How Do I Transform My IT Organization from a Cost Center to a

META GroupMETA Group

Dr. Howard RubinEVP and Research Fellow

META Group, Inc.Stamford CT

Dr. Howard RubinEVP and Research Fellow

META Group, Inc.Stamford CT

[email protected]

How Do I Transform My IT Organization From a

Cost Center to a Value Center?

203 973 6922www.metricnet.com

How Do I Transform My IT Organization From a

Cost Center to a Value Center?

203 973 6922www.metricnet.com

© 2001 META Group Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com 2

The essential focus areas for the high-performance 21st century IT organization

Value creation Cost management Investment management Risk management Global technology management Human capital management Performance management and communication

The critical business/IT transformations From cost center to value center From constraining to agile From reactive to proactive

The essential focus areas for the high-performance 21st century IT organization

Value creation Cost management Investment management Risk management Global technology management Human capital management Performance management and communication

The critical business/IT transformations From cost center to value center From constraining to agile From reactive to proactive

What We Are Hearing About 21st Century IT: The Challenges You Are FacingWhat We Are Hearing About 21st Century IT: The Challenges You Are Facing


Meeting the challenges Adopt an investment

mindset and discipline Introduce a new funding

model for IT as an investment portfolio

Enact a new management model that is consistent with the value-generation-focused needs of the enterprise

Meeting the challenges Adopt an investment

mindset and discipline Introduce a new funding

model for IT as an investment portfolio

Enact a new management model that is consistent with the value-generation-focused needs of the enterprise

What We Are Hearing About 21st Century IT: Responses to the ChallengesWhat We Are Hearing About 21st Century IT: Responses to the Challenges

META Technology Leaders IndexMETA Technology Leaders Index

META Index Dow Jones S&P 500

In the majority of sectors we track, the technology leaders outperform their peers and generate exceptional

shareholder value


The average company will spend an average of 3.84% of revenues on IT in 2001, compared to 3.50% in 2000

Average IT spending per employee was $10,052 in 2000, up from $8,407 in 1999; it will be $12,700 in 2001

As a result, the pressure on IT to produce more effectively for less will continue to increase

The average company will spend an average of 3.84% of revenues on IT in 2001, compared to 3.50% in 2000

Average IT spending per employee was $10,052 in 2000, up from $8,407 in 1999; it will be $12,700 in 2001

As a result, the pressure on IT to produce more effectively for less will continue to increase

What We Are Hearing About 21st Century IT: Why Change? The New IT EconomyWhat We Are Hearing About 21st Century IT: Why Change? The New IT Economy

2.15

%2.

59%

3.16

%3.

50%

3.84

%

13.65%

42.05%

36.70%

22.34%

9.70%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1997 1998 1999 2000 2001 (Est)

IT $ as Percent of Revenue IT Spending Change

After decades of expansion, the growth rate of the IT economy is slowing:

After decades of expansion, the growth rate of the IT economy is slowing:


IT Spending as % of Revenue

INDUSTRY 2000 Start of 2001 2002 (projected) 2002 vs 2001 2002 vs 2000Chemicals Average 3.09% 3.51% 2.6% -26% -16%Construction & Engineering Average 1.55% 2.03% 1.2% -41% -23%Consumer Products Average 3.52% 4.33% 3.9% -10% 11%Electronics Average 3.14% 3.20% 2.8% -12% -11%Energy Average 3.56% 4.71% 2.7% -43% -24%Financial Institutions Average 6.76% 6.09% 6.5% 7% -4%Food/Beverage Processing Average 2.31% 2.56% 2.4% -6% 4%Health Care Average 4.33% 4.81% 4.2% -13% -3%Hospitality & Travel 1.71% 1.72% 1.4% -19% -18%Information Technology Average 4.13% 4.68% 4.8% 3% 16%Insurance Average 3.78% 4.11% 3.6% -13% -5%Media Average 3.66% 3.95% 3.8% -4% 4%Metals/Natural Resources Average 1.84% 2.30% 1.9% -17% 3%Professional Services Average 5.11% 6.39% 5.1% -20% 0%Retail Average 1.64% 1.80% 1.7% -6% 4%Telecommunications Average 5.79% 5.88% 5.7% -3% -2%Transportation Average 3.79% 3.93% 4.1% 4% 8%Utilities Average 3.61% 3.90% 2.8% -28% -22%

