Forrester calls this business-owned technology spending. Within this investment framework, chief executive officers will use process-based core competencies to drive top-level budget allocations, while executive competency teams will use business objectives, risk and interdependencies to prioritise projects.
IT budget pain highlights the technology spending gap
An age-old schism exists between technology investments and business requirements. It is characterised by technology decisions made with ambiguous business backing, and business decisions made with limited technology considerations. This gap stands in increasingly stark relief as today's tight budgets emphasise a number of factors facing IT:
Inability to demonstrate technology's value
Few IT organisations rigorously estimate or measure the impact of technology investments. But budget-constrained business executives, burned by past projects, increasingly hold CIOs accountable for business benefits. For example, 79% of business leaders feel their massive ERP efforts were not fully effective, making these execs cautious about today's tech spending
It gets left out of high-impact decisions
IT once used its own budget to run the technology show. But CIOs today have less control over total technology spending as business execs make decisions that impact IT - like outsourcing, Web site development and customer care. For instance, a recent Forrester survey found that IT by itself made outsourcing decisions only 10% of the time.
Lack of business-based discipline
IT finds itself in an impossible situation. IT has no responsibility for setting business objectives and has for 15 years failed to establish a business foundation for technology spending. The past decade of huge technology investments with limited business cases - like ERP, Y2K, e-commerce and CRM - caused any business-planning skills IT had to atrophy.
Emerging dynamic collaboration will only make it worse
Dynamic collaboration - firms working together to improve shared business activities and collective competitive standing - increases the technology decision-making gap. Why? A company must not only get its own technology house in order, but it must also figure out how to create and support links with its customers and partners as:
Investment justification spans organisations and companies
As competition pits supply chain against supply chain, information must be pulled from multiple internal and external systems to track performance across partners. Appliance manufacturers like General Electric (GE) must invest in technology to improve the effectiveness of the entire process - from when a customer orders a new dishwasher using GE's kiosk at The Home Depot through to delivery and installation at the consumer's home.
Business partnerships define technology realities
Business performance, not technology, drives the selection of partners to execute business processes. One result is that IT gets left out of technology-determining decisions when partners' technologies dictate a firm's internal investments. When business managers - not IT - partner with French & Associates to operate accounts receivables and order-to-cash, whatever technology French & Associates uses comes with the deal.
Decisions focus on business processes that cross organisations
Collaboration occurs at the process level, requiring that the decision to deploy collaborative technology must include all of those involved in the process. Activities like supply chain management require cooperation from raw material suppliers, manufacturers, and distributors - as well as technology vendors (see the January 2001 Forrester report Orchestrating Service Providers).
Firms need business decisions - not technology decisions
To bridge the growing technology decision gap, executives must stop viewing technology as separate from their business. It's not just a question of centralised versus decentralised IT. Technology decisions made in stand-alone IT organisations - no matter where they report - can 't fix the gap. Instead, technology spending decisions require:
Business objectives and metrics
Firms must establish business metrics that measure the impact of projects on collaborative business objectives. Technology spending has no value without measurable business impact. This impact must be publishable to partners.
Business ownership of technology decisions
Technology spending must be part of business plans. CIOs must give up control of isolated technology budgets, and technology decisions must cease to occur apart from business decisions.
Process-based, distributed decision-making
Firms must drive budget decisions at the process level, employing cross-functional teams to lead projects and make decisions. Today's budget allocations by business units and functional groups won't work. No one group has the complete process picture.
Business-owned technology spending closes the gap
Making technology investments part of business means a new technology spending decision-making process - what Forrester calls "business-owned technology spending": A decision-making process that includes technology spending as an inextricable part of business plans.
This may sound obvious, but two things make it different: Technology investments don 't occur without business decisions, and the focus is on processes, not projects. Few companies do this right today, but the ones that do - like Cisco Systems and GE - top everyone's benchmark lists. This report develops the analytical framework for this approach, laying the foundation for future detailed research.
Three steps make up business-owned technology spending - executive teams drive the first, top-down budget allocation activity, while tactical teams of managers execute the two bottom-up project funding steps. The three steps are: 1) drive business budgets using process-based competency management; 2) prioritise projects according to business objectives; and 3) adjust project priorities based on risks and interdependencies.
1. Drive business budgets using process-based competency management
Whether it calls it strategy or core competency, a firm must focus its investments on delivering best-of-breed specialties. Forrester has found that only 3%of firms have a formal process to identify core competencies, and companies create only weak links between competencies and decisions. To remedy this disconnect, the CEO and his or her executive committee must:
Formalise core competencies
Companies must validate their core and non-core competencies using internal and external information. These competencies must be based on processes: what gets done - like product design or customer service - instead of what gets delivered -like product or quality.
Manage through executive competency owners
CEOs must form senior cross-functional teams to manage competencies. These teams will meet at least quarterly to review and update budget allocations and competency objectives.
