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Technology Business Management: How Innovative Technology Leaders Apply Business Acumen to Drive Value


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At the height of the global recession that began in 2008, business technology leaders were at a turning point. Faced with the conflicting mandates of spend less on technology and drive greater business productivity, we found the traditional approaches to managing IT were no longer adequate. Although each of our situations was different, we struggled to collaborate with our business partners to make fact-based decisions about cost and quality tradeoffs, to drive the right levels of investment in our projects and services, and to maximize the business value from every dollar invested in IT.

Fundamentally, our management approaches lacked the necessary business acumen. Our business partners managed their businesses one way, and we managed ours another way. We spoke different languages. They talked about cost and quality and we talked about technical constraints and service levels. When new market opportunities appeared, they justified the
investments to go after them. We said no to new projects far too often because we had dysfunctional funding

We formed the TBM Technology Business Management Council to deal with this challenge. Rather than each of
us trying to solve the problem on our own, we got together to share and discuss innovative approaches. The theme was always the same: how can we create and leverage transparency internally and with our business partners to optimize our costs, balance the supply and demand for our services, and drive more investment in business productivity and transformation?

In this book, we share our perspectives on Technology Business Management, a prescriptive and applied set of practices for CIOs and their teams to maximize and demonstrate business value. The videos, interactive infographics, and interconnected surveys of the TBM Index provide a rich learning experience for you. We hope you will not only learn the principles of TBM but also how to apply them.

We recognize there is no substitute for conversations with other practitioners of TBM. What makes this book unique is it is a core part of a collaboration platform that connects you to us — a community of your peers who are learning about, adopting, and using TBM. We encourage you to connect and participate. Ask questions. Share your own observations and lessons. In doing so, you will have a better learning experience but you will also help us evolve the practice of Technology Business Management.

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Technology Business Management: How Innovative Technology Leaders Apply Business Acumen to Drive Value

  1. 1. Getting Started This media-rich book authored by the TBM Council combines videos, interactive graphics, and the TBM Index where you can measure and compare key performance metrics with other CIOs. Please touch the video above to learn how to interact with this book, and gain the most out your experience. Getting Started HOW TO USE THE BOOK
  2. 2. Getting Started LinkedIn Authentication 2 Touch the LinkedIn logo above to sign in with your LinkedIn account. In doing so, you will have full access to the TBM Index and other resources in the book. We ask for LinkedIn authentication to help ensure the integrity of TBM Index data. Your company’s industry and size are used for demographic purposes. No other information, including your connections, are used without your explicit permission. Your LinkedIn data will not be shared with third parties. SIGN IN WITH LINKEDIN
  3. 3. Meet the Council 3 TOUCH THE PHOTOS TO INTERACT Meet the Board of Directors and Officers of the TBM Council. You can also meet Principal members of the Council and see demographics of other readers. Touch on any photo to read their biography and meet the leadership team. Getting Started
  4. 4. At the height of the global recession that began in 2008, business technology leaders were at a turning point. Faced with the conflicting mandates of spend less on technology and drive greater business productivity, we found the traditional approaches to managing IT were no longer adequate. Although each of our situations was different, we struggled to collaborate with our business partners to make fact-based decisions about cost and quality tradeoffs, to drive the right levels of investment in our projects and services, and to maximize the business value from every dollar invested in IT. Fundamentally, our management approaches lacked the necessary business acumen. Our business partnersi managed their businesses one way, and we managed ours another way. We spoke different languages. They talked about cost and quality and we talked about technical constraints and service levels. When new market opportunities appeared, they justified the investments to go after them. We said no to new projects far too often because we had dysfunctional funding models. We formed the TBM Technology Business Management Council to deal with this challenge. Rather than each of us trying to solve the problem on our own, we got together to share and discuss innovative approaches. The theme was always the same: how can we create and Getting Started Foreword 4
  5. 5. leverage transparency internally and with our business partners to optimize our costs, balance the supply and demand for our services, and drive more investment in business productivity and transformation? In this book, we share our perspectives on Technology Business Management, a prescriptive and applied set of practices for CIOs and their teams to maximize and demonstrate business value. The videos, interactive infographics, and interconnected surveys of the TBM Index provide a rich learning experience for you. We hope you will not only learn the principles of TBM but also how to apply them. We recognize there is no substitute for conversations with other practitioners of TBM. What makes this book unique is it is a core part of a collaboration platform that connects you to us — a community of your peers who are learning about, adopting, and using TBM. We encourage you to connect and participate. Ask questions. Share your own observations and lessons. In doing so, you will have a better learning experience but you will also help us evolve the practice of Technology Business Management. 5 Getting Started
  6. 6. 6 CHAPTERS INCLUDED 1. The New Business Model of IT and the Forces Shaping It 2. Position Your Organization to Manage Your Supply and Demand 3. Understand and Benchmark the True Cost and Performance of Your Services FUTURE CHAPTERS 4. Provide Transparency to Link Service Delivery with Business Outcomes 5. Execute Demand-Based Planning to Gain Greater Efficiencies and Alignment 6. Optimize Services and Suppliers for the Best Cost for Performance 7. Rationalize Your Portfolios to Sustain Value Creation 8. Innovate to Drive Growth and Strategic Business Advantage 9. Transform the Business by Enabling Agility Drive a Performance-Based Culture10. Chapter Summaries
  7. 7. Chapter 1 The New Business Model of IT and the Forces Shaping It Executive Summary Over the last decade, the value equation of business technology has changed dramatically as the result of several forces that are beyond our control as technology leaders. In this chapter, we share the lessons we’ve learned in adapting to these forces, giving rise to a new paradigm for maximizing the value they deliver to the business: Technology Business Management (TBM). We introduce four decision-making capabilities that help us more efficiently run our businesses while balancing our investments in growth and business transformation. Built upon transparency, TBM complements our existing key initiatives (such as IT service management, IT governance and modernization) and applies to virtually every enterprise, regardless of your maturity or business model.
  8. 8. As technology leaders, we are relied upon to both run and grow our businesses. This dual role is nothing new. There has always been a tension between our investment portfolios of running and growing — and transforming — the business. This is important because we are judged — and we judge ourselves — by how well we strike the appropriate balance between these competing portfolios. Investing poorly likely puts our business at a competitive disadvantage, alienates our business partners, and in turn, limits our tenures, compensation and career paths. The investment triangle of run, grow and transform (see next page) forms the business value equation of enterprise technology. Unfortunately, forces beyond our control have permanently altered this equation, leading to a seachange in the skills and methods we must employ to strike the right balance. Let’s first consider how these major forces have permanently altered this value equation. Then, we will look at a new management paradigm that is needed to counter them. Section 1 The Business of Enterprise Technology Has Changed 8 The Business of Enterprise Technology Has Changed Chapter 1 Section 1
  9. 9. The Economic Crisis and Regulatory Expansion Constrain Innovation The global recession that began in 2008 has made a lasting impact on business technology spending. Average IT budgets fell in every region except “emerging Asia”ii and there continues to be downward pressure on many. According to recent Network World researchiii, only a fifth of businesses have budgeted more for IT in 2012 than they did last year, with the majority (39%) keeping budgets flat. It’s not just flat or declining budgets that have an impact on the value we deliver. It’s how we deploy those budgets. Since run-the-business spending is often fixed and non-discretionary, budget cuts generally come from our change-the-business initiatives first. While we often try to optimize our run-the-business spending to free up budget for more strategic priorities, the recent tightening has made this more difficult for two reasons: • Over the past several years, we became much more efficient and productive, making it much harder to find additional optimizations. Many of us have had to admit we’ve cut to the bone, there’s no more to give. We’ve got to find ways to optimize our demand instead. 9 Touch each category to see how each affects your investment portfolio. Interactive 1.1 The Technology Investment Triangle
  10. 10. • At the behest of our CFOs, many of us postponed expenditures on equipment and software to preserve cash. Now hardware and software refreshes, which are mostly run-the-business costs, are eating into potential grow/transform investments. In fact, from the second quarter of 2009 (when the recovery began) through the third quarter of 2011, 94 percent of capital outlays in the United States were used to replace aging high-tech equipment, machinery, and buildings. Only 6 percent was spent on business expansion. To make matters worse, the ever-increasing regulatory burden (i.e., mandatory expenses) puts growing pressure on our run-the-business costs. The costs to comply are rarely classified as grow or transform. And since most regulations mandate additional reporting from the business, they disproportionately consume our technology budgets. Whether it’s complying with IT- focused provisions (e.g., PCI DSS, HIPAA, data privacy acts) or business-focused regulations (e.g., Sarbanes- Oxley, anti-money laundering statutes, environmental laws, changing tax code), information technology is needed. This drives up the run-the-business part of our investment triangle. Cloud Computing and Consumerization Loosen Your Grip on Technology Spending The cloud has fundamentally altered our relationship with the lines of business. More than ever before, we face real competition. Where outsourcing decisions in the past were usually made by us, our business partners are increasingly making decisions to selectively outsource services such as infrastructure and software to the cloud. Even when we’re able to retain control over sourcing 10
