Companies have struggled during years with the allocation of their investments. Is 50% of them going to business infrastructure a good thing, should we not invest more in protecting our brand or increasing our operational efficiency? One of the underlying complexities is the relationship between level of investment and the expected value we get from it.
CIOs have learned to segregate their investment portfolio by type of value they are getting. But when it comes to validate the structure of their portfolio (% allocated to different value contributions), the discussion with senior management turns short, and often ends by “That’s sounds good, but investment pool will be under a lot of scrutiny this year, and projects will be approved on an individual basis”.
Most of the time businesses have set up clear strategic objectives and identified two to three strategic axis, such as developing market reach, improving the efficiency of our supply chain, accelerating the introduction of new product. Based on these critical assumptions, CIOs are ensuring that money invested goes to these strategic buckets. However depending on several factors, minor investments could bring incredible value with rapid return, and large investment might result in additional risk for the company but could eventually generate important future cash flow. It becomes obvious here that if we are trying to architect the overall investment structure of a company by working at projects level, it will un-doubtfully lead to a short term approach, and select initiatives with rapid return and low risks; two separate discussions need to take place to tackle with this issue.
One of my previous post “Integrate IT in the Company Investment Portfolio” highlighted the importance to separate the formulation of an investment strategy in changes from its relative optimization: 1- The formulation will enable the identification of value segments where the company should invest and the expected performance targets to achieve, spread over a cycle of 3 to 5 years and the overall envelope of investment. The company should as well clearly state its appetite for risk. 2 – Optimization is a close loop cycle developing alternate scenario on investment structure to satisfy targeted performances.
This second step is certainly the most challenging one as it can trigger important changes in the organization. Performance and Effort are linked and expressed by the S-Curve model.
It implies a limit to performance (whatever the effort provided) if we continue to operate under the same business model and lead organizations to define new working assumptions to eventually continue to improve their performance.
The chart depicts this process (X axis: Effort; Y axis: Performance).
As any important change the immediate performance will drop in the first step and grow progressively. This paradigm shift is disruptive but create opportunities to limit the size of future investments whilst growing rapidly the performance.
CIOs are certainly one of the best resources in the Enterprise to understand impact of changes and their expected return. Using this approach they could feed a strategic discussion with senior management and enable long-term creation of value for their company.
If you are interested in S-Curve for IT, you can consult “CIOs Manage you S-Curve“.
The title picture is a John Gilbert’s Sculture representing “The symbol of Uncertainty”, 2001, Ceramic on Marble.