Overall Average 3.50% 3.84% 3.4% -11% -3%

Notes:

Figures as of Sept 17, 2001

Revenue projections for 2001 and 2002

are unstable

What We Have ObservedWhat We Have Observed


Technology Cost of Goods and ServicesTCOGs

IT Dollars per Good of ServiceINDUSTRY TCOGSBanking $4.00 per $1000 assets under management

Chemicals Average $51,000 per active patent

Construction & Engineering Average $63,000 per active project (large)

Electronics Average TBD

Energy Average $2.00 per barrel of crude oil

Financial Institutions Average $5.50 per $1000 assets under management

Food/Beverage Processing Average TBD

Health Care Average $31 per patient

Hospitality & Travel TBD

Information Technology Average TBD

Insurance Average $1.34 per $ of life insurance in force

Media Average TBD

Metals/Natural Resources Average $9 per ton of steel shipped

Professional Services Average $454 per job placement

Retail Average TBD

Telecommunications Average $28.3 per access line (wireline and non-wireline)

Transportation Average $9600 per tractor

Utilities Average $16,000 per megawatt generated




$0 to $600M save in 6 months

2x to 3x performance at the same time

A Division of META GroupA Division of META Group

1

($ in Millions)

Target Total Cash Outlay Reduced by 26% Year-to-Year (1)

$1,074$912

$822

$457

$383

$246

$695

$499

$460

$138

$73

$45

$102

$100

$124

$194

$183

$36

2000 Actuals 2001 YTD 2001 Recast

Total HardwareCapital

ITB Low Risk

ITB High Risk

ITB Med Risk

RTB Non Disc

RTB Core

($162)

($65)

($11)

($22)

$158

($2)($74)

($90)

($28)

($137)

$2,163M

$1,856M

$668M Reduction from 2000 Actuals

$2,524M

(2)

($196)

($39)


A profile of IT organizations in F1000 companies today

About 30% are “frozen in the past” . . . IT managed as a cost; still mainframe-based; long development lead times; not flexible

About 55% are “in the abyss” . . . Spending is growing, but not managed as an investment; distributed computing is growing with uncontrolled complexity; strategic work content is low

About 10% are “competitive” . . . Spending is under control; the portfolio is being managed; development is effective, and strategic content is high

About 5% are “leading” . . . Spending is managed as an investment; package-based solutions play a key leveraged role; sourcing is also leveraged; a “market ready” mindset

A profile of IT organizations in F1000 companies today

About 30% are “frozen in the past” . . . IT managed as a cost; still mainframe-based; long development lead times; not flexible

About 55% are “in the abyss” . . . Spending is growing, but not managed as an investment; distributed computing is growing with uncontrolled complexity; strategic work content is low

About 10% are “competitive” . . . Spending is under control; the portfolio is being managed; development is effective, and strategic content is high

About 5% are “leading” . . . Spending is managed as an investment; package-based solutions play a key leveraged role; sourcing is also leveraged; a “market ready” mindset

What We Are Hearing About 21st Century IT:IT Readiness to Meet the Challenge Is LowWhat We Are Hearing About 21st Century IT:IT Readiness to Meet the Challenge Is Low

To evolve and transform, you must know where you are today! Do you?

To evolve and transform, you must know where you are today! Do you?


What We Have Found: The YinWhat We Have Found: The Yin 84% of companies either do not do business cases for their IT

projects at all, or just do them on a select few key projects

83% of companies are unable to adjust and align their budgets with business needs more than once or twice a year

More than two-thirds of IT organizations are not “market-ready” — benchmarking is done less frequently than once a year

89% of companies are flying blind — virtually no metrics except for finance (sort of like flying a plane by monitoring your fuel burn rate)

57% of companies perceive they are balancing the pressures of cost-cutting and IT effectiveness — but perception is not necessarily reality

84% of companies either do not do business cases for their IT projects at all, or just do them on a select few key projects

83% of companies are unable to adjust and align their budgets with business needs more than once or twice a year

More than two-thirds of IT organizations are not “market-ready” — benchmarking is done less frequently than once a year

89% of companies are flying blind — virtually no metrics except for finance (sort of like flying a plane by monitoring your fuel burn rate)

57% of companies perceive they are balancing the pressures of cost-cutting and IT effectiveness — but perception is not necessarily reality


