Investile Dysfunction

On why IT and Finance should learn to play nice - It may help with the Board

I’ve talked to many folks enabling IT Portfolio Management and when I ask if they are partnering with finance or strategic planning in their effort, the answer is that IT is managing it on their own with the aim of (1) ensuring they are allocating resources to the right projects and (2) ultimately able to communicate the value they provide to the business.  Most of the time the portfolio management effort is managed in a project management-centric way within an IT PMO.  This is the age-old IT vs finance conundrum which seems to have impacted many organizations.  Both sides are to blame in the ‘conflict’, but a survey I came across by Deloitte and Corporate Board Magazine underscores why progressive IT organizations increasingly need to partner with finance and even strategic planning.

The survey found that 29% of Corporate Boards look to CFOs to provide help in understanding a company’s IT strategy - which is slightly under the 34% who look to CIOs to do this.  Score one for why your IT Portfolio Management effort should be a partnership with finance.  The CFO who may not be your best friend today might be called upon to discuss company’s IT strategy tomorrow.

Underscoring the need further to partner with finance or strategic planning is the fact that Boards don’t really want to talk about IT.  The same survey found that the Board is actively involved in discussions of financial performance 87% of the time and strategic planning 79% of the time while being actively involved in IT discussions only 14% of the time.  So while the IT organization’s IT Portfolio Management effort may have the aim of communicating the strategic and financial value they provide to the enterprise, partnering with those who can help them convey this value is smart strategy.

What do those of you in IT feel about this?  I’d love to hear from those who’ve partnered successfully with finance as well as those who feel strongly that partnering with the likes of finance and strategic planning is ill-advised.  War stories welcome.

Forget execution, just pick the right strategy and you're all set - Smart guy who has some ideas that make no sense

Recently, I spoke at the BPM Summit on the topic of Corporate Portfolio Management (what else of course) and after my address had the pleasure of hearing Professor Peter Kontes of the Yale University School of Management and Greenwich Advisory Group give a presentation entitled "The CFO's Role in Formulating Corporate Strategy." Kontes is an advocate of the concept of economic profit which is one that based on quick observation/study makes sense. He also provided a definition of strategy that I liked. He states, "The objective of strategy is to maximize the corporation's intrinsic value and total shareholder returns over time." It's concise and pretty much gets at what the esoteric term strategy means.

But one of Kontes' main assertions is that you "Fund strategies, not projects" and he showed a slide of a line of business (LOB) with three strategies before it. The LOB today had an intrinsic value (IV) today of $50M and with the Gold strategy, the IV could become $100M. The Green strategy would result in an IV of $80M and the Red strategy would yield an IV of $70M. And in Kontes' view, the CFO in this case does the right thing by choosing the Gold strategy. Duh.

So you're thinking to yourself as I did - "Wow. It really is that simple. What have I been thinking and doing for so many years when the answer was right before me? It all comes down to picking the strategy with the biggest number attached to it." With this realization, I thought I really have wasted a significant amount of my professional life trying to pick the best initiatives as part of a strategy. Instead, I should have been focused on just picking the strategy with the greatest value and voila!, the rest would take care of itself. I wish someone would have told me this much much earlier.

I did ask Konte about how you determine the IV of a strategy, and he said there are some proven techniques to estimate the IV of a strategy. To say I'm highly skeptical would be an understatement. Even if there was some 'formula' to estimate the IV of a strategy, this is prone to the massive cultural, gamesmanship, incentive alignment issues which make coming to the 'right number' nearly impossible. Maybe the concept works in a theoretical construct but in a practical one, I see little hope.

The idea that projects or investments which require resources and which ultimately help you deliver upon a strategy are less important or shouldn't even be focused on in lieu of a strict focus on the strategy selection is preposterous. This premise completely underestimates or doesn't seem to even consider the importance of picking the right investments (aka projects) and executing upon them well. Perhaps the idea of picking the strategy with the biggest IV assumes that the company executes and selects the right initiatives, but this assumption, if made, is inane, ridiculous, silly, etc. How an organization allocates its resources to initiatives, projects, investments, etc and then executes on those selected initiatives is what distinguishes companies from each other. Two companies that have identified the same or similar strategy can and do have very different outcomes precisely because of the bets they make (resource allocation) and the execution against those bets.