  11. 11. decisions, the cloud has altered the expectations of our business partners. Here is why. Cloud providers market directly to our business partners who are savvier than ever about technology. As a result, our business partners expect to order services at a published price over the web. They want near-instant access from almost anywhere. They want an intuitive application with round- the-clock support. If we can’t meet these expectations, they are more willing than ever to build the business case and source those services directly through the cloud. This disintermediation of the IT supply chain creates a number of challenges (e.g., integration, security, administration) which cause unintended consequences for our overall investment portfolios. Public cloud computing introduces other challenges as well. For example, it means we must be able to make apples-to- apples comparisons between our external services and internal ones. Consider end-user support for end-user software. Many SaaS providers do not provide level 1 support to end users; they expect their customers to do so. In this case, the retained cost of providing level 1 support should be included in any comparison of on-premises software to a SaaS solution. Embracing consumer technologies — the consumerization of IT — also affects our decision making. Our business partners and end users often compare the purchase price of consumer-grade PCs, laptops, internet service and so on to similar but commercial-grade products and services that we provide. The disparities in price and quality along with 11
  12. 12. the inherent diversity of products and services increase the cost and complexity of running our business. This loss of control often translates into poor business and technology decisions. Adopting public cloud services or consumer technologies without a clear understanding of their total costs, including retained costs, can spell ruin for our run-the-business budgets. Furthermore, shadow IT can impair our ability to execute a cohesive technology strategy and enterprise architecture initiative, hindering agility and impairing business alignment. Cloud and consumerization are not inherently good or bad, but our decisions to adopt them must be based on facts. Business Growth and Competition Drive Demand Faster than Efficiency Gains Increasing demand for our services, projects, and infrastructure often stems from business growth. The corresponding investments we make, properly classified as grow-the-business, are welcomed by our business partners. Such capital investments in new capacity often drive down our unit costs (by spreading fixed investments across more units), which help keep our run-the-business spending in check. By taking advantage of continuous cost/performance improvements (e.g., due to forces described by the laws 12
  13. 13. of Moorev, Koomeyvi, Bellvii, and others), hardware refreshes can help reduce our run-the-business costs. New hardware is generally cheaper to buy, power, cool, and maintain than older hardwareviii. However, these gains have barely kept pace with the growth in demandix. We may now be at a tipping point. According to Dr. Howard Rubin, efficiency gains have offset demand growth by about 18% per year. However, he believes these gains will be more than offset by increased demand in the coming years. Rubin cites efforts to protect revenue, tap into new revenue sources and markets, leverage new channels and support new devices as reasons for this geometric growth rate. Increased demand is not just an issue of quantity. In order to innovate and compete, we often build or cobble together leading-edge technologies that are more powerful, complex and integrated. Creating these services may be viewed as growth or transformation, but they create a run-the-business “hangover” that is usually greater than the cost of running traditional or commoditized technologies. While these forces apply upward pressure on our run-the- business costs, increased global competition is driving greater accountability for growth and innovation. To be successful, we need to foster transparent conversations with our business partners to make collaborative decisions about cost and quality…and about supply and demand. 13
  14. 14. Value Is in the Eye of the Beholder Each of the forces we described above affects our investment portfolios — and our value equation — in different ways. Some drive up our run-the- business costs while others exert greater pressure for growth and innovation. How these affect the value we deliver depends on the expectations of our business partners. The MIT Center for Information Systems Research defines value as “delivering performance on a dimension that stakeholders find important. The performance dimension may be monetary, such as revenue or profit, or nonmonetary such as customer satisfaction or process reliability. However, delivering performance on an unimportant dimension has no value.” XII A free marketplace has a built-in mechanism for handling the innate subjectivity of value: cost (or price). Cost helps bring supply and demand into equilibrium. If a product or service is free, demand is potentially infinite. However, putting a cost on our services starts to shape both supply and demand. Our business partners begin to understand how the cost of technology affects their cost of revenue. They will decide how much service they need, at what level of quality, and help us minimize waste. They will tell us when cost exceeds value. Cost is a very important signal. Section 2 14 Chapter 1 Section 2 Value Is in the Eye of the Beholder
  15. 15. This does not mean we all must charge back for our services. Many of us are not ready to take this step; for some organizations it may never be needed. However, we need to enable value-based conversations with our business partners. Since value is subjective, we need to frame our discussions in quantitative terms that our business partners understand. Cost transparency helps us do this. Transparency of quality is also important. This means clearly defining and communicating our services and their quality (e.g., through service- and operational-level agreements, security ratings, etc.). It also means measuring and communicating the quality of service delivered. Once the cost and qualityxiii of our services is known, how do our business partners assess value? In general, they compare our costs and quality against three factors: 1. The cost and quality of third-party alternatives: Our services should not cost more than similar-quality services from third-party providers, including the cloud. Since it is often difficult to perform apples-to-apples comparisons of services, the perception of cost and quality is important. Competitive providers often do a good job of marketing their services, making them appear better or cheaper than what we are offering. 2. The cost and quality of internal alternatives: Our business partners may own and operate their own technologies, including both applications and infrastructure. In certain operating models (e.g., decentralized IT organizations), the lines of business often own a large part of their technologies. The cost and quality advantages of greater scale may encourage our businesses to move to a shared services model, but only if and when we address political roadblocks. A clear and unbiased comparison of costs and quality helps us overcome such objections. 15
  16. 16. 3. The business outcomes enabled by our services: Innovation is the engine of growth, both to our top-line revenues and to our bottom-line profit. The growth supported by our services must justify the investments in them. As technology leaders, we manage the cost and quality of our services. Our business partners are the best judge of business outcomes. What we need, then, is a decision- making framework for collaborating on cost, quality and business outcomes. 16 Video 1.1 The Benefits of Technology Business Management
  17. 17. Technology Business Management (TBM) gives us a decision-making framework for maximizing the value from our technology investments. The framework relies on our foundations of financial and operational data, our service delivery people and processes, and our relationships with our business partners. It defines the disciplines that are essential to optimizing our costs so that we invest more in growth and agility. We provide a guided tour of the TBM Framework in this book. In the remainder of this chapter, we introduce you to each component. We also introduce the TBM Index with a diagnostic for you that follows the structure of the framework. By answering a set of questions about your organization, you will get a baseline of how your organization is currently applying Technology Business Management principles. The diagnostic also benchmarks your organization against your industry peers. In each subsequent chapter, we discuss each component of the framework in greater specificity. You will learn about the options you should consider when applying TBM, along with the pros and cons of each. Extending from the baseline diagnostic, we present additional questions in each chapter based on those options. The answers to these questions will provide actionable findings based on recommendations from TBM Council members and other experts. Section 3 17 Chapter 1 Section 3 TBM: A Framework for Maximizing Value
  18. 18. While your decision-making framework may be different than the TBM Framework here, it should center on driving collaborative tradeoff decisions internally and with your business partners based on facts and metrics. Tradeoffs are essential because we must find ways to drive greater value without spending more time, money or resources than we already have. Even if our budgets grow, the ability to maximize value through tradeoffs helps us stay lean and ready for tougher times. But what kind of tradeoffs can we, and should we, be driving? To answer this question, let’s start our guided tour in the center of our framework with the decision-making capabilities. Run the Business More Cost Effectively There are four types of decision-making capabilities that help us maximize value through tradeoffs. The first two help optimize the cost and quality of services in order to run our business more cost-effectively. First, we optimize our cost for performance. To get the right quality for the best possible price, we must balance our cost, quality and risk based upon the needs of our business partners. Balance is the operative word, as reducing cost is not always the right answer. Indeed, sometimes our business partners are willing to pay more for better quality. Clearly there are two sides of this tradeoff. On the cost side, we must consider our total cost of ownership (TCO), not just our acquisition 18 Diagram 1.1 TBM Framework
  19. 19. costs (a small part of the TCO for most services or technologies). Where possible, we must reduce waste and increase the utilization of our services, technologies and other assets. We must also understand our unit costs, since the volume of our services and technologies will vary based on business conditions. Our challenge is to create a total cost structure that optimizes unit costs given the volume fluctuations of our business cycles. This demonstrates business maturity, which fosters the trust of our business partners. On the other side, we have performance. Here we refer to the various qualities of a service or technology for which we pay. These include the warranty qualities of availability, security, and fault tolerance and the utility qualities of features and functions (i.e., business efficacy, fitness for purpose). In many cases, we can reduce our costs simply by reducing the quality of services or by increasing the associated risks. Such decisions may be appropriate, but only when considered in the context of potential business outcomes. Cost and performance tradeoffs address only part of our efficiency challenge. We must also rationalize to sustain value creation. Over time, our portfolios of services, applications, technologies, infrastructures and suppliers become more complexxv. By driving up our costs and hindering agility, portfolio complexity cannibalizes innovation. To sustain our 19 Diagram 1.2 Run-the-Business Capabilities
