Maximizing Investment Yields And Minimizing Waste: A Guide To IT Investment Councils

The Purpose of the IT Investment Council Is to Maximize Investment Yields and Minimize Waste in Investments, Not to Manage the IT Organization

The company which we have considered for the assignment is Pansing Distribution Pte Ltd. The company is based out of Singapore and now wants to invest in an IT Automation process which will increase operational efficiency. In this assignment we will evaluate the investment and will also look at the capital budgeting situation (Burns, 2015).

It’s becoming clear to our clients, not to mention many CEOs that digital business is going to drive investments in technology up for many, if not most, enterprises. In that context, a functional mechanism for approving investment priorities is essential. There will be simply too many opportunities in the next few years for enterprises to waste money on technology investments with minimal results; focus matters. Not surprisingly, our clients are showing keen interest in IT investment councils (also known as “IT governance councils,” among other names), which they rightly see as key to maximizing the value the enterprise gets from its investments in change (Abor, 2017).

In this research, we describe some of the key considerations for CIOs and executives seeking to start up an IT investment council, or to improve the functioning of the one they have.

The Purpose of the IT Investment Council Is to Maximize Investment Yields and Minimize Waste in Investments, Not to Manage the IT Organization

IT investment councils have three important roles to play in driving up yields and driving down waste in the enterprise’s investments involving technology:

• Ensure coherent execution of business strategy via investments in change at scale. The enterprise’s investments in technology are roughly equivalent to its investments in change at scale. To be clear, plenty of important changes can happen in any enterprise without the involvement of IT— for example, hiring or firing a chief marketing officer (CMO) or CEO — but change that involves significant numbers of people or activities necessarily includes technology. In this sense, the IT initiative portfolio represents an important forecast about what will and will not change at scale within the enterprise’s planning horizon. That change must be aligned with the enterprise’s goals and the strategies for achieving those goals. In general, the enterprise’s commitment to its strategy can be gauged by the extent to which its investments in change support the strategy (Burns, 2015).
• Ensure that proposals for change involving technology clearly describe desired business outcomes and address risks. This is simply another way of saying that the council must demand high quality in the proposals that are submitted to it. Low-quality proposals divert time, attention and other resources from better-quality proposals.
• Ensure that preconditions for success, specifically including allocation of non-IT resources, are in place before execution begins. Project failures are waste, and various surveys show that, on average industrywide, over 20% of technology-supported initiatives are failures, with failure rates climbing rapidly with project size and complexity. Many failed initiatives exhibit unmistakable symptoms of pending failure well before execution begins. The investment council can and must make sure that those initiatives don’t go to execution, unless and until critical success factors are achieved.

Effective investment councils do not manage IT’s budget (Dellavigna, 2013). We know CIOs whose investment councils pore over every detail in the IT budget, down to what’s being spent on inkjet print cartridges. (If that sounds extreme, please note that we’re referring to an actual case.) It’s the CIO’s job to manage IT’s budget, and no one else’s. To argue otherwise is to argue that IT, unlike every other business unit in the enterprise, can’t be effectively managed from within the function. Is marketing’s budget reviewed and “corrected” by every other C-level executive and business unit leader in the enterprise? If not, why take that approach to IT, especially given that the head of marketing knows about as much about IT as the CIO knows about marketing?

In any case, the investment council’s role is to rank and approve investments in change, not to run the IT organization. The investment council must determine how much investment — of IT and other resources — to allocate to each goal, including goals related to enterprise transformation. Only involve the investment council in discussions of IT infrastructure and operations when there’s a significant investment in enterprise capacity and capability to be made, as described later in this research.

Roles and Responsibilities of the Investment Council

IT’s perennial desires for maximum economies of scale in IT operations will likely be thwarted to some extent by an integrated or entrepreneurial operating model. CIOs should be prepared to explain where the operating model has the greatest impacts on IT’s economies of scale (for example, in duplication of resources across business units in specific areas of IT operations) and why. Enterprise strategic goals may also be thwarted by the operating model; for example, enterprise plans for consistent treatment of customers across all lines of business can easily be thwarted by an entrepreneurial operating model. CIOs should know that such issues can’t be resolved by technology alone, given that change in this respect requires far more than adoption of common tools. The investment council is one of the venues in which needs for executive support for change can be surfaced and promoted. That said, we advise CEOs and CIOs not to put IT on the point of the spear where changes to the enterprise operating model are concerned.

In general, investment councils function as decision makers, not as advisors. If an investment council isn’t empowered to make binding decisions, the implication is that the wrong roles and people are on the council. We have seen effective arrangements that use a two-part decision process, where a small team of senior executives performs an initial scan (the “smell test,” as one of our clients put it) to determine whether a proposal is worthy of further consideration, and a council with broader membership manages approvals and prioritization for proposals that pass the first scan. That’s not the same thing as an arrangement where a council’s decisions must be reapproved by senior management. In that situation, it’s likely that investment council members will start to question their roles in the process, with resentment and/or apathy the likely outcomes. If an advisory council is needed to prescreen proposals before they get to the investment council, make it clear that the council’s role is in fact advisory, and the final decisions will be made by a different executive or executives. Such an arrangement — like almost any other — is workable when everyone involved understands their roles in the process.

Many of our clients struggle with defining the value of investments in infrastructure. In general, infrastructure represents indirect value in Lean methodology terms: It is essential to producing the direct value that customers recognize and pay for, but in most enterprises, it’s not directly monetized, so it is difficult or impossible to value in terms of ROI. For example, what is the ROI for information security, or for any other risk reduction initiative? The answer is that there is none, given that we will never know exactly how much mischief was avoided via our investments in information security.

In general, framing arguments for infrastructure in terms of ROI is misleading at best. Arguments for investments in infrastructure and operations can effectively be framed, first, in terms of capacity and capability, and second, in terms of unit cost (Taha, 2014).

Capacity and capability get to the questions of how, when and where the enterprise will operate. The first question to be answered with regard to any infrastructure investment is: Is the capacity and capability offered by this investment essential to operating this business the way we intend? (That’s a nontrivial question in the era of digital business.) The second question is: Does the capacity and capability come at an attractive cost (which may be expressed in terms of unit costs, or in overall costs over time, such as is offered by a total cost of ownership approach).

As implied above, direct comparison of infrastructure investments to market-facing initiatives is difficult, in large part because the value propositions are very different. A solution is to create a separate investment portfolio for infrastructure and internal operations improvements, which will allow the investment council to compare apples to apples in determining the most attractive opportunities for investment in infrastructure (Andor, 2015).

References:

Burns, R., & Walker, J. (2015). Capital budgeting surveys: the future is now

Abor, J. Y. (2017). Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Springer International Publishing

Dellavigna, S., & Pollet, J. M. (2013). Capital budgeting versus market timing: An evaluation using demographics. The Journal of Finance, 68(1), 237-270

Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: a survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172

Taha, H. A. (2014). Integer programming: theory, applications, and computations. Academic Press

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