I'm not saying the strategy selection is irrelevant as picking the right strategy with the right size opportunity is hugely important. But I'd take a medium size strategy coupled with great investment selection and execution over a theoretically great larger strategy which has poor or uncertain resource allocation efficiency and execution. It maybe enticing to believe that decisions in our multi-variable world can be made so easily but I'm surprised that someone as smart as Professor Kontes would advocate a position which appears to be flawed on so many levels.

How do we measure the "value of IT"? Will we ever stop asking this question? Or more importantly, will it ever be solved?

I'm convinced that many consultants/software vendors have become millionaires putting forward frameworks, ideas and 'best practices' which purport to help organizations demonstrate or answer questions about the "value of IT".  Generally, the ideas espoused in these "let's demonstrate the value of IT" efforts can be categorized into one of two extremes.  They are either (1) full of inane, oversimplified platitudes or are (2) overly complex, shock & awe inspiring treatises.  In both cases, they don't work and so the question about the business value of IT remains wide open - and really not even a bit closer to any semblance of an answer.  Just Google those 3 words ("value of IT")and you have over 600,000 items that come up from the likes of Gartner, Microsoft, Infosys, etc.  So this leads me to 2 conclusions:

1. If consulting/software vendors offered a 100% satisfaction/money back guarantee, they'd be in trouble
2. If you have been "selling" an answer the same question for many years which is not really correct (or even all that close), maybe it's time to get into a new line of work.  While I know that won't happen since you're making a ton of money promoting your ideas, it would seem to be the right thing to do if we ever want the market to be more efficient, e.g., only those companies who really truly know something survive and hence add useful thinking to the body of knowledge.

So now let me ask if anyone has developed, seen or employed truly useful and pragmatic ideas or practices on how an IT organization actually brings value to an organization which have demonstrably impacted growth (revenue, net income or shareholder returns)?  I had written a few posts ago about the CIO of Medtronic and his approach which was straightforward and so that would be my only prerequisite - no unproductive complexity in the approach.  I don't want consulting jargon, academic ideas which never have been put into practice or convoluted frameworks and value chains which make for good whitepapers and lend themselves to pretty graphics but which are ultimately great theory but useless from an implementation and impact perspective.

I'm hoping to hear from the few who actually might know something about the "value of IT".

Please describe your ideas in a few paragraphs as well as any organizations who've employed the approach and their results (even at a high-level if that is all you can divulge).  Please don't send me links, whitepapers, etc as I don't have the time to read them. 

Good ol' M&A synergies - much hyped but elusive

So companies who do acquisitions or investment bankers who try to push companies to do acquisitions generally will promote the idea that the two companies being one is better than the two being separate. The argument as it goes generally buckets synergies into a few types:

1. Revenue synergies - "We can cross-sell each others products to other's customers"
2. Operational synergies - "We can be more efficient about product development because of our teams collaborating with each other."
3. Cost synergies - "We can fire one company's salesforce"

The argument as it is put forward is that the two companies together are like peanut butter & jelly or like NJ & you - "perfect together". As a former New Jersey'ite, I expect only a handful of people will remember the Tom Keane commercials which had this as their catchphrase, but I digress.

Back to the topic at hand - synergies.

Unfortunately, while deals maybe predicated on high-level claims of synergy, they have proven to mostly be elusive. Instead of peanut butter & jelly, company combinations based on synergy expectations have been more like peanut butter & ketchup. From afar, you may think a PB&K sandwich resembles PB&J but as you get closer, you realize it's a pretty colossal mess. Ok I took that analogy way too far, but oh well...

Again, back to the topic - synergies.