What We Have Found: The YangWhat We Have Found: The Yang 1 out of 6 companies have a process in place to capture

benefits from IT initiatives

Roughly 1 out of 6 companies have real-time budgeting processes that focus on merit-based funding for all nondiscretionary IT work

1 out of 12 organizations continuously use benchmarking information as “market data”

Only 1 out of 9 companies use metrics to manage IT efficiency and effectiveness beyond basic financial reporting

1 out of 7 companies believe they have achieved success in balancing the pressures of cost-cutting and IT effectiveness

1 out of 6 companies have a process in place to capture benefits from IT initiatives

Roughly 1 out of 6 companies have real-time budgeting processes that focus on merit-based funding for all nondiscretionary IT work

1 out of 12 organizations continuously use benchmarking information as “market data”

Only 1 out of 9 companies use metrics to manage IT efficiency and effectiveness beyond basic financial reporting

1 out of 7 companies believe they have achieved success in balancing the pressures of cost-cutting and IT effectiveness


Value Transformation Step 1a:From Cost Center to Value CenterValue Transformation Step 1a:From Cost Center to Value Center

View IT as a business of products and services

Treat the IT investment as a portfolio of assets

Set the stage for business/IT “fusion,” not “fission”

View IT as a business of products and services

Treat the IT investment as a portfolio of assets

Set the stage for business/IT “fusion,” not “fission”

Changing to a Value CenterChanging to a Value Center

Transformation requires the adoption of a new operating model for IT and a new form of business/IT

partnership

Transformation requires the adoption of a new operating model for IT and a new form of business/IT

partnership

Business Perception of IT CredibilityHighLow

Hig

hL

ow

Inve

stm

ent

Co

st

EffectivenessEfficiency


BusinessPerception

ofDependency

onInformation

Business Perception of IT CredibilityHighLow

Hig

hL

ow

Inve

stm

ent

Co

st

EffectivenessEfficiency

Supporting Supporting the the

BusinessBusiness

Strategic Strategic PartnerPartner

Preferred Preferred PartnerPartner

Value Transformation Step 1b:From “Factory” to “Strategic”Value Transformation Step 1b:From “Factory” to “Strategic”

The transformation of IT’s role in the enterprise is critical

The transformation of IT’s role in the enterprise is critical


Value Transformation Step 2:Move IT to a True Business ModelValue Transformation Step 2:Move IT to a True Business Model

Adopt a business discipline philosophy, beginning by clearly understanding the fully allocated costs of IT products and services

Manage and balance the IT portfolio to drive higher levels of value and lower levels of risk

Benchmark current IT product/service offerings to begin identifying an IT regime capable of supporting ongoing business innovation

Adopt a business discipline philosophy, beginning by clearly understanding the fully allocated costs of IT products and services

Manage and balance the IT portfolio to drive higher levels of value and lower levels of risk

Benchmark current IT product/service offerings to begin identifying an IT regime capable of supporting ongoing business innovation

Eight Basic Tenets of Running IT as a Business

1. Costs are known and auditable

2. Budgets are developed using clear models

3. Critical business information is available in real time

4. The work backlog is managed from a value perspective

5. Performance is visible internally and to the customer

6. The organization is “market ready”

7. There is a focus on cost reduction, quality improvement, and customer-facing performance

8. IT performance is judged on day-to-day performance, application delivery, and the ability to “run IT like a business”


Value Transformation Step 3:Look at IT as an Investment PortfolioValue Transformation Step 3:Look at IT as an Investment Portfolio

Express activities in business terms

Continuously manage the investment yield from a risk/ return vantage point

Position the CIO as a “fund manager”

Position IT as portfolio and product managers

Link all through an investment management discipline

Express activities in business terms

Continuously manage the investment yield from a risk/ return vantage point

Position the CIO as a “fund manager”

Position IT as portfolio and product managers

Link all through an investment management discipline

No

n-D

iscr

etio

nar

y C

ost

s

Risk

Dis

cre

tio

na

ry P

roje

cts

Ris

ks

Rew

ard

s

VentureVenture

InvestmentInvestment

DiscretionaryDiscretionaryEnhancementsEnhancements

Non-Non-DiscretionaryDiscretionary

CoreCore

IT Investment PortfolioIT Investment Portfolio


Value Transformation Step 4:Revamp the IT Funding ModelValue Transformation Step 4:Revamp the IT Funding Model

Adopt a fluid IT budget model that considers all projects to be business projects