  20. 20. capacity to create value, we must identify when, where and how to simplify, modernize, or consolidate our portfolios and their resource components. We must appropriately trade diversity and complexity for cost reduction and simplicity. To make those decisions, we must first understand the consumption of our resources. Any decision to alter a portfolio has an impact on consumers. We must understand who is being affected and how. We leverage our insights into consumption, cost and performance along with more strategic considerations, such as supply risks, enterprise architecture and vendor lock-in, to create properly balanced portfolios. Improve Our Ability to Change the Business Running our business more cost effectively increases our capacity to change our business. Not only does it free up budget for growth and transformational investments, but it helps us demonstrate credibility to our business partners. Credibility is as essential to our success as the capacity to spend on innovation. Change-the-business investments are those that help us grow revenue, exploit new ways to reduce costs, or fundamentally improve the way we do business. They help improve the top or bottom lines of our income statements. While our run-the-business decisions can improve our bottom line by optimizing costs, they mostly 20 Diagram 1.3 Change-the-Business Capabilities
  21. 21. do so by changing the way we deliver our technology- enabled services. For the purposes of our discussion, we define change-the-business investments as those that improve our business processes or decision-making capabilities. We focus on two types of decisions that improve our business. First, we innovate to grow and compete by balancing our investments across a portfolio that is governed with our business partners. Our portfolio of investments may include run-the-business investments, but we often strive to maximize our investments in business growth and strategic advantages. Innovation largely stems from the projects we undertake. Unfortunately, we often make portfolio decisions based on limited visibility into the total investments being made in our projects and services. Many tools give us insight into the hours being spent, the status of our projects, and our human resource capacity. However, we need to make decisions regarding our total investments, including the impact of projects on our longer-term run-the-business spending. Here we make investment tradeoffs based on a clear appreciation of the investments being made. Next, we must be prepared to transform our businesses by enabling agility. Transformational opportunities generally come along infrequently and unexpectedly, usually driven by market and technological changes that occur outside of our walls. Because these opportunities are difficult to predict, our businesses must quickly respond to take advantage of them. Agility makes this possible. Business leaders consistently describe agility as a key to success. We enable agility through several tactics. We 21 Video 1.2 TBM Provides Value Management
  22. 22. create cost structures that represent the right balance between flexibility and efficiency. We make investment decisions quickly, backed by the facts, and we enable more of our people to do the same. We give our business partners informed choices in the services they consume so they can quickly respond to changing market conditions. We move quickly to exploit the right market- based innovations such as mobile, cloud, collaboration, and services-oriented architecture. Once again, tradeoffs are essential. However, agility stems from the speed and confidence of making those tradeoff decisions. The Role of Transparency Our decisions depend on bidirectional transparency between us and our business partners. Transparency provides the visibility we need to make optimization decisions internally. Transparency with our business partners enables us to collaborate on tradeoffs. And transparency of business demand enables us to plan with greater fidelity and safely reduce excess capacities. Most importantly, transparency builds trust. We have a new motto for today’s technology leaders: be transparent or be gone! In our experience, few business technology executives argue with the need for better transparency. Most of our business partners demand it. Instead, many of us don’t know how to get there or what to do with it. Transparency is a sensitive matter. We can be too transparent, hiding the forest with the trees. We can reveal confidential information. We can report bad data and destroy hard- won trust. We can reveal problems but lack the tools for solving them. TBM addresses these concerns. 22
  23. 23. Building the Foundation TBM starts with positioning our organizations — our roles, responsibilities, and processes — to manage the supply chain of IT. This does not mean we must all reorganize for TBM. Instead, we must first understand who plays what key roles in managing our supply and demand. For example, who is responsible for defining our services? Who sources service components and manages the performance of our suppliers? Who works with our business partners to discuss their consumption and understand their demand profiles? Who translates business demand into actionable IT plans? The names or reporting structures for these roles is less important than how we arm our people to make decisions. Leaders in these roles must be given the facts and the decision-making framework to manage supply and demand by collaborating with our stakeholders. The Core Disciplines Building upon this foundation, TBM delivers meaningful perspectives for us to make collaborative decisions with our business partners. TBM provides an accurate picture of our costs and performance by the dimensions we need to manage, such as our services, applications, technologies, projects, data centers, suppliers, and consumers. Getting the right perspective depends on transforming much of our data, especially financial, asset and consumption data. We have important tools for this, such as activity-based costingxvi and the bill of materials for our services. We must consider the data that is needed or recommended for such a transformation, how data quality affects our decision making, and the methods for 23 Touch each element of the supply chain to understand the benefits related to IT services and projects Interactive 1.2 The Supply Chain of Business Technology
  24. 24. improving our data over time. Building on top of this foundation, TBM provides bidirectional transparency between us and our business partners. On one hand, TBM shows our business partners how much they consume, how much everything costs, and at what levels of quality. On the other hand, TBM helps us assess and translate the business demand for services into technology plans. We have several options for creating transparency with our business partners. For example, we can provide cost transparency based on actuals or by using published rates (prices). We can provide a shadow bill of IT (or showback) or charge back for our services. We can implement a hybrid model. Each approach has advantages and disadvantages. In comparing and contrasting different models of transparency, we can decide on an approach that is best suited for our business. We also have several options for planning with our business partners. Consider budgeting, a central component of planning. Many of us budget from a baseline, such as our prior year expenditures. However, some of us are moving to zero-based budgeting that reconsiders each line item based on the needs for next year’s business. This is more complex than baseline budgeting, but promises greater fidelity. In evaluating these alternatives, along with other, more advanced approaches to demand-based planningxvii, we can select an approach to planning that improves the value we get from it. Continuous Improvement Each of these decision-making disciplines helps us drive greater value. However, our value potential depends on the degree to which we can exploit them. Rarely do we possess all of the people, skills, data, tools and processes 24 Diagram 1.4 The Core Disciplines
  25. 25. to fully exploit TBM, especially at the start. In order to both sustain and improve value creation, we must leverage our governance processes and execute roadmaps for TBM that help create and drive a performance-based culture. The TBM Framework illustrates the necessary elements of a performance-based culture. In addition to governance and TBM roadmaps, the framework addresses change management such as training, the socialization of TBM, marketing your IT services, and the proper operational cadence for TBM decision making. 25 Video 1.3 The Board Explains the TBM Framework
  26. 26. Technology Business Management is built to be universal. Since it is both applied and prescriptive, it has been tested and adapted by enterprises of many shapes and sizes. These include a rapidly growing list of organizations, including companies in nearly every industry; with a few million dollars in annual technology spend to many billions; and in the Americas, Europe and Asia-Pacific. TBM has been applied by both traditional IT organizations and product operations groups whose spend is often described as “cost of goods sold” (COGS)xviii. Technology organizations of different maturity levels, operating models and delivery models employ TBM xix. Your organization is likely practicing many TBM principles already. For example, you may be providing cost transparency to your business partners or using business demand models to build your IT plans and budgets. But how does your organization compare to your industry peers? How well have you adopted the practices recommended by the TBM Council? Section 4 26 Introducing the Technology Business Management Index™ Chapter 1 Section 4
  27. 27. The Technology Business Management Index™ will help you answer these questions. The TBM Index™ benchmarks and assesses how you and other technology leaders improve value by applying business acumen to your decision making. Following the structure of the TBM Framework, the TBM Index employs an interactive survey found in this book and through the Council website. Structured in four main parts (see graphic on next page), the TBM Index offers you several benefits including: • Compare your organization’s application of business practices against those recommended by the TBM Council. • Benchmark your practices against your industry peers. • Use the TBM Index as a basis for conversations with other TBM Council members. • Discover which TBM practices correlate with IT metrics, such as run- vs. change-the-business percentages or IT spend as a percent of revenues. Providing these benefits is an important goal for us. However, we have another very important goal for the TBM Index. The Research Goal and Structure of the TBM Index The research goal of the TBM Index is to provide an industry-validated benchmark on the state of Technology Business Management. This will help us understand the degree to which TBM is being practiced by each industry, geography, IT operating model, and so on. In turn, we will be able to be more prescriptive in our recommendations to TBM practitioners. Furthermore, the TBM Index will allow us to correlate specific TBM practices and principles to the value delivered by business technology providers. To do this, the TBM Index is structured into four main parts, starting with a baseline diagnostic and later introducing questions and tools to assess outcomes. 27
