A Portfolio Approach to Managing IT Investments

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So far in this module, we have seen how enterprise systems that put in place

information capabilities in your organization have to

address a business objective and implement an operating model.

In this session, we will conclude with the discussion of how enterprise systems

also have to be aligned with the broader portfolio of IT investments in your firm.

You can think about this portfolio of IT investments as similar as to your

financial portfolio.

Your personal financial portfolio may have different classes of investments.

Example, fixed deposits, mutual funds, equities,

each of which is categorized by a certain risk and return.

And the overall risk of this portfolio, as well as returns that you seek,

are aligned with your risk preferences and financial wherewithal.

Similarly, your portfolio of IT investments also has different classes of

IT assets or expenses, each with a specific risk of failure and return.

Every time you make an investment, you need to rebalance this portfolio

to ensure that the overall risk that you're carrying in your IT portfolio

is aligned with your competencies and capabilities as a firm.

This rebalancing of the portfolio of IT investments

is the final step in your design of information capabilities.

Let's look at each of the classes of IT investments that make up

your portfolio in greater detail.

We have four asset classes that describe the IT investments of a firm.

Each IT investment that you make will fall into one of these four classes,

depending on the business objective of the investment.

The first class of IT investments is strategic IT investments.

Strategic IT investments,

as the name indicates, advance your competitive position in the market.

These investments support new market entry, new product development,

and other revenue or group enhancing business activities.

They often require the development of new capabilities.

Strategic investments are characterized by the highest rates of failure

in your portfolio, but they also deliver the highest rates of return.

Informational IT investments provide information to the right person

at the right time in your value chain.

This could be for a broad range of business objectives, ranging from

financial reporting and compliance, to communication of business information for

analysis and other managerial decision making.

Informational investments depending on the scope and

aligned change that the agenda in the organization can be risky investments.

So a compliance system for basic financial reporting may not be risky.

But then ERP investment,

as we saw in the previous session can be characterized by high rates of failure.

Transactional investments, the third class of IT investments in your portfolio,

reduce costs through substitution of labor with technology or

increase of throughput for the same costs.

These investments automate business processes and

reduce complexity and costs in your organization.

But as we mentioned in a previous session,

transactional investments are never a source of competitive advantage.

If you don't invest in them, you may be competitively disadvantaged, but

they do not yield competitive advantage to your firm.

Transactional investments are also the least risky of

the asset classes in your portfolio of IT investments.

Infrastructure investments, the final class of IT investments,

are the foundation of the IT portfolio.

And they refer to shared computing resources, servers, printers, etc,

that are used by multiple applications and systems in your organization.

The justification for these investments is varied.

Sometimes infrastructure are an output of cost reduction through

standardization and consolidation and reduction of non-discretionary spending.

Sometimes they are an outcome of regular upgradation to newer versions of products.

But occasionally, infrastructure investments will provide new capabilities,

such as investments in voice over IP, or mobile technologies, and

adaptation to new technologies, such IoT, etc.

Therefore, for most part, infrastructure investments are not risky.

However, in the event that they represent a shift in capabilities of the firm,

they may carry high levels of risk and failure.

I want you to note two points in developing or

classifying IT investments in your portfolio.

First, remember that an investment may be categorized in more than one class.

For example, a supply chain management system is an informational investment,

in that it connects your supply chain partners and ensures that the right

information is available to the right partner at the right time.

However, if you are one of the early firms

to make this investment in supply chain integration in your industry,

the investment would also classify as a strategic investment.

Indeed, this investment is pushing your competitive position in the market,

requiring fundamental changes in your organization,

as we discussed with enterprise systems.

And it does not have enough industry learning to guide your effort.

In turn, the likelihood of failure for

this supply chain management investment is nontrivial.

The second point that is important for you to remember is that an investment

that is once considered strategic may transition to being

transactional over time, for example, ATMs.

In their initial form were a strategic experiment with IT by banks and

considered to be strategic to the early investors in these investments.

However, ATMs have since evolved to being a transactional investment in banks.

In general, for a given scope of implementation,

the maturity of a technology over time will impact its classification too,

as a strategic investment.

Transition across asset classes over time is common in IT investments.

Portfolio management is a powerful tool to align your IT strategy

with your business strategy.

The reading that is assigned to you outlines that nearly half of

the Fortune 1000 firms have adopted IT portfolio management in

their management of IT investments.

Let's now look at how classifying your IT investments into one of these four

classes helps you align your IT strategy with your business strategy.