Treat every quarter as a year

Forget the idea of an IT budget; fund and squeeze the baseline, but fund everything else based on merit/business value

Manage the whole portfolio — old and new from a value viewpoint

Adopt a fluid IT budget model that considers all projects to be business projects

Treat every quarter as a year

Forget the idea of an IT budget; fund and squeeze the baseline, but fund everything else based on merit/business value

Manage the whole portfolio — old and new from a value viewpoint

Define Projects

Determine Project Size,

Cost, Priority, Benefits, and

Feasibility

Execute Projects

Manage and Grow

the IT Asset Base

ContinuousBusinessFlux/Needs:Requests, Initiatives, Projects, Ideas, Needs,Etc.

Continuous Assessment of Value-Focused Performance

CompletedProjects

Work Program

Consensus

Statement of Work


Value Transformation Step 5a:Make Performance VisibleValue Transformation Step 5a:Make Performance Visible

Is the enterprise efficient in managing its technology investment in comparison with its peers (“doing things right”)?

Are our businesses effective in generating value from their technology investments (“doing the right things”)?

Is the enterprise efficient in managing its technology investment in comparison with its peers (“doing things right”)?

Are our businesses effective in generating value from their technology investments (“doing the right things”)?

Advisory Business

The Businesses of IT

Software Business

Utility Business

Eff

ecti

ven

ess

Value

The Assessment Landscape

The key executive questions The key executive questions

Efficiency


Value Transformation Step 5b: Use Measures That Link to Key QuestionsValue Transformation Step 5b: Use Measures That Link to Key Questions Is IT managing investments efficiently and effectively?

Is IT efficient across the entire portfolio of services, products, and labor it procures and operates? Are resources being utilized at effective and expected levels?

Is the backlog building or declining or steady? Is technology managing the business’s IT investments in alignment

with business needs? Are technology customers satisfied? Is IT a “true provider of choice”? What is our cost of quality for IT? What is the level of IT performance?

Is IT generating value at a level consistent with business goals? Are we attaining expected benefits from our technology investments? Are we investing in IT futures appropriately?

How does IT compare? Against competitors/peers? Against the best-in-class performers across sectors and geographies?


Value Transformation Step 5c: Use the 7 Indicators of High-Performance ITValue Transformation Step 5c: Use the 7 Indicators of High-Performance IT

The Businesses of IT

Efficiency MeasurementIndicators

Effectiveness AssessmentIndicators

Advisory Business

Software Business

Utility Business

InvestmentDistribution

Cost Management

WorkVolume

Satisfaction

Performance& Quality

ValueAttainment

FutureInvestment


Value Transformation Step 5d: Map Performance Onto Your Business ModelValue Transformation Step 5d: Map Performance Onto Your Business Model

Changing to a Value Center: The Business Network MapChanging to a Value Center: The Business Network Map Create the business

network map for the enterprise

Overlay the IT cost structure side-by-side with key business indicators

Overlay the value structure of IT

“Show me the money”; “show me the value”; “show me the leverage”

Create the business network map for the enterprise

Overlay the IT cost structure side-by-side with key business indicators

Overlay the value structure of IT

“Show me the money”; “show me the value”; “show me the leverage”


Value Transformation Step 6: Move to High Performance and High Impact Value Transformation Step 6: Move to High Performance and High Impact

Understand your IT “value net” in the context of the business

Understand the key drivers for IT performance today and tomorrow

Continuously evolve to higher levels of value and impact

Understand your IT “value net” in the context of the business

Understand the key drivers for IT performance today and tomorrow

Continuously evolve to higher levels of value and impact

IT and Business ImpactIT and Business Impact

IT Impact on

Business Structure

1970 1980 1990 2000 2010 2020

ERA IV: IT Reshaping IT Reshaping

Business ModelsBusiness Models

ERA III: Value Creation and Value Creation and Business EffectivenessBusiness Effectiveness

Internet/Network Computing

ERA II: Productivity and End-User Productivity and End-User EmpowermentEmpowerment

Automation, Cost Control, Automation, Cost Control, and Efficiencyand Efficiency

LowLow

High

Client/Server Computing

Ubiquitous Computing

Mainframe/Midrange Computing

ERA I:


