Strategic Investment Methodology

 

 

 

 

 

 

 

 

 

The Strategic Investment Methodology (SIM) enables a company to develop an information technology strategy that is aligned with and supports the business strategies of the company. Combined with Interactive Planning, SIM allows the company to develop the information technology strategy in a very short amount of time. A typical SIM project takes about three weeks to be completed.

The first part of a SIM project is to analyze the current use of information technology in the company. This analysis, using the SIM procedures, is done top-down and usually takes two weeks. The analysis utilizes the accounting information of the company, and it is done by Toscano Management Consulting working with selected information systems and financial managers.

The second part consists of the analysis of the business strategy of the company with the SIM methodology. A sophisticated strategic plan is not required, simply the ten or fifteen major strategic directions that the company is following.

The third part consists of comparing current use with the strategic priorities developed in the second part, thus providing the basis for the new information technology strategy. These last two parts are completed in a period of one week.

To implement a SIM project requires the participation of an Executive Team made up by those senior managers of the company who are responsible for the development of the business strategies. The Executive Team works for a total of two days. The analysis of the data and the development of the information technology strategy are done by a Project Team that is made up by the managers that run the operations of the company. They usually are the direct-reports to the Executive Team. The Project Teams works for a total of one week.

The basic SIM concepts were developed by a group of seven major companies working jointly in a research project under the direction of the Nolan Norton Company. Dr. Toscano, at that time Manager of Information Systems Strategy at IBM Corporate Headquarters, was a member of that group and a major contributor to the development of ISM.

Toscano Management Consulting has modified those basic concepts and implemented them in an Interactive Planning methodology that allows the completion of the project in a very short amount of time.-.

 

 

STRATEGIC INVESTMENT METHODOLOGY

 

 

 

The rapid growth in the use of information systems technology (I/T) has created a challenging problem for senior management. Executives realize that accelerating advances in technology create new opportunities to improve productivity, lower costs, and gain competitive advantage.

They are also aware that the business is dependent on information systems to operate on a day-to-day basis. Yet, surveys of senior managers show that a very large number of them do not feel confident that they are receiving proper value for their I/T expenditures.

A major factor contributing to this problem is that executives consider I/T an operational cost, and manage it as such. This is because they can readily relate I/T expenditures with operational volumes: the more products they make, or the more orders they receive, the higher the I/T cost. But most executives find it difficult to relate I/T expenditures to the business strategies and objectives. Yet, they intuitively know that there is a strategic value to I/T.

The Strategic Investment Methodology (SIM) is a simple, practical planning technique designed to help senior management understand the strategic role of I/T and develop a technology strategy that is aligned with and supports the business strategy. SIM has five basic objectives:

  • Help senior management understand the organization's expenditures for I/T by providing a top-down, non-technical, "macro-view" of what was spent in the previous year.
  • Relate those I/T expenditures to the business strategies of the organization in a compact, easy-to-understand format.
  • Identify those areas where technology can help the most in implementing the strategies and achieving business objectives.
  • Provide an analytical foundation to evaluate the strategic impact of change, allowing senior management to answer questions such as:
    • How should we modify our I/T strategy if we change our business strategy?
      • How can we reduce our I/T expenditures with a minimum impact on our ability to executive our business strategies?
  • Create a framework that facilitates communication between senior management and I/T management so they can work together more effectively on strategic issues concerning the use of information systems technology.
  • Go Up

 

 

METHODOLOGY

 

 

There are three parts to a SIM study, which are described in the following pages. Because SIM is implemented using the methodology of Interactive Planning, a SIM study can be completed in a very short amount of time. If the agendas of the executives allow it, a study can be completed in only two to three weeks.

PART 1 - EXPENDITURES IN THE BASE YEAR

The first step in a SIM study is to develop a top-down description of I/T expenditures during a base period, usually the previous year. This provides the reference point necessary to determine the strategic direction required. All expenses incurred by the organization because they use I/T (such as hardware, software, personnel, facilities, etc.) are included. And it is not limited to the budget of the I/T Department; it covers resources managed by users and purchased from outside vendors as well as the resources managed by the I/T department. This information is obtained from the accounting system of the organization.

The next step is to define the macro-processes of the organization, that is, the eight or ten fundamental things that the organization does to fulfill its mission. Once senior management agrees upon the definition of these macro-processes, the total I/T expenditures, which were collected from the accounting system by type of expenditure, are the allocated to the macro-processes. This results in total dollars of expenditure per macro-processes during the base period.

The expenditure for each macro-process is then distributed among six "portfolios". The portfolios are defined based on the purpose of the expenditure, that is, the reason why the expenditure was made. The six portfolios and their purposes are:

  • INSTITUTIONAL - Automate the administrative processes of the organization
  • OFFICE - Support secretarial and office work (correspondence, reports, presentations, e-mail, etc.)
  • DECISION - Support managerial decision making which is not part of the administrative processes. Included in this portfolio is professional computing (engineering analysis, statistical work, computer-aided design, etc.)
  • PHYSICAL - Support processes that involve a physical entity in a physical process (such as a barrel of crude oil in a refinery or a pallet of parts in a warehouse)
  • EXTERNAL - Where the direct user of the technology is not an employee of the organization (such as a customer, a supplier, or a regulatory agency)
  • INFRASTRUCTURE - Technology expenditures that are shared by the previous portfolios (such as those for networks, training, security, planning, etc.)