  28. 28. There are many potential conclusions to be drawn from this research. For example, we will try to answer the following questions: • How does cost transparency correlate to increased change-the-business spending? • Does zero-based budgeting result in fewer budget variances throughout the fiscal year? • Does providing greater service choices and tiering result in more satisfied business stakeholders? • How does the value of TBM maturity vary by industry, geography and operating model? • At what size of company or business technology organization is TBM most needed to create satisfied business partners? While strength of correlation does not prove causation, it gives TBM practitioners greater confidence that the investments they make in Technology Business Management will result in the benefits they need. 28 The four surveys that construct the TBM Index (Right)
  29. 29. 29 Start the TBM Index The TBM Index™ baseline diagnostic gives you a snapshot of TBM at your organization so you can: Your responses are protected according to our privacy policy and will not be shared with third parties. Complete Your Profile so that you can access group comparisons. (5 minutes) Complete the Diagnostic to reveal your TBM Index baseline scores. (30 minutes) Compare Your Results versus baseline, or those in your industry. (5 minutes) Compare your organization to others in your peer group (industry, size, operating model, etc.) See where you can improve your decision-making capabilities Have a common benchmark for conversations with other TBM Council members 1. 2. 3. Get Started Now Click the button to the right to launch the Index
  30. 30. Executive Summary Implementing Technology Business Management (TBM) often accompanies a broader transformation of an IT organization. For many, this transformation positions the IT organization to be a better service provider and business partner. In contrast to many cost-centric IT organizations, these organizations build foundations on a unique value proposition, services aligned to that value proposition, and clear roles and responsibilities for optimizing their services portfolio by balancing supply with demand. In this chapter, we will discuss how to position your organization to manage the supply and demand for your services. We will focus on several core components of your TBM foundation, including your technology business model, how to define services and assess their unique business value, and the key roles your people must play to manage your services as a portfolio. Chapter 2 Position Your Organization to Manage Your Supply and Demand
  31. 31. Build Your Foundation Based on Value The Technology Business Management framework is built on a foundation that positions our technology organizations to manage supply and demand. This foundation defines our technology business model, the services we provide, and the roles and responsibilities that are essential to optimizing value. But to define any of these, we must carefully define our value proposition. Many technology leaders, corporate leaders and business partners mistakenly assume their technology organization’s value proposition should mirror their corporate strategy. For example, many assume that if the corporate strategy is cost leadership, then technology should be delivered cheaply; or, conversely, a product leadership strategy justifies enormous investments in highly custom technologies and services. This line of thinking is overly simplistic, imperils corporate strategyi, and stems from failing to 31 Diagram 2.1 The Foundation of TBM Positions to Manage Supply and Demand Build Your Foundation Based on Value Chapter 2 Section 1
  32. 32. understand or communicate how technology will help the business succeed. Instead, our value proposition must clearly articulate how we will enable our business to execute on its corporate strategy. Value proposition and corporate strategy are linked; but they are not the same. Best price (corporate strategy) does not mean cheapest IT. Best product does not mean custom applications. In other words, our technology is a means to an outcome, not the outcome itself. To better understand the connection between corporate strategy and value proposition, we share examples throughout this chapter from DIRECTV (see example at right), Xerox, The Clorox Company, and Inteva Products. Why is our value proposition so important to our Technology Business Management foundation? Because the value we promise to deliver drives both our technology business model and how we define our services. It refines what we expect from our TBM-related decision making and defines what constitutes success or failure for our technology organizations. Create a Unique and Compelling Value Proposition There is hardly anything more important for the success of any enterprise than its unique value proposition. More than mere messaging, our value proposition answers important questions about why we exist and the services we deliver, such as: 32
  33. 33. • Why should my business partners source services from me as opposed to doing it themselves or buying from an external service provider? • What must I keep in-house as opposed to sourcing externally? (Or, what is core and what is context?) • What value should our services reinforce? What will make them unique and compelling? • How should I communicate the value our services deliver? Creating a unique value proposition (or unique selling proposition) has been described extensively in business literature, especially for marketing professionals. The details for creating one are beyond the scope of this chapter. However, there are some important differences between creating a unique value proposition for a company as opposed to one for an IT organization. To understand these differences, let’s begin by considering a simplistic value chain (Diagram 2.2, Pg.34) for a technology-enabled business process. In our value chain, business value is built in four layers. We start with resources we procure and provide, such as hardware, software, and facilities. We deliver technology services by adding value through expertise and labor. We deliver business services by packaging, delivering and supporting business applications and offering additional value through consulting, training, application development and so on. Finally, we deliver business capabilities that generate revenue, reduce costs, increase productivity or otherwise improve corporate performance. Of course, not all of us execute all four layers of this value chain; our business partners often deliver parts of it. However, the value chains for technology-enabled business processes create or enable revenue and if done efficiently, help deliver a profit. Now consider the services you deliver. Where do they fall in this value chain? If you’re like many business technology providers, you probably offer services that fall into several segments. This is what makes it so difficult to define your unique value proposition. The simplest way to start is to focus on the segment where you have the best opportunity to deliver the highest value to your business. This will help you define your unique value proposition. Many IT leaders fail to deliver unique value – or if they do, they fail to accentuate and articulate this uniqueness. For example, it’s not enough to deliver technology services cost effectively; many cloud and other external service 33
  34. 34. 34 Diagram 2.2 Technology Business Model Archetypes
  35. 35. providers are equally cost-effective (or perceived as such). Your value proposition must be truly unique. Being part of (i.e., internal to) your business provides an advantage for delivering value. You may possess real or perceived strengths in safeguarding your customer data. You may be in a position to deliver the end-to-end services your business needs. You may be able to build and support differentiated business applications based on a more intimate knowledge of your business and customers. If you have these advantages, you should use them to define your unique value proposition. Ask your business partners these questions to reveal a little bit about your value proposition: • Why do you source services from my organization and not a third party? • Why not build or source your own technology-enabled services and applications? • What do we provide that you cannot get elsewhere? What is unique about the services we deliver? • How do we help you execute on your corporate strategy? • Do you consider us a business partner or a service provider? If your business partners struggle to answer these questions, or if they believe they are forced to rely on your organization, spend the time to develop or refine your unique value proposition. Need help? You probably have an expert business partner with a vested interest in you getting it right: your chief marketing officer (CMO) can help you better define your unique value propositionii. We provide recommended resources below. 35
  36. 36. In looking at our own business technology organizations and those of other companies, we’ve identified business models that vary based on business value and organizational focus. Indeed, these two elements are highly correlated: a mostly internal focus of a technology organization results in an emphasis on managing assets and cost and creates little unique business value; a more external focus (even to the point of external customers of the business) stems from delivering business services and capabilities and therefore greater unique value. To illustrate, refer to Interactive 2.1 (Pg.37). At the top you’ll find a business model archetype based on delivering the complete value chain described above. This archetype, what we call Business Driver, is often beyond the scope of a traditional business technology organization (i.e., an IT department). Exceptions include technology product and service providers where the technology function is integral to the customer service organization; think Facebook, Google, Yahoo!, and 36 Your Technology Business Model Depends on Your Value Chain Chapter 2 Section 2
  37. 37. As we move down, we encounter archetypes that conform to more traditional organizations. Since our models are based on their value chains, the other models comprise various parts of the Business Driver value chain. Let’s discuss each of these, starting with the Expense Center. Expense Center The Expense Center archetype is characterized by a lack of service orientation, as the move to defining and delivering services accompanies greater customer focus. The expense center IT organization is the least connected to business demand and is usually funded as a percentage of revenues, based on headcount, or through a baseline budget adjustment. These approaches poorly reflect business needs. The expense center model for IT is inappropriate for any corporate strategy. It is the vestige of an era when technology was less crucial to corporate strategy. As its name implies, an expense center IT organization is focused on cost containment. This leads many to assume it is the right model for a company with an operational excellence (or price leadership) corporate strategy. After all, cost leadership is tantamount to market leadership for these companies. However, investing more in technology solutions often helps reduce the cost of products and services due to productivity gains. 37 Interactive 2.1 Technology Business Model Archetypes Touch the archetype labels on the left to see the differences between each business model.
