IT investment as a Portfolio

Executive Summary:

As per a recent Computerworld survey, the Information Technology (IT) spending is expected to go up in 2015. The major areas of spending are expected to be in Security, Mobile, Business Analytics and Cloud. As organizations across industries dabble with the IT budget for next year, there are few factors they should consider before deciding the final budgetary amounts. This post is an attempt to discuss those factors that drive the IT decisions.

Need for IT investments:

Firms invest in IT primarily for two reasons - 1) to achieve Strategic depth 2) to Improve productivity. The priority for these two during the budgetary decisions varies depending on the business cycle and other macro economic factors. When an organization has high growth plans and the broader economy is doing well, the firm is more likely to favor IT investments that increase strategic depth against its competitors. When the organization is operating in an mature market or is facing head winds in the market conditions, it is more likely to concentrate on controlling costs and invest in IT projects that help the organization to improve productivity. However this is not a rule by any means and the IT decision depends a lot on the specific organization's nature of doing business.

A recent computerworld survey highlights the top priorities for organizations in 2015 (see the Cost watchers). The priorities seem to be slightly biased towards those investments that help to achieve productivity improvements and reduce cost. But as the global economy recovers, the strategic considerations are critical as well.


Business Cycle impact:

The priorities for IT investment varies with the earnings volatility and the industry business cycles that are applicable to specific organizations (See IT spending by industry by revenue in 2014 by Gartner in the picture. As business cycle changes and the earnings fluctuate, firms might re prioritize their IT spending. The two graphs below show the S&P exchange traded funds for banking and finance in 2014. Here I am using stock price as a proxy for earnings and future prospects. You can very well see the volatility in the stock prices. Under these circumstances, as firms look to finalize their IT budgets for 2015, it is critical to find a balance between strategic and productivity improving IT initiatives.




IT investment as a portfolio:

I strongly believe that firms should treat IT investments as they would treat their finance portfolio. Firms should hedge between strategic and productivity improving IT projects to account for earnings volatility. E.g.: a strategic initiative to build an e-commerce ordering channel should be balanced with a project for integrating inventory across other channels that improves the productivity of non-online order fulfillment.
Also rather than just measuring the value addition by an individual project on a standalone basis, firms should measure the value each IT project brings to the portfolio on a whole. In order to effectively measure the return on investment for each project, a comprehensive analysis should be performed to create a list of possible alternative initiatives so that appropriate opportunity costs can be accounted for. The side benefits of a project, such as reduced time of development for other projects, should also be considered while making the decision. The project's value should be measured based on the "additivity principle". The topic of valuing an IT project investment is a topic of its own and will go beyond the scope of this post.

Effective Implementation:

Budgetary decisions are only the beginning of the IT project life cycle. After design and development of the IT projects, irrespective of the method of development (agile vs. waterfall), the implementation part of the IT project is key as well. The soft side i.e. the culture of the organization would be impacted by the roll out of most of the IT initiatives. New employee skill sets are needed, the work responsibilities change and the org structure undergoes changes as well. In order to derive better value out of the IT investments, it is imperative to plan for and implement the change effectively. Only when the new IT systems are institutionalized, accepted and followed in the organization will the true ROI on these IT investments can be truly achieved.

Conclusion:
It is critical to view IT investments as a portfolio during the budgeting process. Even when measuring the ROI, the value addition should be considered not only at the individual project level but also at the portfolio level. Balancing the IT portfolio is a key factor in coping well with the business cycle volatility.

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