Notice that the type of technology used is not considered, just the total dollar amount spent. The result of Part 1 is a matrix relating the macro-processes to the portfolios. The cells of this matrix show the amount spent in the base year for each macro-process on each portfolio. Since the methodology is based on the relative values of expenditures, the matrix is normalized to percents. The total of all the cells adds up to 100% of the expenditures.

Go Up

PART 2 - ANALYSIS OF THE BUSINESS STRATEGIES

It goes without saying that the organization must have defined its business strategies for SIM to be applicable. This second part analyzes those strategies. The required input to SIM is 10 to 15 statements summarizing the strategic direction of the organization. Simple statements or paragraphs are sufficient; a detailed strategic plan is not required. The senior management team of the organization performs these three evaluations on those statements of strategic direction:

  • The relative importance of each strategic direction, using a scale of 1 to 5
  • The impact of each macro-process on the success of each strategic direction, using a scale of 0 to 5
  • The benefit for each macro-process of investing in each portfolio, using a scale of 0 to 5. The cross-multiplication of these three evaluations results in a matrix of macro-processes versus portfolios. The value in each cell in this matrix indicates the strategic importance of that cell. The matrix is also normalized to percents since what are important are the relative values of importance.

The resulting matrix is always uneven: some cells have high values, others low or zero value. The higher-valued cells identify where technology is most helpful and makes the biggest contribution to the business strategies of the organization. The rationale is as follows: a cell has a high value of strategic importance because investing in that particular portfolio has great benefit for the particular process, and that particular process has a high impact in the success of a strategic direction which was considered to have high importance. These high-value cells are called the "strategic target areas".

Go Up

PART 3 - DEVELOPMENT OF THE I/T STRATEGY

The strategic analysis begins by comparing the matrix of strategic importance obtained in Part 2 with the matrix showing allocation of I/T expenditures developed in Part 1. The comparison shows how well aligned are the I/T expenditures in the base year to the strategic priorities of the organization. If the use of I/T is supportive of the business strategy, there should be high use of I/T in the strategic target areas, that is, in the cells with high strategic importance.

In the over forty SIM studies performed in major companies in different industries, government agencies, and public institutions, major misalignments were always found. There were invariably a significant number of strategic target areas with either low or no I/T expenditures. Conversely, there always were cells with very low strategic importance that showed heavy I/T expenditures.

Since the comparison is done on total expenditures, the existence of very large on-going systems expenditures could obscure a recent change in direction in the use of I/T. Therefore, to detect such changes, planned I/T development projects are also analyzed for strategic alignment. In the studies performed, they were also consistently misaligned with strategic importance.

The importance and expenditures matrices provide a very solid analytical base to develop a new I/T strategy that is supportive of the business strategy. The cell-by-cell analysis pinpoints specific areas where improvements are needed. The new I/T strategy will identify ways of increasing technology utilization on the strategic target areas showing low or no expenditures. This is complemented a macro-processes and portfolios analysis obtained by adding the rows and columns of the matrices.

It should be noted that the result of a SIM study is the strategic directions that I/T should take. The translation of these directions in terms of specific project plans showing activities, resources and calendars is follow-on work. Similarly, technology decisions such as architectures, platforms, and systems that could be required to implement the projects are also follow-on work. They are not included in SIM because I/T managers know very well how to perform these tasks.

One of the very useful results of SIM is to show management that there are two very different types of I/T expenditures. When the expenditures occur in the cells with low strategic importance, I/T is an operational cost, and it should be managed as a cost. That is, it should be reduced as much as possible while preserving an adequate level of service. When I/T expenditures occur in the cells with high strategic importance, they are strategic investments that will help the organization achieve its business objectives. These expenditures, therefore, should be managed as investments and increased when they are effective. It would be a major error to treat them as an operational cost The realization that I/T has these two very different roles, cost and investment, has a profound long-term effect on the decision process of senior management and will greatly influence their attitude towards information technology.

Go Up

 

 

BENEFITS

 

The many SIM studies conducted to date have demonstrated the following benefits:

  • Improved understanding by senior general, functional and unit management of how I/T expenditures are being allocated and managed.
  • Ability to differentiate between information technology that is used to run the business and should be managed as a cost item, and technology that support the business strategy and is an investment to achieve the business objectives.
  • A top-down, non-technical view of I/T expenditures that can be used for strategic planning and for tracking the implementation of the strategies.
  • Improved effectiveness in the use of technology by better alignment of I/T expenditures to the business strategic priorities.
  • Identification of opportunities to apply technology where it can help the most to achieve the business objectives.
  • An effective mechanism to assess the impact on information technology resource allocation of changes in the business strategy.
  • A business strategy driven approach to prioritizing reductions in I/T resources.
  • Enhanced communications by using the SIM model as a framework to discuss strategic issues in the use of technology.
  • Better teamwork among all participants as a result of the intensive joint planning session.-.

Go Up

Toscano Management Consulting, Inc., 2005

 

 

38 Rolling Hills Lane, Harrison, New York 10528-1712 Phone 914-777-1901 E-mail: mail@toscano-consulting.com

 

 

 

Home | About Us | Contact Us  | Experience| 

 

 

 

 

Copyright©2005 Toscano Management Consulting Inc. All rights reserved.