Introduction

The third installment in the ‘The Case for the Business Case‘ focuses on a review of  a 2006 paper by Peter Weill and Sinan Aral, published in the MIT Sloan Management Review, titled “Generating Premium Returns on Your IT Investments“.

But first a recap:

In the first part of this series I elaborated on a model suggested by Jeanne W. Ross and Cynthia M. Beath; focusing on the association between two dimensions: Technology Scope and Strategic Objectives. Technology Scope covered the investment spectrum between Shared Infrastructure and Business Solutions and Strategic Objectives covered the spectrum between Short Term Profitability and Long Term Profitability; resulting in four investment areas categorized as: Renewal, Transformation, Process Improvement and Experiments. The authors suggested that organizations need to make consciousness decision as to what portion of their investment allocation will be allocated to each of these categories and then evaluate any request for funds against that allocation.

In the second part I introduced an approach suggested by Professor John Ward, Professor Elizabeth Daniel and Professor Joe Peppard, where they were suggesting a method which will enable the organization to better understand the stated benefits expected from executing its IT investments. This approach was a result of evidence suggesting that many business cases either exaggerate the expected benefits or lacked elaboration on the business change required to have them realized.

Generating Premium Returns on Your IT Investments

The paper addresses two points:

  1. Most organizations make IT investment decisions along a range of four categories (and this will be the focus on this post); and
  2. Gaining a better return on the IT spend requires organizations to exhibit a certain set of practices and capabilities – and the authors refer to organizations that exhibit these practices and capabilities ‘IT Savy’. This post, however, will not focus on this point as it is not directly contributing to the discussion concerning the way organizations structure their approach to approving IT investment requests.

In an approach somewhat similar to the one we already encountered in Jeanne W. Ross and Cynthia M. Beath’s article, the authors suggest that most organizations make IT investment along four broad classifications:

Considering IT Investments as a Portfolio

 

Transactional Investments:

This are investments that “are used primarily to cut costs or increase throughput for the same cost“.

Information Investments:

These are used to “provide information for purposes such as accounting, reporting, compliance, communication or analysis“.

Strategic Investments:

These are used to “gain competitive advantage by supporting entry into new markets or by helping to develop new products, services, or business processes“.

Infrastructure Investments:

These are funds allocated to the creation of “shared IT services used by multiple applications…depending on the service, infrastructure investments are typically aimed at providing a flexible base for future business initiatives or reducing long-term It costs via consolidations”.

The authors acknowledge the fact that for any single project, the associated investment can spread over one or more investment types, meaning that when requesting funds towards making an IT investment, that – most often – will serve more than just one purpose and thus the expected outcomes and benefits are likely to be spread across different investment domains.

They further suggest that this portfolio allocation approach “underscores the importance of how organizations use technology instead of focusing on the technology itself“. This puts the responsibility on senior managers to have a clear vision about what is it that they want to achieve from their IT investment. The paper further suggests that the business value derived from each investment classification is different. For example. transactional investments are likely to result in lower cost of goods sold, while strategic investments are likely to result in greater innovation and provide a platform for future growth, etc.

Some Final Thoughts

The importance of this paper is not so much in the actual model if suggests for IT Investments’ classification as much as in the principle it establishes. Given the limited pool of funds available for IT Investments, organizations ought to create a strategic view of how they want their funds to be split in order to achieve a balance between their various competing needs  – a sentiment firmly planted in the discussion made in the first review in this series. Unlike the first review, the classification system proposed does not explicitly recognize the need to allocate funds to ‘experimentation’ (unless this can be bundled under Innovation).

 

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2 Comments

  1. Hi Shim,
    I don’t exactly get the point here…… How is “investing” in IT any different than investing in a new plant or a new piece of equipment or any other top line, bottom line, CSR or government mandated project funded in whole or in part through either the CAPEX or OPEX budgeting process?

    This process has been around for years and I know in our own company, we put investments in IT projects in direct competition with other “projects” competing for scarce or limited funds.

    BR,
    Dr. PDG, Jakarta

    Reply

    • Paul, I can see why you will be perplexed.

      The context of these posts is the background debate around #NoEstimates. While the concept of competing demands is well established, the need to manage this demand using a rational approach is somewhat lost by some who, I believe, forget that organizations don’t just run one project but many and the decision of which one should be invested in is, to a large degree, a result of a complex web of considerations, one of which is the projected cost.

      Reply

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