In the latest example of faux synergies, a Wall Street Journal titled "As Software Firms Merge, Synergy is Elusive" talks about deals between PeopleSoft and Oracle or the more recent IBM/Cognos or SAP/Business Objects deals where shareholders of the acquiree have been rewarded, but where customers are increasingly getting frustrated with the 'integration'. It boils down to the following which the article points - "While the voluminous deal activity has meant a bonanza for shareholders - many software stocks have soared this year, partly because of the hot merger landscape - Mr Gonick's experience [Lev Gonick is CIO of Case Western Reserve University] highlights the flip side: As the big software companies flesh out their integration plans internally, customers on the outside are left with unanswered questions about their future. It often takes years for software makers to integrate all the products they have bought - if they manage to at all - making it hard for customers to decided what to buy in the meantime. Some customers worry about losing negotiating power in the long run as the number of product choice dwindles. And all the dealmaking can crimp a CIO's ability to plan, since it's unclear which software makers will survive."

So this is ultimately an example of the often seen "win-unknown-lose" situation where the acquiree wins because of the premium they get at time of purchase, where the acquirer's situation remains uncertain for some period while the deal & integration unfolds and where the customer loses for the above-stated reasons. Don't you love synergy?

Anyone out there have thoughts ore experiences related to the integration (good or bad) with Oracle-Peoplesoft, Cognos-IBM, SAP-BusinessObjects or any other software merger which they'd like to share? If you are the customer, are there tips & tricks that you know of that may make some of the uncertainty more palatable? Other wisdom, stories (pleasant or horror), ideas?

IT portfolio management myths & misinformation - part 1

I've been reading various articles on IT portfolio management recently and while I was shocked to hear it has been around since 1988 (given it's real lack of progress), it unfortunately suffers from many issues.  Below are a few of the issues in its current incarnation. 

• It's fixated on ROI - The portfolio of IT projects needs to be viewed in financial terms beyond ROI, e.g., revenue, expense, profit, NPV, etc as this is ultimately the language of business.
• No consistency in return calculations - Even with ROI, the metric is mostly calculated with little to no consistency making prioritization using this metric subject to error.
• Too much focus on software tools - The discipline and strategy needs to be understood long before any project portfolio management or IT portfolio management tool is implemented.  Software is not an elixir and implementing a solution does nothing without a proper understanding of the process, strategy and discipline.
• Organizational behavior and culture is key - Using an IT portfolio management discipline in a substantive and game-changing way is a major change management effort.  Simple platitudes about managing it like a portfolio of stocks won't do.  Cultural and behavioral change must constantly be attended to.

Over time, I'll highlight some of the other issues I see in the ideas circulating around IT portfolio management at this time.  I'd love to hear others ideas and thoughts.

Jeff Bezos' Amazon takes the long-term view on innovation

My recent post on Sara Lee commended them for continuing to invest in product development and marketing even in the face of poor results.  I just read an interview with Jeff Bezos, founder and CEO of Amazon.com, from the Harvard Business Review's Oct 2007 issue which I also found refreshing because it is presented an uncommon perspective on innovation at public companies. 

When talking about the culture of Amazon, Bezos stated, "First, we are willing to plant seeds and wait a long time for them to turn into trees.  I'm very proud of this piece of our culture, because I think it is somewhat rare.  We're not always asking ourselves what's going to happen in the next quarter, and focusing on optics, and doing those things that make it very difficult for some publicly traded companies to have the right strategy."

Somewhat rare?  I'd say this is highly uncommon.  Bezos doesn't say they don't think about what is going to happen in the next quarter as short-term performance is obviously important as it gives investors confidence and also helps pay for a future, but he does point to a balance between the two.

When one thinks about the innovative opportunities that an organization should go after, Bezos acknowledges the uncertainty and risk of these efforts but again has the right outlook.  He states, "We may not know that it's going to turn into an oak, but at least we know that it can turn out to be that big.  I think you need to make sure with the things you choose that you are able to say, 'If we get this to work, it will be big."

He goes onto add, "Every new business we've ever engaged in has initially been seen as a distraction by people externally, and sometimes, even internally.  There's nothing wrong with asking them (questions).  But they all have at their heart one of the reasons that it's so difficult for incumbent companies to pursue new initiatives.  It's because even if they are wild successes, they have no meaningful impact on the company's economics for years.  What I have found...is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company."

Bezos' words are interesting because they highlight how it is easier to be a naysayer in an organization and then say "I told you so" when something fails than to stick your neck out and take a stand.  Devil's advocate is useful to surface questions but the devil shouldn't be allowed to kill ideas.  This is a function of the fact that failure is not tolerated in most organizations.