  38. 38. Take cost leader Wal-Mart. This retailer’s technology business model is best described as a value partner. For this retail giant, cost leadership often results from outspending competitors on business technology. For example, Wal-Mart was the first retailer to build its own satellite network, at the time (1987) the largest private satellite communication system in the world, giving the retailer a distinct advantage in managing its inventory and supply chain. The retailer continues to make dramatic investments in IT to support its “every day low cost” strategy. It is this strategy, and the linkage of services to unique business value, that justifies Wal-Mart’s investments and drives its technology business model. Wal-Mart clearly demonstrates that an expense center model is inappropriate for a cost leadership corporate strategy. Gartner’s research shows the fallacy of an expense center orientation that seeks to reduce “cost per” relationships (above). Gartner shows that instead of setting IT spending as a percentage of revenues or dollars per employee, business technology leaders must educate their business partners by defining “IT services explicitly in business terms. Executives can then make informed decisions about the right level of spending based on the cost of these business services and the value they deliver.” This aligning of spending to services is only possible when adopting a services orientation at some point in your value chain. 38
  39. 39. Service Provider The Service Provider archetype is characterized by the introduction of the service portfolio and creation or assignment of service owners and business relationship managers, all of which we will explore later in this chapter. Service providers often focus on the maturity of service management processes (e.g., ITIL) in order to define and deliver services efficiently and at the promised level of quality. Despite rhetoric to the contrary, service providers often operate at arm’s length from their business partners, relying on the business relationship manager to understand the business partner and their required outcomes. This orientation can operate like a vendor- customer relationship. Service owners define and deliver services and business relationship managers sell them, negotiate service levels and set expectations, review performance on a regular basis and make adjustments as needed. The service provider model is well-suited for most shared services organizations. Since they must serve the needs of multiple business constituencies, the service provider model works well to deliver standardized services at the right (and clearly specified) levels of quality and cost. Indeed, businesses that choose a shared services approach generally do so to improve operations, something the service provider model supports. In the service provider model, projects and other change-the- business investments are often restricted to technology services, such as new applications, which may be driven by transformational or other high-value business initiatives. However, the role of the business technology organization is often limited to the technical aspects of those projects or investments. Delivering greater value only comes from greater customer intimacy — by shifting your organizational focus more externally to your business. Value Partner The Value Partner archetype is characterized by a change in the service owner and business relationship management roles that reflect a more external focus of your organization. The shift to value partner depends on earning the credibility of a trusted business partner. In this model, the term “business partner” is more than semantics; it is based on a partner-oriented relationship. In our experience, credibility is earned through the following: 39
  40. 40. Creating a governance program that enables you, your line of business leaders and your corporate leadership to review, discuss and manage the IT investment portfolio alignment to business goals and/or capabilities. Clearly differentiating your technology services and articulating their value and business performance through a regular review process involving your business relationship managers. Delivering professional services such as application development, information security reviews, business application design (planning), business process analysis, enterprise architecture and others. These demonstrate that your organization knows your business and not just its technology. Meeting other core requirements such as performance and capacity, competitive unit costs, and expedient problem resolution. In other words, making the shift to value partner depends on delivering elements that are largely in your control as a business technology leader. In delivering these well — and demonstrating your unique value proposition when doing so — you will earn the credibility to deliver other business services and to help drive and fund business innovation. 40 Video 2.1 Xerox IT Transforms from Service Partner to Value Provider
  41. 41. Business Driver The Business Driver archetype could be considered the one that is not IT. These organizations truly are the business. This model is only possible when the products or services delivered to customers are largely based on your business technologies. If your company provides software, platform or infrastructure as a service in order to generate revenue, you are operating in this business model. If your business unit provides technology-based services to your external customers, you are a business driver. It is very unusual to see a traditional brick-and-mortar institution with the majority of their business technology delivered under this business model. However, it is not uncommon to find business units within brick-and-mortar companies that are business drivers. For example, the online store of a brick-and-mortar retailer represents a business driver. Even an investment bank whose services rely heavily on technology may fit this model. The business unit of an aircraft manufacturer that provides online flight scheduling services is a business driver. In these cases, the services of these technology organizations demand such an intimate relationship between business process owners and technology decision makers (e.g., service owners) that their organizations may be indistinguishable. Most business driver technology organizations started out that way. They were created in-house and are led by a CTOv, not a CIO. These CTOs often have much greater technology budgets than their CIO counterparts. However, with the emergence of the cloud we have begun to see CIOs be given responsibility for their company’s external “technology-as-a-service” business. This only occurs when the CIO has proven his or her ability to run IT like the business. The business driver model is included here because Technology Business Management is equally applicable to business driver organizations. There are many CTOs on the 41
  42. 42. TBM Council representing organizations that are not considered IT. Moreover, they often provide excellent examples of practices that should be, but often are not, applied by more traditional IT organizations. Their services-orientation and clearly defined unique value propositions are good examples. Which Model Is Right for You? From what you’ve read, you might assume that the best model for you is the business driver or the value partner model. We will avoid labeling these as better or best and instead focus on the ramifications of each model. As we stated above, the expense center model is inappropriate for any organization that wants to be a valued part of the business. Time and time again, expense centers are forced to evolve or they are replaced. This trend started with outsourcing and has accelerated with the cloud. The competitive intensity in our markets means our investments in technology must distinctly help us execute our business strategies. Expense center providers rarely do this. For expense center CIOs or VPs of IT, the service provider business model is an excellent start for delivering greater value. By adopting a services strategy, developing a service portfolio and a unique value proposition, and creating roles for service owners and business relationship managers, your organization will become less dispensable. However, this may only be one step in the right direction. Service providers are increasingly at risk of being replaced in whole or in part by external providers. There is an exception where technology organizations are built for the purpose of delivering technology services. Common with large organizations, especially global banks, 42
  43. 43. CTO-led technology organizations often provide hosting services and shared applications to their lines of business. Their business value stems from being more cost-effective than external service providers while delivering high- performance and specialized (e.g., via security, privacy) technology services. These organizations often operate like a cloud provider, even billing the lines of business based on actual or planned consumption of shared technology services. Sometimes they deliver services to third-party customersvi. Value partner is the least dispensable model for a traditional IT organization. At this level you are demonstrating customer intimacy and business acumen that, in turn, create unique value. Value partner CIOs have earned a seat at the table with their business partners. They have also demonstrated they can run other shared services, beyond those that are considered technology-driven, such as procurement, human resource management, and even legal services. Many businesses rely on providers that operate in more than one business model archetype. For example, lines of business with the global banks often maintain their own CIO-led IT organizations that build and support their own applications, hosting them on infrastructure provided by their CTO-led technology services organizations. This provides the advantages of economies of scale and specialized services with the business knowledge needed to support business processes. Some of these organizations also provide technology-enabled customer services, characteristic of a business driver archetype. Does this mean we can adopt a hybrid model, with one business technology organization adopting two or three business models? Yes, but examples of this are uncommon. Value partners often outsource many of their technology services — or create a separate organizational unit — so they can focus on the customer intimacy that distinguishes the value they provide. Business drivers rarely take on the business services that are characteristic of the value partners. Even when CIOs are handed the cloud business of their brick-and-mortar businesses they often maintain largely separate organizations for business service delivery and the execution of business processes. 43
  44. 44. Which business model archetype applies to your organization? Interactive 2.2 will help you decide. For each row, select the box that best describes your organization. As part of the TBM Index, this infographic gives you the opportunity to compare your selections to those of your industry peers. To interpret your selection of these five characteristics, look for misalignment. If your organization is a service provider, for example, your unique value proposition, service portfolio, organizational alignment, transparency processes and funding model should align to the characteristics shown in the service provider column. If they do not align, seek to understand why, as variances may prevent you from being effective in your chosen business model. For each row, select the attribute that best describes your own organization. Interactive 2.2 The Service Portfolio Activity Map 44
  45. 45. As with competitive vendors in the marketplace, we must carefully define our portfolio of offerings, i.e., our services. The services we choose to provide and the way we deliver and support them determine our value to the business. Moreover, they drive our resource and skillset requirements and, in turn, our cost structure. A poor choice regarding one service affects our capacity to deliver others. Many business technology leaders struggle to define their services. Perhaps this should be expected when so many are evolving from an expense center model focused on technologies. Sometimes the struggle stems from a failure to grasp the basic concepts of IT service managementvii. At other times, technology leaders think bottom-up (i.e., starting with the assets or resources you own) as opposed to top-down (i.e., starting with your business capabilities). Does TBM rely on you having defined your services? Not entirely. The disciplines of TBM, such as understanding and managing true cost and performance or providing transparency to change business behavior, have been adopted by organizations that have not developed a service catalog. These organizations often manage their investments by dimensions other than services and business capabilities such as: 45 Maximize Business Value with the Services You Deliver Chapter 2 Section 3
  46. 46. • Business applications, which approximate business services; • Core infrastructure and technologies, such as servers, storage, networks and data centers; and • Projects, such as software development and other capital improvements. Many of the decisions to optimize costs, rationalize portfolios, innovate and improve agility apply well to these types of objects. However, it is often difficult to link those decisions to business outcomes without a services orientation. For our discussion, we will refer to five types of technology and business services, as shown and defined in Interactive 2.3 (Pg.48). You may have other types of services defined for your own organization. This taxonomy raises a couple of important questions. First, how do we distinguish business process automation from delivering business applications? Business process automation — and business services in general — are characterized by improving a business process. Simply delivering and supporting a business application fails to accomplish this goal. Indeed, almost any technology provider, with little or no knowledge of our business processes, can deliver and support an application. Instead, consulting with our business partners, understanding their processes, and driving continuous improvement provide business value. When continuous improvement is delivered as an integral part of delivering and supporting a business application, we have business process automationviii. Second, what’s the difference between a technology (resource) and a technology service? A resource is a procurable, such as a technology, an application, a third- party service, or labor. Resources provide value and can be delivered as a service or as part of a service by adding value through the following activities: 46
