itSMF IT Service Portfolio Management - What IT needs to do to avoid cost cutting while Business is in survival mode?

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The current financial crisis forces organizations to consider their spending habits. This often results in blunt cost cutting actions were (amongst other) IT ends up being the passive victim of the …

The current financial crisis forces organizations to consider their spending habits. This often results in blunt cost cutting actions were (amongst other) IT ends up being the passive victim of the excirse. How can IT take a more active attitude and partner with the business to ensure the most effective response to the crisis?

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  • 1. 12/02/2009 My name is Arno Kapteyn and I am a Managing Consultant at Capgemini based in The Netherlands. My field of expertise is primarily IT Governance with a secondary focus of IT Risk, IT Compliance, IT Security, IT Service Management and IT architecture. In the course of my professional career I gained hands-on experience in using models such as: -ITIL (V2 and V3) -CobiT -COSO -ValIT -ISO 17799/ 27000 -CMMi The use of these models helped to address topics amongst which: -(IT) Process Improvement -Risk Management -Value Management -Business – IT Alignment -Control Framework Design (to meet Security, Financial and other Compliance requirements) -IT Performance Management 1
  • 2. 12/02/2009 As a result of the economic down-turn the strategic business goals have shifted for almost every company. Short term survival has become a topic on virtually every C-level agenda. Issues facing the business in this time: -Lower income through less customer (both Consumer and Business) spending -Lack of investment capital from the financial market (As a result of Financial Institutes unwillingness to supply loans) -Increased business risk (increased risk of business partners defaulting on their commitments) All this insecurity leads to businesses trying to increase their financial reserves. 2
  • 3. 12/02/2009 This translates into a focus on Cash-Flow: Ensuring more money comes in each month than the money flowing out of the company to pay the bills. Hopefully improving the financial reserves. In the worst of times the cash-flow is negative (more money is flows out than comes in). This eats into the reserves (represented by the central container in the image). When the reserves are depleted in combination with a negative cash-flow the Enterprise goes bankrupt! So there is a sense of urgency. Noteworthy: -Sales on credit does not actually bring cash so only when the credit is due (and paid) it results in positive cash-flow - On the other hand, depreciation of assets does not involve actual payments leaving the organization so this two does not influence cash-flow 3
  • 4. 12/02/2009 But how does that translate to the day-to-day reality of the Business? The answer: It does not, since the Business does not exist. Every enterprise is a unique combination of divisions, functions, logical entities, etc. the operational translation of a strategic statement like: “Short Term Cash Flow Improvementquot; will translate differently for each of these Enterprise segments. A couple of examples: -Marketing communication might cut-back on advertising expenditure -Sales might put extra effort in maintaining the income volumes -Finance might focus on debt collection and/ or pay additional attention to customer risk management to So were does that leave IT? If IT were to be considered just a cost-centre the answer would be easy, pull the plug and save yourselves a bundle of cash each month! 4
  • 5. 12/02/2009 The fact that you do not see that happen even in the worse of circumstances indicates something we all know. Though we might not always be able to prove it: IT delivers value to the business. By pulling the plug we might inadvertently stop what ever is left on the income side of the Cash Flow balance. For instance if a bank were to close down its internet bank this might lead to the loss of any remaining confidence in that bank with the possible devastating result. So a stale mate: We need to reduce expenditure for the enterprise (Including IT) but ensure we do not worsen the Income side of the Cash-flow equation while doing so. To answer the question were we can safely trim down the IT Expenditure we need to know how we add value to the (individual sections of) the business. 5
  • 6. 12/02/2009 So first of all: We need to break-down the business into its segments so we can see what services IT actually supplies to that particular segment. You could think of this as customer segmentation as we see it in (business-to-business) marketing. Than together with that (section of) business we need to ensure we create the maximum (Short term) business value (Read: Income) at a minimum expenditure. The first step to achieve this is for Business to identify what the Enterprise Value of each of its business processes is (and how they want to react to these troubled times). For those business processes business want to keep up and running IT needs to identify the services they supply that are actually supporting those business processes. Imagine IT decides a certain Service offers top value to the manufacturing facilities of a Detroit car maker and they focus their effort on enhancing that value. And than the Enterprise decides to shut down manufacturing since they have more than enough cars on stock already…. Furthermore Service Portfolio Management needs to identify the nature of the value it offers for the business process. For example: An IT Project that will reduce the operational cost of a business process by let's say 75% percent 10 years from now is useless if the current expenditure for running that project bankrupts the company in the next two months. At this time we should not be interested as much in the chicken that lays the golden egg some time in the distant future, we need a chicken that lays eggs now! So we can sell it and generate cash. Furthermore, we should check for chickens that don't eat that much. The primary focus should be about the nature of the value even if the value is not 100% quantifiable. 6