Each team will include business unit executives and key stakeholders - like VPs of R&D, manufacturing, purchasing, distribution and finance for the value-creation competency team. There should be three competency teams, based on process-based competencies: customer-facing, value-creating and enabling (see the July 2000 Forrester Report The E-business Organisation).
Allocate investment budgets at the competency - not project - level
CEOs must resolve funding battles by divvying up dollars across the three competency buckets - creating spending plans at a level where corporatewide issues like customer-versus-plant can be resolved. The executive competency teams later will drive the allocation of this spending to individual projects.
Negotiate business objectives that reflect competencies
Working with the competency teams, the CEO will develop a small number of business objectives to guide investments. Each competency team must then assign these objectives weightings that reflect their relative importance to the overall competency bucket.
Forrester has identified a set of 11 actionable business objectives - like increasing end customer profitability by 5% and improving partner responsiveness by 15% (see the September 2000 Forrester report Measuring E-business Success).
Sort projects into process-based competency families
The competency teams must assume responsibility for decisions about projects that impact the competencies in their bucket. For instance, the customer-facing competency team would take on funding for projects like production-to-order pilot, which impacts the concept-to-market process. This will include negotiations, as some projects will affect multiple competency buckets. Where project funding requests exceed the allocated budget significantly - say by more than 15% - the team must divide its budget into sub-processes and assign projects to these new process families.
2. Prioritise projects according to business objectives
Competency teams assign individual project priorities based on the business objectives. This is basic project management - but organisations either don't execute project management, or IT does it with limited business input. To link project priorities to the competency objectives, each competency team will:
Drive decisions through a project review team
Each competency team will appoint a cross-functional project review team composed of managers - like directors of R&D, sales, marketing and technology for the customer-facing competency bucket. These teams will do the detail, bottom-up work of allocating the budget earmarked for the competency team across specific projects.
Break projects into six-month chunks
Project review teams will work with those making project proposals to create short-term deliverables. Business executives won't easily guarantee multi-year business impacts, and big projects don't allow for midstream corrections. To prevent one large project from dominating the budget pool, divide large projects into chunks accounting for no more than 30% of the total budget.
Set priorities based on business objectives
Review teams will calculate a numeric ranking for each project. This priority results from multiplying a project's expected contribution to the executive competency team's business objectives by that objective's relative weighting.
Identify metrics to demonstrate project success
Firms need ongoing control over project portfolios to adapt initiatives to changing business needs. Project review teams will assign detailed metrics - like reducing manufacturing costs and cycle time or improving customer satisfaction - to track a project's impact on competency team objectives. This will allow firms to improve project funding over time - and to cancel investments that fail to support core competencies.
3. Adjust project priorities based on risks and interdependencies
Complexities like probability of success and project interdependence influence priorities. But few firms examine project-level risks. Although IT assesses project interdependence today, this assessment must expand to include business impact. To account for these complexities, project review teams must:
Adjust for business risk
Firms should calculate the probability of project completion on time and on budget - and of meeting ascribed contributions to business objectives and use this risk factor to adjust projects priorities (see the May 14, 2001 Forrester Brief Tough Times Demand Disciplined Decisions).
Factor in project interdependencies
To create a complete picture of a project's importance, firms must adjust priorities based on interdependent projects' expected impact. A financial services firm's effort to improve the suspect-to-customer process might require the implementation of a predictive analytic tool before a project to increase qualified leads can take off.
PHASED ADOPTION OF BUSINESS-OWNED TECHNOLOGY SPENDING
It may take years for firms to achieve business-owned technology spending and may require significant changes to corporate processes and culture. To get started, companies should assess their technology spending decisions and determine with which of three phases to begin:
1. 2001 to 2003, tying IT projects to business objectives;
2. 2002 to 2004, aligning technology investments by process; or
3. 2003 and beyond, executing business-owned technology spending. Services and software vendors can assist firms in this journey, but users must hire multiple vendors to get a complete solution.
Phase 1: 2001-2003, tying IT projects to business objectives
In firms with IT-dominated technology spending and business execs that don't commit to the business impact of technology spending, the CIO must launch the move to business-owned technology spending.In these companies, the CIO must:
Identify the business value of current projects
IT must challenge business execs to identify the value derived from today's projects - from both technology and business process investments. One energy company's CIO has worked on this approach for the past 12 months, identifying business value for 40% of his projects. His progress results from his CEO's commitment and from a monthly report that lists business execs that have - and have not - committed to business value for projects affecting their organisations.
Require business value before allocating IT budget to new initiatives
IT must create a process for assessing the impact of new projects and establishing technology spending as a required part of each business plan. IT at AXA Client Solutions, the US division of AXA Group, makes project owners build a business case that includes estimates of the projects' impact on revenues and costs over a five-year period. AXA has improved visibility of technology spending and saved several million dollars by stopping funded projects that fail the ROI test.
Measure and report on project performance
IT must develop project performance metrics and demonstrate results establishing credibility and the skills required for ongoing project success. Services firm Insightout Performance Management creates a CIO dashboard to help firms describe IT's performance in business terms and measure IT's contribution to the business.
