The Challenge of Value — Portfolio Management and the Myth of ROI

Information Technology (IT) spending continues to come under close scrutiny. And so it should! The track record of value received from investments in IT continues to be spotty at best, and dismal at worst. In the first edition of The Information Paradox, published in 1998 (revised 2003), we quoted the now-legendary 1996 Standish Group study which found that 73 percent of corporate America’s IT organizations were “challenged”-defined as late, over budget, or cancelled, and failing to deliver all of the expected benefits. Standish estimated that in 1995 American companies and government agencies spent $81 billion for cancelled software projects, plus $59 billion for software projects that were completed late. Even worse, of the IT projects actually completed by the largest American companies, only about 42 percent delivered the features and functions originally proposed. This is the exact opposite of doing more with less.

Somewhat surprisingly, the latest Standish Group survey, as reported by Scott Berinato in CIO Magazine, found almost no change, with 72 percent of projects in 2000 categorized as “challenged” or “failed.” If the Standish Group survey is correct, and there is no reason to suppose otherwise, billions of dollars in capital budget continue to be wasted. Investments in IT are still not delivering enough of the right capabilities. As a result, businesses are suffering from lost opportunity costs and an overall competitive degradation. In 2003, as they did in 1996, when Standish published their original study, people are still saying, “something has to be done.”

Portfolio management: another “silver bullet”?

Almost no one believes that a magic, silver bullet answer exists out there somewhere. The interactions between technology systems, organizations, processes, budgets, business communities, governments, and all the rest are just too complex. Simple solutions simply don’t work. On the other hand, though, almost no-one wants to hear about “difficult solutions.” Optimism abounds whenever some promising new approach surfaces that looks “do-able.”

Portfolio management is a good example. Barely heard of a couple of years ago, unless of course you had read The Information Paradox or were in the financial community, portfolio management has emerged as almost a new industry. Portfolio management is now front-and-center in many industry publications, the subject of an increasing number of conferences, and seen as a growing and profitable new practice area by many industry analysts and consulting firms. Meta Group states that 50 percent of organizations are using some form of portfolio management, or plan to be by the end of 2003. All of these companies expect great things. But are their expectations justified?

Portfolio management can indeed be a powerful tool to help organizations maximize the value that they receive from their investments in IT. Unfortunately, very few organizations are implementing portfolio management in a way that will achieve this goal. Most organizations are using portfolio management to manage the costs of IT, and where they do look at value, it is usually in the context of establishing the Return on Investment (ROI) of IT, and tracking ROI.

Most companies expect to control IT costs through portfolio management by looking at IT costs in a compartmented or siloed manner. It’s simple: the CIO has a budget for IT, and it needs to be prioritized. ROI is the measure that will be used to prioritize this budget. Unfortunately, companies who take this approach are unlikely to have more than very limited success with portfolio management. Portfolio management, like the business environment, is more complex than that. As a result, in 2006 or whenever the next Standish survey comes out, these companies will still have “challenged” IT projects, and they’ll still be wasting money.

Return-on-investment is more than technology

Eric Dean, the former CIO of United Airlines, captured the problem with ROI, saying:

“We can’t measure the value of those things [IT] without measuring the use to which they are put. ROI should be based on the costs of achieving the desired change&it’s not just about technology.”

The fact is that IT in and of itself does not deliver value – it simply delivers a capability. Value is only realized when that capability is effectively used as part of an overall business change program addressing human skills, processes, organizational structures, and -yes-changes in how technology enables and supports change to deliver value. This kind of value is much more difficult to measure than ROI. It’s about how to enable, quantify, and measure the business benefits of change.

The real “secret” to portfolio management

In The Information Paradox, Fujitsu Consulting introduced Benefits Realization”, a value-based approach to portfolio management. The fundamental premise of the approach is that we are not today implementing technology – we are implementing change. Technology is only a small part of enabling this change. The real “secret” to portfolio management – one that totally eclipses any reductions in IT spending – is in better understanding and managing how IT capabilities can be effectively used as part of comprehensive business change programs to drive real business value. The organizations that understand this are the ones who can harness portfolio management effectively to drive and sustain business value.

In the years since The Information Paradox was first published, we have worked with many clients across the world to implement this kind of portfolio management, enabling them to go beyond “last one out turn the lights off” thinking to asking, “how do we ensure that we get the greatest value from every dollar we spend?” While these clients have significantly improved their return on investments in IT-enabled change, some things have not improved. These things include the ability to articulate clear, focused strategies with well-understood, value driven business outcomes; the ability to acknowledge, surface, and deal with the complexity of strategy execution; and the ability to institute adequate governance processes. The lesson here is that even optimal portfolio management has its limits.

Overcoming the challenge of value and looking beyond portfolio management

As a result of our/this work, new thinking and practices have evolved beyond Benefits Realization and portfolio management to the broader subject of Enterprise Value Management.

Enterprise Value Management goes beyond the challenge of realizing IT value to address the essence of overall organizational governance by building on and extending Benefits Realization with a value-driven strategy process. It integrates enterprise architectures in structuring programs of change, and it identifies a dynamic, “sense and respond” strategic governance system to help organizations manage what is, in most cases, “an uncertain journey to an uncertain destination.”

Adopting and implementing Enterprise Value Management, just as in the case of its genesis, the Benefits Realization Approach, is not easy. It requires vision, discipline, and the courage to stay the course. It represents a fundamental change in how we think, manage, and act. Without such change we will continue to dismally under perform. There will, as always, be a few bright stars, but most results will be mediocre at best and appalling at worse. Our organizations, the people who they serve, the people who work in them, and society as a whole deserve better. Investors and analysts will demand that we do better. We can do better. We must do better!