Capital spending on technology,which accounts for half of business investment, is making a comeback. This surge in investments presents us with a paradox. On one hand, it is good for the economy and bodes well for future improvements in productivity and value creation. On the other, this surge signals a return to the bad habits that characterize such investments—waste,rework, over-budget projects, and outright failures. Not long ago, we were writing off $100 billion in technology investments every year.

More than half of all technologyrelatedinvestments fail to deliverpromised value, come in late, or goover budget (and those that come inon budget usually do so because originalestimates allow for enormouswaste). It is common for churn (uselesswork) to consume 30 cents ofevery project dollar. Often, 35 percentof the investment portfolio is tied upin low-or no-value investments.

Now portfolios are under suchscrutiny that most low-value investments are squeezed out. We’ve learned to be wary of leading (bleeding-edge) technology and doing things in-house that are best done outside. We’ve learned the value ofbreaking projects into smaller chunks. But few firms have set up disciplined investment management processes.

Root causes of wasteful technology investment are weaknesses in the management system. The solution lies in redefining how we manage IT investments. Today, it is hard to create value without involving technology. So,the technology and business components of the investment must be managed as a whole. Separating them guarantees you’ll waste money.

Not Tracking the Right Things

Most leaders recognize the need to be more involved in managing their technology investments,but they lack the tools—including metrics, optimization processes, risk management tools, and governance models.

We see a steady decline in the ability of teams to manage risks even after the sources are clearly identified. Project teams lack the power, influence, and levers to fix the problem. Paralysis occurs because technology investments have grown more complex and require strong governance across functions and business lines. Often, these horizontal links are weak because governance models are rooted in vertical businesses or functional silos. This results in the bulk of the mandate and the project staff coming from a single business line—while the breakthrough power of the investment lies in making horizontal linkages.

It’s not easy to fix, because power flows vertically, and any investment lacking support stands little chance of success. Once the spending machine starts up, commitments are made, and careers and egos are put on the line, it is hard to change course. Momentum builds, and there is not enough governance to change course. Our governance doctrines and protocols are outdated.

The Way Out

The solution is to update our doctrines for managing investments involving technology. The first step is to tighten up front-end portfolio management and investment optimization by insisting on better business model planning and business cases. Next, assess the risk of investments. Make mitigation of the identified risks compulsory for continued funding, and track progress. Next, build an end-toend investment management process that measures front-end business case assumptions against risk scoring and mitigation and back-end performance.
Here are the elements of the solution:

• Build an up-front investment optimization system to ensure money is allocated in the right areas—from a strategy and ROI perspective.
• Ensure that investments are subject to disciplined risk assessment, employing up-to-date risk modeling built around your pattern of execution.
• Establish a closed-loop tracking system to compare front-end business case projections with risk-assessment scores (and corrective actions) and backend delivery performance. Create a system that tells you: what was promised, what risks were identified, what was done about them, what was delivered in the end, and what was learned along the way.

By incorporating this information, you can set and track aggressive investment efficiency-improvement goals measured in terms of ROI and PTI. You can also track the cost of achieving each incremental dollar of revenue or profit. You can then set targets for improving the number of investments that achieve their original projections (on time, on budget, on scope and on value). Even a small improvement can produce huge returns.

Next Wave of Margin Improvement

This tracking of investment efficiency in technology-intensive investment represents the next frontier in margin improvement. Today, with large-scale outsourcing and component architecture, we are seeing ROI improvements on fixed technology investment. Now, attention is turning to new technology investment. And the numbers justify this attention.

What makes all this tricky is that the success or failure of new technology spending is primarily influenced by business factors. Governance, market planning, value propositions, and competitive environment are greater sources of risk to technology spending than any failure of the “black box.” Yet many leaders still think their technology team is the problem, when really it is the management system. This is why new metrics and tools are needed. All it takes is for the CEO to insist on them.

Armed with better tools and information, leaders can make better decisions, the impact of which will find their way to the bottom line.

Barry Sheehy is President and CEO of CPC Econometrics, Inc. - www.CPCEconometrics.com

Source materials provided by: Leadership Excellence 2006 www.LeaderExcel.com