  47. 47. • Designing and Packaging the service, including service composition and negotiating and documenting service levels with your business partners or other consumers; • Sourcing the service and/or components in a way that strikes the proper balance of cost, quality and sourcing-related risks; • Costing and Pricing the service so you can optimize unit costs and advertise your rates to your business partners to influence their demandix; • Assessing Demand for the service by collaborating with business partners and translating business plans into resource requirementsx; • Supporting and Monitoring the service to ensure your business partners and end users receive the agreed-upon value and remain satisfied; and • Billing or Charging for your services based upon the negotiated prices (rates) and the levels of consumption or other factors. Use the service portfolio activity map (Interactive 2.3) to clarify which types of services your organization provides and how you provide them. For each box, tap to select between “not performed”, or “performed”. Using the infographic, evaluate your services using the technology-enabled value chain. Here, a value partner will show proficiency at all levels and across all activities while a service provider will show less proficiency across business services. You should easily spot discrepancies — potential issues that inhibit value delivery. 47 For each type of service (row), select whether or not your organization performs the activity listed at the bottom. Descriptions for service type and activities are shown by touching each item. Interactive 2.3 Service Portfolio Map
  48. 48. Assess Service Value based on Your Corporate Strategy As noted in the first chapter, the MIT Center for Information Systems Research defines value as “delivering performance on a dimension that stakeholders find important”.xi Considering what we’ve discussed previously, the performance dimension your stakeholders find most important is helping the business execute on its strategy. Begin by assessing your services based on that dimension. In order to keep things simple, we recommend a qualitative approach to business value assessment of services. In our approach, your services fall into one of three unique business value categories — differentiator, advantageous and essential — which are defined in Interactive 2.4 (page 50). We’ve assumed that you do not provide unessential services, or that they are a very small part of your portfolio. Most organizations offer services of each category. It is unrealistic to think we can deliver only differentiators, as many of our companies’ competitive advantages are not a product of our technology-enabled services. Sometimes they have more to do with the design and quality of products (e.g., Apple), the strength of the brand (e.g., The Coca-Cola Company), the efficacy of the supply chain (e.g., Wal-Mart) or the skills and knowledge of employees (e.g., KPMG). Our services may be essential to exploiting these advantages, but they may not be unique by themselves. This is to be expected. Furthermore, our business partners are bound to request services that do not support the competitive advantage of our business. For example, a collaboration service may not directly support a competitive advantage, but our business partners may insist that we provide such a service. It is paramount that we must invest in each of our services based on contribution to our corporate strategies. For this, we must manage our services as an investment portfolio. Manage Investments in Services as a Portfolio The discipline and techniques of portfolio management have been applied to many kinds of investment portfolios, including those of financial instruments (e.g., stocks, bonds, and options), a firm’s products and brands, and a company’s vendors and suppliers. 48
  49. 49. The goal of a portfolio manager is to maximize the collective benefits of our investments while managing risk through diversification. For example, financial portfolio managers purchase a variety of investments to yield a certain return at a certain level of risk; product portfolio managers invest across mature but lower growth markets and less mature but higher growth markets to balance profitability and growth; and vendor management chooses vendors and suppliers to optimize economies of scale while minimizing supplier and supply chain-related risks (e.g., supplier bankruptcies, geo-political issues, etc.). If we view and manage our services as an investment portfolio, what trade-offs are we trying to manage? After all, many of the services we deliver are dictated by the needs of our business. We do not have the option of not providing or not investing in many of our services. In this way, service portfolio management is very different from a stock portfolio: a hedge fund manager chooses his or her investments without regard to delivering services as part of a greater value chain. In contrast, the IT service portfolio manager creates a model for deciding how to invest in each service. Using such a model, he or she asks the following questions about the portfolio of services: • What business value do we expect from each service? How does each service fulfill our unique value proposition and contribute to our corporate strategy? • For differentiator services, what are the goals of our continued investments? Should we increase or decrease our investments in each of them? 49
  50. 50. • Are our services cost-effective? What changes can we make to improve the economics of delivering services? • Should we rationalize essential services to free up investments for new services or improve others (or lower the cost of the portfolio)? • Should we outsource certain services or certain parts of our service? Furthermore, the portfolio manager works with our business partners, process owners and/or business relationship managers to identify services that are needed to satisfy new business requirements. The service portfolio investment matrix (Interactive 2.4) helps to quickly assess a portfolio, communicate with business partners, and drive investment decisions. With this approach, services are rated according to their unique business value, as discussed above, and their financial performance. This categorizes services into one of four primary investment categories (divestment candidates, subsidizers, loss leaders and top performers), each with a different implication for future investments. Once completed, the matrix intuitively facilitates investment planning. When used during value-based conversations with our business partners, such as through a governance body, it helps identify services that are consuming large investments but are failing to deliver unique business value. Service portfolio managers can use the matrix to define investment goals. In general, we make decisions to move services up and to the right in the matrix, shrink the size (investment level) of those 50 Interactive 2.4 The Service Portfolio Investment Matrix Touch each quadrant of the investment matrix to learn about the types of services that fall into them.
  51. 51. that cannot be moved, manage demand for unessential services and retire services that are not driving value. The service portfolio matrix also facilitates more strategic decision making. In evaluating new reference architectures, for example, the matrix illustrates its impact on services in the portfolio. A modernization effort should lead to more cost-effective service delivery and potentially business value improvement. Furthermore, long-term initiatives can be broken down into phases to show their impact on a year- by-year basis. As we discussed earlier, classifying services according to unique business value is largely qualitative. Financial performance, on the other hand, is more-or-less quantifiable, depending on the TBM tools employed. For example, the following tools help us manage the financial performance of our services: 51 Interactive 2.5 Service Portfolio Matrix Touch each service on the investment matrix to learn about the types of decisions recommended for each.
  52. 52. • Activity-based costing of our services to understand their unit costs and degree of efficiency (e.g., return on assets) • Unit cost benchmarking internally over time and/or against industry peers • Comparing the cost of services to similar ones provided by external service providers • Comparing cost recovery (e.g., chargeback or showback) against service total cost of ownership (TCO) To use the matrix, two additional attributes are needed for each service: their demand profile and their lifecycle stage. Growing or declining business demand is indicative of business adoption and also has implications for capacity requirements. It is also important to identify services that are in the pipeline (in the process of being developed or deployed) and those that are being retired, as these indicate potential changes in available funds. The tools employed to understand financial performance depend, in large part, on the decisions we make regarding our business model, our approach to transparency and planning, and other aspects of TBM. We will discuss these tools and techniques for demand management in subsequent chapters, along with a more robust discussion of portfolio management in the chapters on the decision-making capabilities of the TBM framework. The service portfolio investment matrix is an important tool. However, its impact on business value depends on our ability to make and execute the decisions it facilitates. In other words, managing our investment portfolio depends on our people. 52
  53. 53. Defining a compelling and unique value proposition for our organization, choosing the right technology business model, and establishing a model for managing our service portfolio is up to us and our executive team. These things must be driven from the top down, but they depend on distinct roles in our organization that may not exist if we haven’t already made the transition to service provider or value partner. We will discuss the most important roles here. Manage Your Supply with Service Owners and Service Portfolio Management Our service ownersxii are like the product managers of a software companyxiii. They are accountable for the success of their services, beholden to key performance indicators set by the IT service portfolio manager and our executive management team. Good service owners deliver successful services by: Optimize Your Team to Manage 53 Optimize Your Team to Manage Supply and Demand Chapter 2 Section 4
  54. 54. • Understanding their markets — i.e., their customers and their potential customers; • Creating clear value propositions for their services; • Monitoring their service alternatives, what might be considered their competition, but must also be considered potential sources of service for the business; • Rationalizing the technologies, such as applications, used to deliver their services; • Building different service level packages, or tiers of service, to cost-effectively meet the distinct needs of our business partners; • Managing the costs, budgets and financial performance for our services and service level packages; and • Setting prices or rates that are communicated to service consumers. Service owners are responsible for the entire lifecycle of the service. Without a lifecycle perspective, service owners will struggle to apply the portfolio management discipline, especially when it comes to making or recommending investments in new services, introducing new service packages, and retiring services. Generally, service owners are not service managers. They are not responsible for the day-to-day operation and support of our services. They work with service managers, application owners, tower owners and others to ensure their services are performing according to expectations and commitments. Furthermore, service owners are responsible for improving the 54 Diagram 2.3 Service Owners Improve Financial Performance
  55. 55. financial performance of their services, in essence moving services to the right in the service portfolio matrix. They are also responsible for right-sizing our investments in those services (i.e., changing the size of the bubble). Service portfolio managers work with service owners and business relationship managers to manage the service portfolio. Together, they set the services strategy to deliver on the organization’s unique value proposition and support the company’s strategy. Our service portfolio managers must also define the key performance indicators (see following table) by which we measure service performance in order to manage our portfolios. 55 Key Performance Indicator Description Service Level Achievement Performance against service-level agreements that have been negotiated with business partners. These often include service availability, incident response times, bug fixes and enhancements, security and compliance, etc. End User Satisfaction Percent of end users reporting satisfaction with the service. This is often measured through periodic end-user surveys. Unit Cost Reduction Reducing the per-unit costs of providing the same (or essentially the same) service over time. Unit costs should be reduced due to improved efficiencies, economies of scale and other factors. Major enhancements may require a new baseline for unit cost reduction. Management of Service Budget Delivering service at a total cost within the quarterly and annual budget for the service. This requires that the budget be set or translated into a service-oriented budget, which is often different than the budget managed in the general ledgerxiv. Service-Level “P&L” The difference between the cost of providing a service and the amount recovered from the business or when compared against third-party benchmarks such as external service providers or industry peers. This can be applied when both charging back for service delivery and when performing showback. Investment Portfolio Alignment The ratios of spending in services according to business-aligned classifications. This requires classifications of services and other investments (e.g., projects) according to your global business capabilities, business strategies and/or other targets. Table 2.1 Types of Key Performance Indicators for Service Owners and Service Portfolio Managers Source: Apptio, Inc. Used with permission.