Investment management

Cost management

Workflow management

Customer relationship management/human capital management

Performance/quality management

Value (risk/asset) management

Futures management

Investment management

Cost management

Workflow management

Customer relationship management/human capital management

Performance/quality management

Value (risk/asset) management

Futures management

Successful enactment of these disciplines requires that an ongoing set of assessments be made by IT management

Drive them through your processes

Manage them with metrics

Successful enactment of these disciplines requires that an ongoing set of assessments be made by IT management

Drive them through your processes

Manage them with metrics

Core Disciplines

Value Transformation Step 7: Adopt and Embrace the Disciplines of Success Value Transformation Step 7: Adopt and Embrace the Disciplines of Success


The Value Transformation AgendaThe Value Transformation Agenda

1. Move from being a cost center to value center Move from being a support function to strategic

partnerships

2. Move IT to a true business model

3. Look at IT as an investment portfolio

4. Revamp the IT funding model

5. Make performance visible and meaningful Use measures that answer key management questions Apply the seven indicators of high-performance IT Map IT performance to the business’s business model

6. Make the shift to high performance and high impact

7. Adopt and embrace the disciplines of success and value generation

1. Move from being a cost center to value center Move from being a support function to strategic

partnerships

2. Move IT to a true business model

3. Look at IT as an investment portfolio

4. Revamp the IT funding model

5. Make performance visible and meaningful Use measures that answer key management questions Apply the seven indicators of high-performance IT Map IT performance to the business’s business model

6. Make the shift to high performance and high impact

7. Adopt and embrace the disciplines of success and value generation


Transforming While Performing:Changing From Reactive to AlignedTransforming While Performing:Changing From Reactive to Aligned

Time

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IT Very High IT Mod. High IT Part of Life

= Change Rate

PAIN Is Felt Here

Change Rate Moderate Moderately High Very HighChange

CharacteristicsKnown Known Known Unknown Unknown Unknown

Business TechnologyEnvironment

Business Models, Consumers, Distribution, Content Technology

Business Focus Efficiency and Savings

Global Leverage of Business

On-Demand Product; New Consumer


Transforming While Performing: Making the Required ShiftsTransforming While Performing: Making the Required Shifts

IT Stage React Reposition Dynamic Alignment Organization Loose Affiliate Network Community Priority Value

Merger Benefits

Leverage Assets

Value + Capabilities

Global IT Infrastructure

Adaptable Architecture

Value + Capabilities + Business Innovation + Future Vision

Sense & Respond Extreme Agility Move at the Speed of

Business & Environment

Technology Focus

IT IT + Digital Content Management Technology

IT + Digital Content Management Technology + Product Delivery

Reaction Driver

Business Business + Technology

Business + Technology + External Opportunities

Risk of Failure Costs to high Strategic work not done

Out of Sync With Business Plan

Out of Sync With Business Plan and Industry


CUSTOMERS

SUPPLIERS COMPETITORS

Community

Network Relationships

Technology

Human Resources

BusinessModels

OTHER STAKEHOLDERS

EMERGING ORGANIZATION

TECHNOLOGY

Capabilities

The next-generation IT organization is a TECHNOLOGY COMMUNITY.

A COMMUNITY is characterized by identity, shared values, a global business perspective, relationship growth, the ability to rapidly accumulate and share individual experiences to create organizational capital, the cultivation of an intelligent society, and a focus on grasping opportunities and turning the

future into an asset.

It is, in fact, a TECHNOLOGY AND INNOVATION community.

The next-generation IT organization is a TECHNOLOGY COMMUNITY.

A COMMUNITY is characterized by identity, shared values, a global business perspective, relationship growth, the ability to rapidly accumulate and share individual experiences to create organizational capital, the cultivation of an intelligent society, and a focus on grasping opportunities and turning the

future into an asset.

It is, in fact, a TECHNOLOGY AND INNOVATION community.

Transforming While Performing:What’s on the Horizon?Transforming While Performing:What’s on the Horizon?


IT Financial Re-Engineering: Never Having to Be Reactive, Never Having to Say You’re SorryIT Financial Re-Engineering: Never Having to Be Reactive, Never Having to Say You’re Sorry

— Charles Darwin— Charles Darwin

It’s all about: Balance and agility Portfolio management and new budgeting models Continuous business alignment


Transformation Steps


It is not the strongest of the species that survives, nor the most intelligent, but the one that is most responsive to change

— Charles Darwin— Charles Darwin





Documents

How Do I Transform My IT Organization from a Cost Center to a