these organizations, IT is essential to the execution of current operations and strategies and new applications are essential to the maintenance of a competitive position into the future. The planning and organizational relationship between IT and the business must be very close in such organizations.

    ? Turnaround - Totally uninterrupted and defect-free IT operations are not absolutely critical to achieve operating objectives operations, but new applications are a key factor in this type of

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    organization’s ability to meet strategic growth targets. This organization now considers its investments in new IT systems as the engine by which it can reduce costs, improve customer service, and develop a competitive position in the marketplace.

    ? Factory - This type of organization is heavily dependent on totally reliable IT operations to enable current business processes. However, IT applications that are under development, though profitable and important, are not fundamental to the firm’s ability to compete. An

    investment bank that is dependent upon trading systems but built upon relationships with clients may fall into this category.

    ? Support - Such an organization may use IT in the running of its business. However, the organization would be able to survive the lack of availability of such systems for some period of time. Likewise, when viewed realistically, new investment will make incremental improvements in the future of these firms. The authors of this grid cite a large professional services organization as an example of such an organization.

    Figure 1. The McFarlan Strategic Grid

Source: Applegate, McFarlan, and McKenny, “Corporate Information Systems Management.”

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     2. The Cranfield Grid

    John Ward and Joe Peppard of the Cranfield School of Management in the United Kingdom produced a variation of the grid that looks at individual investments within the IT investment portfolio (see Figure 2).2 The key difference is clearly the quadrant that is now labeled ―High

    potential.‖ In this matrix, the developers have added the ability to include a key class of IT

    investments those that may be lacking current benefits but that have the possibility of producing future benefits.

    Ward and Peppard moved the focus of analysis to look at the expected business contribution of an investment. As such, they recognized the potential for movement through the matrix, from high potential to key operational and on to support. The understanding of investment change over time, with concurrent change in management focus, investment ownership, and portfolio balance, is a key concept that must be internalized before an organization can embrace any portfolio management process or tool. (see Figure 2)

Figure 2. The Cranfield Grid

Source: Ward and Peppard, “Strategic Planning for Information Systems.”

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