The #1 CIO Issue: How to Explain and Justify I.T. · PDF fileCIO Perspective. 10 Copyright © 2003, Paul A. Strassmann How to Line Up I.T. Investment Proposals I.T. Cost Reductions

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Copyright © 2003, Paul A. Strassmann

The #1 CIO Issue:The #1 CIO Issue:How to Explain and JustifyHow to Explain and Justify

I.T. BudgetsI.T. Budgets

Los Angeles, CA - September 22, 2003

Gartner Group Application Development Conference

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From I.T. Exuberance to I.T. Reluctance

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Performance of 3,284 Global Firms Does Not Favor I.T.

Down

Level

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Alignment Expectations

•• Reduce Costs Reduce Costs

•• Improve Productivity Improve Productivity

•• Enhance Competitiveness Enhance Competitiveness

•• Increase Security Increase Security

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Three Alignments – Three Scenarios

InformationTechnology

InformationProductivity

KnowledgeAssets

ReduceCosts

ImproveManagement

IncreaseCompetitiveness

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Alignment Scenario #1

Budget Justification

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I.T. As a Share of Revenue

Purchases (57%)

I.T. Costs (3%)

SG&A (23%)SG&A (23%)

Direct Costs (17%)

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CFO vs. CIO Budget Contests

CIO CFO

CEO

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CFO and CIO Perspectives About Results Differ

200.0

100.0

62.0

5.0

3.0

30.0

12.0

0.0

210.0

104.0

50.0

6.0

3.0

47.0

5.0

1.0

250.0

109.0

50.0

6.0

3.0

82.0

6.0

1.0

Appropriations (Sales)

Costs of Operations (COG)

Overhead (SG&A)

Depreciation

Other

Pretax Income

Project Proposal

I.T. Investments

I.T. Operating Costs

2002 2003 2004Business Plan

CF

OP

ersp

ecti

veC

IOP

ersp

ecti

ve

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How to Line Up I.T. Investment Proposals

I.T. Cost Reductions

Operating Cost Reductions

Strategic Investments

Mandatory Changes

Total Investments

Ongoing Maintenance &Operations

I.T. Budget (Equals 2002Spending)

$2,735

$3,235

$6,273

$298

$12,541

$26,918

$39,459

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18

27

3

Investment CategoryI.T. Investment

$000sNo of Projects

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How the CFO Views An I.T. Investment

+ 9.4% - 1.2% - 3.6% - 2.5% + 7.0%

RevenueImpact COG Impact

SG&A

Impact

Depreciation

Impact

ProfitImpact

I.T. ImpactAssessments

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I.T. Architecture

&I.T. Politics

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Align I.T. Budgets with I.T. Politics

Corporate Budget

Divisional Budget

Functional Budget

Local Budget

Personal Options

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Outsourcing

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Money Migrates from Craft to Industrial Economics

Customers: Now 73% of I.T.CRAFT ECONOMICS

Suppliers: Now 27% of I.T.INDUSTRIAL ECONOMICS

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New Directions: Shift Risks to Vendors

n Shift Obsolescence Risks to Vendorsn Move Fixed Costs to Variable Servicesn Purchase Application Servicesn Take Labor out of Costs of Ownership

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From Outsourcing to Utility Services

Outsourcing

• Custom solutions• Contract financing• Customer defined

Utility Services

• Standard services• Usage fees• Applications market

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Outsourcing: Who Will End Up Doing the Work?

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Information Productivity

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Transaction Costs Now Exceed Direct Costs

Purchases (57%) Transaction

Costs(26%)

Direct Costs (17%)

CostsOf

InformationManagement

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Benchmark Information Productivity

$5,891

$2,446

$4,167

$2,110

$3,179

$4,167

$-1,227

8.536

8.08

8.044

8.842

8.284

8.338

7.492

$13,242

$7,428

$8,645

$5,165

$8,887

$16,213

$6,215

$7,268

$4,035

$8,830

$4,625

$9,127

$13,103

$6,780

65.5%

45.7%

39.3%

35.7%

26.8%

21.5%

-25.0%

A

B

C

D

F

Your Company

G

NetIncome

Cost ofCapital - %

Net FinancialCapital

Employed

Costs ofInformation

Mgmt

InformatnProductvty

Company

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Information Competition

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Winners Compete for Knowledge Capital

SOURCE: 1,899 Global firms, 2002 Revenues of $8.2 Trillion

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Source: The PIMS Program, sample of over 3,000 businesses from over 300 corporations

Information Competition and Profitability

65%

10% 15%

10%

Market position

Strategic moves Operating effectiveness

Random events, luck

Explanation ofProfitability

SOURCE: Empirimetric Corporation

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Potential Gains in the Global Automobile Industry

Old Value Chain New Value Chain0%

20%

40%

60%

80%

100%

120%

140%

160%

64%

81%

13%

60%

55%

15%

All Other InformationProfits

130%

158%

Gain

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Impacts of Information Technologies

n Information drives economic “arms race”.n Obsolete assets will be discarded.n Collaboration favors global consolidation.n I.T. becomes an economic weapon.

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Information Security

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Safeguard Knowledge Capital

n Secure Archival Repositoriesn Index Archival Contentsn Enforce Architecturen Authenticate Accessn Control Technical Infrastructuren Apply Risk Insurance Methods

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Prescriptions for Alignment

n Deliver cost reductions.

n Generate productivity improvements.

n Produce strategy-based gains.

n Assure security.

Documents

The #1 CIO Issue: How to Explain and Justify I.T. · PDF fileCIO Perspective. 10 Copyright © 2003, Paul A. Strassmann How to Line Up I.T. Investment Proposals I.T. Cost Reductions