There are three ways in which you can use IT portfolio management

to align your IT strategy with your business strategy.

First, you must align the return profile of your IT portfolio

with your strategic goals and business objectives.

What do I mean by that?

Take a look at this table.

The first column indicates industry averages for

investments in each of the asset classes in your portfolio.

Consultants, system aggregators, and other technology service providers

will be able to share these industry data with you.

The article that I've provided as a reading also highlights industry averages

for various industries, such as retail, financial services, and healthcare.

Now firms, at any point in time, typically pursue one of two business objectives.

We've seen this in the context of our case discussion of Reliance as well.

They focus on increasing revenue and growth, or

they focus on reducing costs and improved profitability.

The business objective that you seek to pursue

will determine the relative investment in each asset class.

This is because each asset class,

as I just pointed out, advances a specific business objective.

I offer to you that strategic investments, improved revenue, and

growth while informational investments transform your cost of operations.

Transactional investments also reduce costs.

Therefore, if your business pinpoint and

in turn your business objective is to improve revenue and

growth, you will increase the strategic component of your portfolio.

If, on the other hand, your pinpoint is operational efficiency,

cost of operations,

you should then seek to increase the informational component of your portfolio.

We saw this in the case of Reliance.

Their profitability was a key concern relative to their competitor, Tata Power.

In which case, the appropriate investment for Reliance would have been informational

or transactional investments that reduced cost of operations and improved profits.

And that's precisely what Reliance engaged in.

The second alignment that you should seek is between the asset

classes in your IT portfolio and your operating model.

So here's a look at Reliance's portfolio before they undertook

the digital transformation.

What stands out to you?

In particular, stare at the informational and

transactional components of the portfolio.

You'll find that the informational investments

are a woefully small component of the IT portfolio,

while transactional investments are the largest component of the three classes.

So lots of silos of automation with little linkages between these investments,

a fragmented organization that does not talk to each other.

These investments paint for you the picture of a diversified operating model.

And as we discussed,

that was indeed the case with Reliance before its digital transformation.

The IT portfolio is mirroring the operating model.

However, we also said that Reliance's business

demanded a unified operating model, which suggests

that the informational investments in the IT portfolio need to be increased.

Redundant automation,

which is contributing to the transactional investments, will be done away with,

in turn reducing the transactional component of the portfolio.

Relatively high investments in strategic IT

are also misaligned with the firm's need to improve cost of operations.

These two need to be reduced to accommodate the increase in

the informational component of the IT portfolio.

You will find that the ERP investment is aligned with both points.

As we discussed earlier, it addresses the business objective

of reducing the cost of operations of Reliance.

At the same time, it is also aligned with implementing a unified operating module.

Reliance's ERP investment is aligned with this objective.

While implementing or

putting in place a unified operating model, the ERP investment would

contribute to an increase of the informational component of the portfolio.

This increase in the informational component

would render a lot of investments and automation in the company redundant,

thereby reducing the transactional component of the portfolio.

So far, you've aligned the returns

on your portfolio with your business objectives and operating model.

The final step is to align the risk inherent to your portfolio

with your competences and practices as a firm.

If you are investing significantly in strategic and informational investments,

both categorized by high rates of return as well as risk,

you need to ensure that your firm is IT savvy.

That it has the competencies and practices to implement such a complex and

risky investment.

These are some measures that will help you assess your IT savviness as a firm.

You saw, for example, in the case of Reliance,

a company whose top management was committed to IT.

Whose employees had experience in successfully adopting and

exploiting IT investments in the past.

And a company who had integrated technology

in a range of business activities.

Therefore, this was an IT savvy firm

that could take on the risk of implementing a complex enterprise system.

Firms who do not possess these capabilities need to consider other

options that mitigate the significant risk of failure of complex IT investments.

These include a staged approach to implementation of the investment,

a pilot implementation to assess and learn about the risks, etc.

These options will be discussed in greater detail in your course on accounting and

finance for IT managers.

I hope that at the end of this module, you now have a sound understanding all

the ingredients that constitute the secret sauce of information capabilities.

We said that capabilities design is a three-legged stool.

You begin with identifying your business objectives.

You then translate those objectives to an operating module.

The operating module will determine your choice

of enterprise system that you implement in your organization.

In this context, you got insights into the challenges and

opportunities associated with ERP implementations in firms.

You finally close the loop by insuring that the technology investment that you

put into place is aligned with a broader portfolio of IT investments in your firm.

This sequence of steps will yield you information capabilities that

are a discernible and sound source of competitive advantage.

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