Phase 2: 2002-2004, aligning technology investments by process
Companies that establish and measure the business impact for IT spending must next shift the IT and business focus from technology projects to business processes dynamic collaboration investments won't fit in today's stovepiped projects. To drive this transformation, CIOs should work with business execs to:
Reorganise IT by process
Structure IT by business process, giving the teams ownership of cross-functional areas like customer service and fulfilment - instead of technologies like ERP and CRM or business functions like accounting and call centres. IT will always require matrix management, matching technical realities with business needs - like sharing content management investments across marketing and purchasing. But in an interconnected world, business process must dominate, with technology and function as the matrixed dimensions.
Set up process-based programme offices
By coordinating projects, measuring cross-functional process performance, and elevating process visibility across the firm, these offices ensure the success of business processes that span organisations functions, and projects. Staff these offices with experts from IT and from business - and recruit a strong senior sponsor, one who will become part of a future executive competency team.
Drive business ownership of technology through innovation teams
Use innovation teams to establish new business practices. Each project run under this new model should set and measure business objectives while teaching middle-level business managers how to run technology-rich projects. Staff these teams with full-time, cross-functional members and charter the teams with delivering new capabilities and defining co-existence with current technology and business practices (see the April 2001 Forrester Report Building E-business Leadership)
Phase 3: 2003 and beyond - Executing business-owned technology spending
Firms in this phase have established business objectives and metrics for technology projects, have business plans that include technology spending, and have begun to focus on business processes. The final steps to adopting the new technology spending model require the CEO's commitment to:
Get serious about core competencies
As the firm develops closer working relationships with partners and customers, competitive success will require focused specialisation. Without disciplined competency management, this specialisation will be more accidental than intentional - reducing competitive advantage.
Restructure the budgeting process for investments
To drive the adoption of top-down budgets using process-based competencies, begin with the core competencies. This will allow the CEO to build executive team support for new decision-making practices using high-return, broadly supported investments.
To speed successful adoption of business-owned technology spending, CIOs should:
Deliver a technology crash course for business execs
These courses shouldn't teach Java or COM/DCOM but should cover the opportunities provided by technology in a connected economy. Many business executives still don 't understand technology, having tossed projects over IT's transom and washed their hands of responsibility for technology's contribution to their business success. But this won 't work anymore. And helping the non-tech execs sharpen their technology awareness will both ease the addition of technology spending into business plans and provide the business execs with career insurance.
Provide stress-management training for IT leaders
The training should include negotiation and arbitration skills - as well as how to keep a cool head. Demystifying technology decisions and creating visible links to business objectives will put CIOs and their direct reports in the hot seat. Shielded in the past from senior management scrutiny by "black box" technology projects, business-owned technology spending will expose project leaders to new levels of review and critique.
Help CEOs align executive compensation plans to technology
CEOs should link key business sponsors' bonuses to successful adoption of business-owned technology spending - and the CIO can help set the goals. The new management by objectives (MBOs) should include items like portion of business-unit sponsored IT projects that have a business justification, and percent of business plans that include technology spending.
Hold vendors' feet to the fire on delivering results
Just as CIOs feel the heat from senior business executives to demonstrate technology spending value, CIOs should demand that their vendors demonstrate capabilities and deliver results. Vendors should produce reference accounts that have completed projects with confirmed results. And CIOs should require performance guarantees built into vendor contracts with revenue implications for firms that do not deliver as promised.
WHAT IT MEANS
The best partners practice business-owned technology spending
In a dynamic collaboration environment, firms with strong business specialties will seek partners that have and can sustain complementary best-of-breed core competencies. This will make a company's ability to optimise its investments' impact on the extended enterprise a key performance predictor - and firms that adopt business-owned technology spending practices will top that list.
New spending measures drive up project success rates
Business-owned technology spending practices will provide firms with early-warning information about the progress of technology projects. Healthy projects will generate higher returns as firms learn to focus funding better. And projects that fail to deliver against established metrics will be shut down more quickly.
Consulting firms will discover new business change revenues
Most companies will seek help in their efforts to adopt business-owned technology spending. Consultants will help their customers do upfront work like developing cooperation from across the corporation, creating diagnostics, and establishing common understanding of what needs to be done. Services firms will then help companies to establish process management offices and with associated new decision-making practices. Look for a provider to land a new crop of multimillion-dollar consulting contracts for this mission-critical work.
Collaboration laggards in manufacturing will adopt early
Older industries such as manufacturing adopt new technologies slowly. But these same firms will aggressively pursue business-owned technology spending. Why? These firms have managed capital expenditures this way for years and will quickly recognise the benefit of better technology spending decisions.
Technology vendors will lead with "proof of concept"
Firms making business-owned technology spending decisions will require that their vendors offer 60-to 90-day proof-of-concept delivery. CIOs and business executives will demand that vendors project and demonstrate performance, deferring payment contingent on successful delivery. Firms skilled at rapid prototyping, like Sapient, will see a surge in business.