  56. 56. Manage Your Demand with Business Relationship Managers and Business Process Owners Once services are defined and owned, there is nothing more important to linking the supply of those services with business demand than the role of the business relationship manager. While service owners and service portfolio managers are accountable for the success of what we deliver, business relationship managers help make our business partners successful and satisfied with our services. They fulfill this role by: • Liaising with business partners to understand their needs and their business plans • Working with service owners, enterprise architects, business process owners and others to define and propose solutions to new business problems • Communicating the business value and the cost of services in the portfolio (or, more specifically, catalog) • Assessing and negotiating the business demand for our services • Identifying and addressing service-related issues by working with service owners, service managersxvi, enterprise architects and others. Business relationship managers are like the account managers of a services vendor (and are sometimes called account managers or client relationship managers): they listen to their customers (our business partners), understand their business plans and pains, and propose solutions. They also wield the service catalog and identify the need for new services in the pipeline. In this regard, they influence our supply. 56 Video 2.2 The Proper Role of Business Relationship Managers
  57. 57. They are also authorities on demand patterns. They serve a critical demand management function by prioritizing what is most important from our business partners, communicating the cost of service choices, and helping close or defer low value requests from the business. They operate with their IT hats on by being mindful of supply-side constraints, and with the goal of ensuring customer success. Business process owners also play a key role in demand management. They are a different kind of business partner than those who own a line of business. They often reside in a shared services organization and are responsible for the design, implementation and improvement of common enterprise processes and are accountable for achieving promised benefits. Together, our business relationship managers and business process owners define business value and manage demand. They are best positioned to understand business plans and pains and position the right solutions. It may be counterintuitive to make these roles responsible for defining value, but value is a function of business need. These roles form the bridge between business processes and our services, and are essential to delivering value. In this way, they are responsible for the business value and demand dimensions of our service portfolio matrix. Since their processes are usually high-value and differentiated, business process owners should be paired with the owners of services that support their processes. In many cases, this is a one-to-one pairing of the two. In this case, service owners may interact little with business relationship managers. Thus, pairing your service owners with process owners may provide the needed supply-and-demand linkage between your services and the business. 57 Diagram 2.4 Business Relationship Managers and Business Process Owners Manage Business Value
  58. 58. IT Finance Must Facilitate Our Business Decisions Many organizations have an IT finance role. Traditionally, this role creates and manages the IT budget within the parameters set forth by corporate finance. This role may also own the IT asset management and procurement functions, responsible for approving purchases and recording new assets, dispositions or changes. For many organizations, this role has mostly been a controller function. 58 Key Performance Indicator Description Service level Achievement Performance against service-level agreements for all services provided to a business partner. Business Partner Satisfaction Percent of services for which the business partner’s end users are reporting satisfaction. Business Planning Percent of services provided to a business partner for which there is a documented business plan, including demand estimate. Business Partner- Level “P&L” The difference between the cost of providing services to and the amount recovered from a business partner. This can be applied when both charging back for service delivery and when performing showback. Project Performance Execution of projects against project plans for the business partner. This includes projects that are delivered under agreements with the business partner, such as those included in professional services offerings. Economic Value Added (EVA) Total profitability from the operations of a business unit from the perspective of the shareholder. Can be employed only if EVA measurements are supported by corporate finance. Table 2.2 Key Performance Indicators for Business Relationship Managers and Business Process Owners Source: Apptio, Inc. Used with permission.
  59. 59. To enable more meaningful decision making, the IT organization needs a CFO of IT — a true financial advisor for business decision making. IT leaders and our business partners need financial analysis in order to optimize our investments. For many organizations, this will require upgrading skillsets and tools. We must employ many of the same techniques that CFOs employ — activity-based modeling, business intelligence, portfolio analysis, cost restructuring and opportunity cost management. Indeed, these techniques are essential to Technology Business Management. We will begin to discuss them in the next chapter. In this way, the role of IT finance is evolving by providing more value-added analysis. This does not mean everyone will have a finance function within their IT organizations. Many will rely on corporate finance for this function. Regardless of our organizational model, corporate finance and IT must align, work from the same source data, and employ consistent approaches to making financial decisions. Other Supply-Side Roles Are Evolving Service owners and business relationship managers are essential roles for managing the supply and demand for our services. We focused our discussion on these, as they often do not exist in organizations that have not made the shift to delivering services. However, we see other supply- side roles evolving with the shift to Technology Business Management. Take technology procurement. In the shift to delivering IT and business services, a category management approach for sourcing from third parties is often more effective. With category management, the procurement function pivots its focus from vendors to the needs of the internal service providers. Its goal is to maximize the value of a product or service category to the organization by managing total cost of ownership (TCO), risk, operational performance and so on, not just the purchase cost and quality of a technology. The shift to category management often occurs with better insight into the downstream impacts of sourcing decisions on the services being provided. For example, when the true TCO of a category of hardware is known, decisions must often be made that span suppliers and contracts. Category planning and execution becomes essential to service performance. 59
  60. 60. We also see capacity management evolving. This occurs because once services are defined and their bills of materials (BOMs) are well known, business plans can be translated much more accurately into capacity plans. As the costs of capacity-related decisions (e.g., excess capacity) become clear, service owners can work more closely with capacity planners to more cost-effectively balance capacity-related risks with capacity-related costs. As a result, capacity planners will become more service centric. Finally, enterprise architecture is becoming much more TCO-aware. Once they have the tools for understanding the TCO-related impact of their standards, along with service owners holding them accountable, enterprise architects will alter their decision-making approach. As trade-offs between the benefits of proposed architecture standards and their costs become clear, architects and their constituents are able to understand not only the impact on the enterprise but the impacts to individual services. This, combined with better demand planning, helps the organization measure the real benefit of architecture changes. 60
  61. 61. This chapter has focused on the foundation of the Technology Business Management framework. We’ve discussed our unique value propositions, technology business models, services and service portfolios, and foundational roles and responsibilities, all of which are essential to TBM. These elements of our foundation enable us to practice the disciplines of the framework: understanding and benchmarking true costs and performance, delivering transparency to change behavior, and planning with greater confidence. The foundation we’ve described also directly relates to the decision-making capabilities of the TBM framework. You should be able to see how service owners and service portfolio managers help optimize run- the-business investments by optimizing the financial performance and levels of investment in our services. These decisions help optimize 61 Build the TBM Disciplines and Capabilities on Our Foundation Diagram 2.5 Our Foundational Roles Enable our RtB/ CtB Optimizations Chapter 2 Section 5
  62. 62. cost-for-performance and rationalize to sustain value creation. You should also understand now how our business relationship managers and business process owners help drive change-the-business investments. In managing the business value dimension of our service portfolio matrix along with our service demand profiles, these roles help innovation to grow, compete, and transform by enabling agility. Taking the Next Step With the tools provided in this chapter, spend some time to create or clarify your unique value proposition and create a plan to deliver the right services; it takes time to get them right. In fact, our value propositions and our services will continue to evolve; there is no final version. Meanwhile, bear in mind that TBM applies to three of the four technology business models. The essential ingredient is your services. If you currently operate as a service provider, or are working on becoming one, TBM will provide essential tools for defining or refining your services and pave the way for delivering greater value. If you run a value partner organization, evaluate the alignment and clarity of your roles and responsibilities. Do your service owners understand their role in optimizing the financial performance of their services? Have your service portfolio managers created an effective model for making investment decisions? Have you paired your service owners and business process owners so they decide on trade-offs that optimize their business processes? 62
  63. 63. If you’re a leader in a business driver organization, assess the ability of your product managers (i.e., service owners) to optimize financial performance. In many cases, product managers are bound to revenue goals but lack the accountability and tools for managing TCO. By optimizing transactional costs and the consumption of shared resources, your service owners can often help avoid or delay major fixed investments, such as data center expansions. Ultimately, the ability to drive the right decisions depends on our decision-making tools. Our next three chapters will describe in detail how to adopt the TBM disciplines that provide these tools. 63
  64. 64. Chapter 3 Understand and Benchmark Your True Cost and Performance Executive Summary Earlier in the book, we established that value is a function of the cost, quality and business outcomes of what we deliver. To maximize value, your managers need clear and effective levers for managing these variables. In our world of limited resources, the IT shops that deliver the most value are those that root out waste, make the necessary tradeoffs of cost and quality and direct resources to the services or projects that maximize profit or create a competitive advantage. In this chapter, we discuss the levers needed to optimize cost and performance. We will show how to create a more consumption-driven accounting model of your costs and resources. In turn, this will give you data you need to collaborate with your business partners on the investments you’re making, use a bill of IT to shape demand and assess business demand to create a more meaningful IT plan.
