Strategy-Based IT Investment Allocation

A Proven Process for Selecting IT Investments

Unrelenting economic and competitive pressures have returned an age-old issue to renewed prominence: How does a business determine which of its many possible IT initiatives most deserve to be funded? Although this issue has been around since the “early days,” it has lately acquired new urgency and importance – especially for the many companies where the use of information technology is inextricably woven into the fabric of their business and into the execution of their core business strategies.

Recent studies by IDG, Meta, Forrester, and others make it clear that issues related to evaluating and prioritizing IT initiatives are among the key challenges facing business and IT executives:

1. Top “business” priorities for IT executives

  • Decrease costs
  • Improve returns on technology investments

2. Only 18% of top IT executives currently use a formal methodology for ROI measurement

3. In most IT organizations,

  • There are no metrics for evaluating the success or failure of past IT initiatives/strategies;
  • Decisions about future IT initiatives/strategies are usually made once a year, in conjunction with the budgeting cycle; i.e., despite an ever-increasing pace of change, there is no ongoing process for strategy and planning management.

Benefits: The fundamental benefit of this approach is to transform the IT resource allocation process from one that is subjective, and without explicit links to business strategy, into one that is objective and is specifically driven by the organization’s business strategies. This approach results in:

  • Clear linkages between IT initiatives and business strategy
  • “Decision packages” that document each potential IT initiative, providing consistent and comparable information that allows them to be objectively ranked
  • A multi-dimensional ranking process that allows each evaluation factor to be properly weighted
  • A clear and appropriate investment threshold, based both on capital and/or operating budget constraints AND on the documented and agreed-upon value of those potential initiatives that lie near the preliminary funding cutoff point
  • Organization of all initiatives into clear and actionable categories; e.g.,
    • Strategy-aligned initiatives to be funded,
    • Non-aligned and low/marginal return initiatives to be deferred or rejected
    • Initiatives that are redundant or inconsistent across business units/functions, and that need to be rationalized/re-organized and re-evaluated
  • “Buy In” by the entire organization, and support for the initiatives selected, as a result of the transparency and objectivity of the prioritization and selection processes
  • A process for rapidly assessing new potential IT investment opportunities in light of changing market conditions and business opportunities

Methodology/Approach: The Strategy-Based IT Investment Allocation Process contains six basic steps, as follows:1. Form Two Teams for Intense Initial Focus: The Executive Management Team is responsible for providing overall sponsorship and guidance, establishing or clarifying the business or IT strategy and related performance drivers, defining the investment guidelines, and achieving consensus on prioritized initiatives and actions that implement the strategy. The Working Team focuses on providing quality information, assessing and rationalizing investments, and developing recommendations to the Executive Management Team for final decisions.

2. Develop a Sound, Data-Driven Framework for Initiative Assessment and Selection: Drawing both on Balanced Scorecard and on traditional IT Planning techniques, this step operationalizes the business and/or IT strategy into a business driver performance model, develops the investment strategy and guiding principles, establishes decision criteria, and builds customized templates for initiative definition and assessment.

3. Assess the Initiatives: Using the framework that has been tailored to reflect the organization’s values and strategies, the Working Team leads the effort across the organization to complete the initiative templates and assessments. The templates document each initiative’s weighted portfolio contribution, ROI, resource requirements, risk, dependencies on other initiatives, and timing. Each initiative is then individually assessed relative to its alignment with the organization’s strategic objectives and business performance drivers.

4. Rank Initiatives: Using the specific prioritization criteria selected by the organization, a preliminary, “by-the-numbers” ranking is created, both on an overall basis and by strategic portfolio. The Working Team then produces a proposed final prioritization, utilizing the quantifiable scores, qualitative information, and their best judgment of the timing and merits of funding each initiative.

5. Apply the Investment Budget to the Ranked Initiatives: Using the organization’s constraints on capital expenditures and operating expenses, determine where to “draw the line.” This is typically performed in an Executive Management Team workshop, where the decision criteria and guiding principles are applied in a highly facilitated session to gain consensus on the ranking and prioritization of initiatives that fall within the established guidelines and budgetary constraints. The result is the set of initiatives that best fit the investment criteria and strategic goals.

6. Communicate Results and Establish an On-Going Process: Following the workshop, the results and their rationale are documented for inclusion in the Business Plan (if the timing is appropriate) and for communication to the various constituencies that need to understand the IT investment strategy. Finally, a disciplined and ongoing management process is defined that will enable the organization to maintain the alignment of its IT investments and its business strategy as it responds to changing circumstances and to new opportunities and requirements.

Results: This process has led to profound results for many of the organizations where it has been applied. One example that can be cited, as it is now in the public domain, is Wells Fargo Bank. As documented in a Harvard Business School Case Study, the On-Line Financial Services Group of Wells Fargo used this approach to determine how best to operationalize and deliver on its on-line banking strategy in a sustainable way. The management team had the overwhelming task of assessing over 420 potential initiatives to select those fitting a complex set of variables. Using the process described above resulted in the selection of only 22 (less than 5%) of the initiatives for continuance. This reduction in non-strategy-aligned projects enabled an intense focus on building a strategic capability to sustain their significant lead in on-line banking.

This is a time of enormous challenge and opportunity for organizations in their use of IT – competitive pressures on operating margins are squeezing budgets, the success of business initiatives and strategies is becoming even more directly dependent on the successful use of IT, and IT budgets remain under very careful scrutiny. As a result, the pressures on IT to identify and stay focused on the very “best” opportunities available have never been greater. The Strategy-Based IT Investment Allocation process is a proven, effective approach to enable businesses to optimize their IT investments and demonstrate IT’s contribution to executing their business strategy.

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