  • 7. 12/02/2009 So we need the Business Relationship in order to jointly battle the problems at hand. However before we can embark on Business Relationship Management you need to have a relationship with business. Tools and Processes can not build that relationship. The willingness to communicate and exchange ideas needs to be their on both sides of the table. Portfolio management cannot force the Business Manager to listen when the IT Executive explains how new technology could improve the IT Value for business. Nor can portfolio management ensure that IT actually checks what the business requirements are in stead of just assuming. The right cultural mind-set is required. Respect for the individual fields of expertise of each partner is a fundamental part of the foundation. A shared sense of urgency and a willingness to partner in order to achieve goals. From that perspective the Financial Crisis can be a positive force to break the “us- against-them” culture you will still find in many companies. If the worse happens and the company goes bankrupt both will be unemployed together! So once you engaged in the dialog, models like ValIT (represented here) and ITIL V3 (specifically Service Portfolio Management) will help you structure the effort and help to achieve maximum effect. ValIT describes three process areas: • Value Governance: Create the Governance structure for the Business – IT Interaction • Portfolio management: Describe the IT components/ deliverables offered including all metadata required for decision making • Investment Management: Defines, Tracks and Manage individual Portfolio Items through their lifecycle to ensure that actually perform (deliver value) as expected. When looking at IT Service Portfolio Management as described in ITIL V3 you will find overlaps and shared goals with ValIT. In comparison ValIT describes the field of Business-IT Alignment and Business Relationship management more from the Business perspective were ITIL v3 (specifically IT Service Portfolio Management) uses more IT Terminology. Working with these two models in combination will ensure focus both on the context and the content of IT Service Portfolio Management. 7
  • 8. 12/02/2009 When we focus on the content of IT Service Portfolio Management you will find it contains two basic blocks: -Services currently in Operation -Services under development Each of these has to be reviewed in a different context: -Services in operation hopefully deliver value in a day-to-day bases. It is here we need to check if we would not hurt the income side of cash-flow by shutting them down. Think of Amazon deciding so save on IT-operating cost by shutting down their website. Not likely! - Services under development since these do not actually deliver value yet these are the obvious candidates to shut down. And indeed ever so often you will find that companies that are in bad weather decide to stop all their development projects. But now imagine you have a project that is close to completion, lets say all that is needed is one more month and an investment of let’s 10,000 (US$, Euro, Yen). Upon completion the value to business is let’s say an out-of pocket cost reduction of 10,000 per month. The break even for the remaining investment would be two months and after that time it would help with a sustained improvement of the Cash-Flow position. Wouldn’t it be a good idea to try and find that remaining investment money? The example goes to show that there is no black and white decision making. Yet in the panic of the moment blunt cost-cutting exercises tend to do just that. In this calculation the money spend in the past is not relevant, it is about time and money still needed before the solutions starts generating value.
  • 9. 12/02/2009 The current economic storm is not over yet and nobody knows how long it will last. So enterprises will need to take action. If IT does not engage into this exercise pro-actively C-level management will most likely force a cost-cutting exercise sooner or later. Any such exercise is likely to be very blunt. We have already seen examples were all contractors were send home from one day to the next, no matter the kind of work they were engaged in. An other example was a statement of a 20% budget cut across the board, no appeal possible. All IT-projects not in operation yet are stopped in some cases. If this becomes the mind-set of top the top executives because they feel the enterprise domains do not take affirmative action IT will be forced in the defensive and become the passive victim of any such exercise. 9
  • 10. 12/02/2009 Times are bad for everybody so cost saving is necessary for Business and IT alike but by doing it smart, together with the Business you can ensure maximum enterprise-value for the remaining expenditure. Winning is relative, everybody is experiencing the same head-wind. If IT and Business counter the effects together in a smart way you might even find yourselves in a better position relative to your competition by the time the wind shifts to a tail wind again. 10
  • 11. 12/02/2009 11