The Ultimate Guide: Strategy to Invest in IT Related Projects

Posted on May 6, 2009


strategyHow to ensure sustainable performance of your investments?

The suggested approach on how to evaluate an investment is steered toward its integration within an overall company investment portfolio. Most of the time organizations make their decision at project level, missing the big picture of strategy for resource allocation and are subsequently confronted with internal politics pressure.

I have created and used these guidelines in many situations to build a trusted relationship with senior management when deciding on where the company should invest.

Specific Assumptions Regarding this Guide: All project management matters should be treated separately. The focus in on the decision to invest, not on the organizational ability to execute. We focus here on investments that create new capability for the company by exploiting Information Technology; Investments sustaining the current capability could be dealt with a different approach, not describe here.

Expected Values for the Organization

What is the primary reason of this investment? Most of the time small investments are focused on delivering one key value segment for the organization. But when it comes to major changes like ERP, multiple values could be generated. Trying to allocate part of the investment to a specific value can become rapidly complex.

Focusing on the main reason of why we want to invest, force us into a two fold discussion: How do we define value, and can we structure (potentially phased) the project in a way that we are addressing key value segment? Value segments should be defined at the right level (Operational Efficiency versus Working Capital Improvement), measured with a key metric, and integrate the identification of the primary beneficiary of the value created (Shareholders, Customers, Employees, Partners, communities,). While other implicit values could be generated by the investment, identify them clearly as secondary.

Tip(s): Design your investment to focus on one critical value segment.

Suggested Reading(s): Potts

Underlying Variables and Risk Topology

Return on investment is usually based on critical assumptions, like market size, competition move, political climate, regulation framework etc…. Whilst investing, we need to identify clearly these parameters and their inherent level of uncertainty. In 80/20 Hugh Courtney suggests a framework to tackle with different profiles of uncertainty which could be used to improve our understanding of risk exposure. It is called the “4 levels of residual uncertainty”: “A clearenough future”, “Alternate Future”, “A range of futures”, “True ambiguity”.  A balance approach is recommended based on the appetite for risk of the organization (“Utility Curve”).

A company could define standard assumptions for the entire portfolio of investment and monitor their evolution over time. This will enable a more accurate picture of the value created and improve the confidence of senior management and shareholder in the way we invest in the company. It is all about managing expectations in an uncertain world.

It is important to notice here that topology of risk will drive the choice of the method used to calculate the return on investment (DCF, EVA, Decision tree, Real Options…).

Tip(s): Understand that you balance your portfolio on critical assumptions that you may not be in control of.

Suggested Reading(s): Trigeorgis, Courtney

Featured Video(s): Bernstein

Relationship between Effort & Performance

I have raised the importance of this relation, in one of my previous post (“The Dark Art of IT Investment”), and suggested to approach this paradigm thru the S-Curve model. When optimizing a portfolio of investment it is important to understand how far we are in the process in term of leveraging past investments. Further we should determine if we are reaching an inflection point when a more drastic change is required versus pursuing continuous improvements that might deliver less and less value.

It is interesting at this step to introduce some flexibility in your investment by incorporating “Options” that you could exercise later, or leverage past ones that you might have created. Several categorizations of these “Options” exist in the literature – Lenos Trigeorgis suggested: “Defer Investment”, “Time to Build”, “Expand”, “Contract”, “Shutdown & Restart”, “Abandon”, “Switch”.

Although theories and mathematical models are available on this subject, I strongly recommend keeping it simple and focusing on the big picture.

Tip(s): Calibrate your portfolio between leverage and future opportunities and optimize it by incorporating flexibility thru premiums.

Suggested Reading(s): Fibol

Tool(s): Working Capital Profiler

The True Recipient of Investment

This is where we bring the human side in the equation. We are all aware of the IT’s potential of disruption on process and organization. Even more, they impact People. A restrictive view is to consider the only change is related to the way people work. But we should consider an investment as a possible lever to change the way people are perceived, see others, and develop the organization as a whole.

Organization, Process, and Technology (OPT) are concepts that could potentially dehumanize the decision process. So rather than considering investing in OPT we are truly investing in People who will subsequently grow the organization. Having said that, it is critical to understand in which population we are investing, and how we intend to maximize the value from them.

Tip(s): Structure your portfolio around effective people and efficient processes.

Suggested Reading(s): Dupuy

Big Picture

To make a sound decision, leaders need to have a clear understanding of the commitment they are created for their organization. If establishing financial footprint of an investment for the next 3 to 5 years is common discipline nowadays, the operational impact of multiple investments is not generally not consider. One of the key advices that I offer when dealing with IT related Investment is to look at the big picture, and to use common sense whilst deciding on moving the entire organization.

Tip(s): Picture the organization after all investment decisions, and use common sense to ensure that this is where the organization should be according to its values and principles.

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