  65. 65. In the latter part of the 17th century, Isaac Newton began a series of experiments on light. His goal was to understand the fundamental nature of light and why it behaves like it does. Newton wasn’t satisfied with what his unaided eyes revealed, but he lacked the tools needed to determine the true nature of light. To give him new perspectives, he created innovative optics such as the first refracting telescope and multi- prism arrays. Optics work by transforming light. They bend, reflect and refract light to help us see clearly and give us otherwise impossible perspectives. Car mirrors let us see behind us, microscopes magnify the very small, and camera lenses allow us to capture moments and share them around the world. In doing so, optics provide us the perspectives we need to make decisions in our daily lives. 65 Chapter 3 Section 1 Understanding Our True Costs and Performance Depends on Our Optics Diagram 3.1 : Understanding True Costs and Performance Empowers TBM Disciplines and Decision-Making
  66. 66. We depend on a different kind of optics to make decisions about our technology investments. Our optics include our resource consumption and demand models that bend, split and combine data much like Newton’s multi-prism arrays did with light. With the right models, our decision- making system provides valuable perspectives through dashboards, reports, KPIs and other metrics. In this chapter, we will show how to build consumption- driven cost and resource models to provide the perspectives our people need to make smart tradeoffs. How an Accounting Model
 Empowers a Transformation We are not the first to discover that our accounting models often distort our perspectives. Nor are we the first to undergo a revolution in accounting and the way in which we manage outcomes. Beginning in the 1970s, the manufacturing sector made fundamental changes to their cost models. In turn, those accounting changes empowered management approaches and design techniques that completely transformed how they delivered products. What led to the accounting changes? Foremost, manufacturers automated more work with robotics and computing. They equipped their production personnel with more advanced tooling to boost productivity. By making production even more capital intensive, automation shifted more of the production cost from direct labor to overhead, an indirect expense. It also added new costs into the overhead, such as the engineering, support and maintenance of equipment. Suddenly, capital and overhead dominated manufacturing’s cost structure. Traditional cost accounting methods proved insufficient. They relied too heavily on direct costs, especially labor. Accountants would allocate overhead (e.g., facilities, 66 Figure 3.1 New Optics are Needed to Transform a Corporate Accounting Model Comprised of GL Accounts and Cost Centers
  67. 67. utilities, equipment, management labor and supplies) to products based on the amount of labor and other direct costs. The more labor-intensive the product, the more overhead they would allocate to it. This approach distorted the true cost of products where automation (an indirect cost) both reduced labor (the primary direct cost) and consumed a greater share of the total. For many manufacturers, the solution was activity-based costing (ABC). Instead of allocating overhead directly to products, ABC assigns overhead first to manufacturing activities such as inserting a rivet, soldering a wire, applying a quart of paint, performing a test or fixing a defect. The cost of each activity includes the direct cost of labor and materials and the indirect costs of equipment depreciation, facility leases, utilities and more. The cost of a product is the combination of its activity-based costs. This proved to be a powerful change. Not only did it create more accurate product costs, but it also provided levers — the activities — that plant managers, engineers, designers and cost accountants could pull to change the cost of a product. For example, automotive engineers saw the true cost of, say, a dashboard. They discovered the impact of dashboard designs that required more assemblies. More assemblies (activities) not only added to the build cost of the dashboard, they increased inspection time (another activity) and the number of defects (more activities). Activities drive costs, and this became apparent with ABC. ABC helped transform manufacturing by empowering decision makers. It enabled new approaches, such as Design for Manufacturability and Assembly (DFMA), which considers the impact of a product’s design on the manufacturing process. ABC helped many firms adopt Total Quality Management (TQM) by exposing the true cost of testing for and fixing defects and revealing the impact of their decisions on quality. ABC helped spur Lean Manufacturing by encouraging process engineers to eliminate or reduce non-value added activitiesi. The impact of this change was dramatic. Because these methods were first adopted by Japanese manufacturers, they helped shift the balance of manufacturing strength from the United States and Germany to Japan. Companies like Toyota redesigned production using these new insights, creating their own production systems (e.g., the Toyota Production System) and becoming global cost and quality leaders by the end of the 1980s. 67
  68. 68. How can we use accounting to empower our own transformation and improve value? This depends on the roles we have in our organization and the decisions we expect our people to make. As we discussed in the previous chapter, fulfilling our unique value proposition depends on roles such as service owners, service portfolio managers and business relationship managers. These people simultaneously manage the value of our services, the business demand for them and their financial performance. Rarely is our financial accounting model sufficient for these roles. Our financial model is designed first for external investors and lenders. It sacrifices important perspectives for the sake of making our financial statements comparable with those of other companies. While our financial accounting is sufficient for those external audiences, internal decision makers routinely need a different perspective. To understand this better, assess how well your current model arms your managers to balance cost and performance, rationalize portfolios, innovate better and improve business agility – the decision-making capabilities of the TBM framework. Over the next few pages, we will discuss what is needed for each of these types of decisions. 68 Chapter 3 Section 2 Arm Your People with the Right Perspectives Chapter 3
  69. 69. Optimizing Cost for Performance Optimizing the cost-for-performance ratio of our services depends on tradeoffs we must make at every layer of our value chain. Our service owners are most responsible for these decisions, collaborating with business relationship managers, vendor managers and others on both sides (supply and demand) of our services. Our service owners make cost and performance tradeoffs when delivering services. As illustrated by our Service Portfolio Activity Map in chapter two (Pg. 44), service delivery activities include designing and packaging our services, sourcing their components, costing and pricing and so on. These activities are like those taken by a manufacturer to deliver products to the marketplace. Similarly, our service owners can make decisions during each activity to eliminate waste, find more cost-effective alternatives for service components, and smartly trade cost for performance. Our new accounting model must help our services owners see eye-to-eye with their suppliers and consumers, often represented by vendor managers and business relationship managers. On one hand, our service owners need a supply-side view of their services. They must see the direct costs of their services, such as application development labor or the invoices for outsourced services. They also need an appreciation of their indirect costs, such as the shared infrastructure they consume to provide their services. On the other hand, our service owners need a demand perspective. For those of us delivering services, our business partners think in terms of the services we provide, not about infrastructure or software. Our service owners and business relationship managers must communicate the value and cost of the services being delivered, understand 69 Video 3.1 Using Cost, Consumption and Utilization Data to Provide Levers for Optimizing Costs
  70. 70. the business demand for those services and translate anticipated demand into an efficient resource plan. In Interactive 3.1, we describe several essential perspectives our service owners need for trading cost for performance (and risk). Some of these enable optimizations that can be made unilaterally and some facilitate tradeoff discussions with others. Open the Interactive graphic. Then rate how well your accounting model provides the data required for each perspective. This will help you evaluate how well your current model arms your managers to make important tradeoff decisions. If you’re like many business technology leaders who are beginning the TBM journey, you may find that your accounting model fails to empower the cost-for- performance tradeoff decisions. In this chapter, we will focus on how to create the right model. Then in chapter six, we will provide a more comprehensive set of cost-for- performance tradeoff decisions. Rationalizing Portfolios to Sustain Value Creation Rationalizing our portfolios helps us focus our scarce resources on our most critical services, technologies, infrastructures and vendors. It simplifies what we manage and deliver. To rationalize our portfolios, our portfolio managers must understand the cost, performance and consumption (demand) of their portfolio constituents. Nowhere is this more important than our portfolio of services. Working with our service owners and business relationship managers, service portfolio managers help 70 Interactive 3.1 Rate Your Perspectives for Managing Service Cost for Performance
  71. 71. optimize our services and decide when new services are needed and existing ones should be retired. They make decisions to trade resources between the services in our catalog and those in our pipeline (in development). They drive our service rationalization process. To do this, we recommend a decision- making framework such as the Service Portfolio Matrix (Pg. 51) introduced in chapter two. This framework triggers actions such as the review of poorly performing services or the decision to retire a poorly consumed service. The primary factors we review to trigger these actions are cost-for- performance, unique business value and business demand. Our service portfolio managers do not manage these factors for our services; they create the decision- making framework and monitor it for changes. A rise in cost, a decline in performance or value, or a change in demand should trigger a review. Our business relationship managers work with our business partners to evaluate the business value of our services, the Y-axis of our service portfolio matrix. In determining value, they should apply criteria established by our service portfolio managers. They may use surveys to do so, but business value is usually a subjective measurement. Regardless of how we measure the business value of our services, it should be reviewed at least annually or when we change our business plans or modify our services. With the right accounting model, we can systematically measure the financial performance (our X-axis) and demand (a third dimension of our model) for our services. We already described how the right accounting model 71 Interactive 3.2 Service Portfolio Matrix Plots Financial Performance, Value, Investment and Demand for our Services