His timeline is remarkable for a public company -a five to seven year outlook for these 'seeds'?  Amongst other public companies, how many take such a long-term horizon?  I'd imagine very few but welcome your thoughts & perspectives.

Using corporate portfolio management with innovation

Innovation is quite the buzz recently.  While you'd think that innovation would be something that organizations would do on an ongoing basis, for some reason, it (meaning innovation) has become quite en vogue recently. 

So with the push for innovation, what is it that companies should focus on?  Companies ultimately will realize the fallacy of "ideation" sessions where web2.0, agility and outside the box thinking are discussed but do nothing in delivering real innovation.  And when they realize this, they may start to institute a process which lets the organization view innovation as a portfolio of opportunities. 

And once this portfolio is in place, organizations will need to change their mindset to realize that "the frequency of correctness does not matter; it is the magnitude of correctness that matters." (source: Michael Mauboussin from his book More Than You Know)

This is contrary or difficult to do for 2 reasons:

1. We tend to get fixated on the failures vs the successes.  This is human nature to some degree and is exacerbated in most organizations where the penalties for failure can often be greater than the rewards for success.
2. Investments in innovation are not like investments in the core business which are more predictable and where "hitting the numbers" is more assured.

Organizations need to become comfortable with the ambiguity of innovation and realize that correctness is not the end goal.  Instead, within the corporate portfolio management effort used to manage innovation, one or two big wins have the capability to change the organization. 

Corporate portfolio management as a means to making better judgement calls

An organization's job is to make the best bets aka allocate it resources in the best way.  And that those companies which make the best bets are the ones who ultimately win.  That is why the optimizing of resource allocation is the single most important strategic decision a company makes.

But don't trust me, let's see what the "really smart people" who write for the Harvard Business Review have to say.  In their article Making Judgement Calls: The Ultimate Act of Leadership, authors Noel M. Tichy and Warren G. Bennis. 

Bennis and Tichy write "A leader's most important role in any organization is making good judgements - well-informed, wise decisions that produce the desired outcomes.  When a leader shows consistently good judgement, little else matters.  When he or she shows poor judgement, nothing else matters."

A fundamental tenet of corporate portfolio management is using data to make better decisions about resource allocation.  So with the right information, the intention/expectation of a good corporate portfolio management effort is that it will help leaders make better judgement calls and hence win in comparison to their peers.

My book mentioned by TheStreet.com as one of the 10 Books to Inspire Your Business for 2008

I'm happy to report that my book, Optimizing Corporate Portfolio Management was recently sited in a TheStreet.com column by Marc Kramer as one of the 10 Books to Inspire Your Business for 2008.  If that's not a reason to buy it, I don't know what is.  And yes, I'm shamelessly plugging my book.  If you want to check it out and see what others have said about it, take a look on Amazon.com by clicking here.

No short-termism here? Sara Lee keeps investing for the future

Ok, so there are not many news articles about a public company that start like this.  "Hit by another quarter of high commodity costs, Sara Lee Corp. posted a 40% decline in fiscal first-quarter net income but said it won't stop pumping money into marketing and product development."

Sara Lee's stance and actions are unique because it so contrary to what many public companies seem to do in the face of bad performance.  Typically, given the short-termism which is rampant in so many public companies, the actions after such poor performance would be bold proclamations about cost-cutting and reengineering of the expense base.  These actions are invariably driven by an overriding and illogical fear of disappointing the short-term fixated Street aka Wall Street analysts and their expectations.

The typical cost cutting actions fail to realize that the cuts in marketing, salesforce, operations and innovation investments (not expenses as they're typically considered) invariably hurt future performance.  In a sense, companies are often "selling their children" to make short-term results while compromising the future.

Per the article, "The increased spending to promote and develop new products squeezed profits in the quarter."  Ms. Brenda Barnes, CEO of Sara Lee, said the innovations will "be the bedrock for a successful fiscal 2008."

Time will tell if these innovations will pan out, but Sara Lee's contrarian view of investing for the future even in the face of poor performance is one that more companies would seem to benefit from.  A corporate portfolio management discipline can be used to determine which are the best areas for investment in the future.