The largest pocket of recoverable shareholder value in our economy lies in improved governance of technology spending.

The notorious hold up man Willie Sutton when asked why he robbed banks coolly observed, “that’s where the money is.” CEOs could do worse than follow Sutton’s advice when considering where to exercise greater oversight and governance. And if you follow the money today it will lead to only one place—information technology. IT consumes most of the capital investment in our economy—more than plant, equipment or facilities. Yet it remains as under-governed as the tribal border areas between Afghanistan and Pakistan. An overstatement? Well consider what would happen if more than half of all the new plants built in this country or equipment purchased came in over budget, late, not meeting requirements or having to be written off entirely. We would see an instant crisis. Boards would revolt, heads would roll and Congress would be holding hearings. Yet this is precisely what happens with IT investment every day.

Although the situation has improved over the wild, wasteful days of the 1990’s, nevertheless investment in Information Technology remains a risky business. Hard data indicates that only 36% of projects are entirely successful (i.e., on time, on budget and deliver promised value). Awful perhaps, but a big improvement over ten years ago when the figure was only 16 percent.[1] So we are slowly getting better, in part, because we have learned to break big projects into many smaller, more manageable ones. But plenty of other expensive habits are still with us. Inadequate governance, poor requirements planning, insufficient business ownership and involvement, poor vendor management, and weak value propositions or business cases all remain major sources of waste.

Measuring the cost of this dysfunction goes well beyond money because of Information Technology’s unique role in value creation. You can’t build or market a product, support a customer or grow shareholder value today without a large dose of IT. So when IT underperforms it wastes not just capital but erodes competitiveness, customer perceived value and, ultimately, shareholder value. Consider this real life case:  a company invests tens of millions of dollars in a new Customer Support System. This investment is needed because the existing system is uncompetitive and beginning to negatively impact brand reputation. The original budget was 15 million over 15 months. Two years and twenty five million dollars later the end product doesn’t work—at least not very well. Now all the choices are bad. You can invest more money to try to get it right or write it off entirely and start again. Either way you lose another year and must invest millions more dollars. Meanwhile your competitive position continues to deteriorate because you don’t have the system that the environment demands. Finally, there is the intangible cost of lost confidence and teamwork as everyone blames everyone else for the mess. Every CEO and business leader reading this article will recognize this scenario—it will be all too familiar.

The traditional response has been to replace the CIO and fire the project leader. Statistics indicate these poor folks have a short half-life. However, this response is based on an atavistic and incorrect assumption that views technology as the source of the problem. Nothing could be further from the truth.

OUTDATED GOVERNANCE MODELS

The real problem is neither people nor technology but rather the way the two are knit together. It’s a story as old as time. Outdated models that once worked fine slowly grow obsolete in the face of a new generation of problems. Today our governance models are simply obsolete in the face of new, more demanding requirements.  In this case, technology investments have grown more complex and pan-corporate in nature—requiring strong horizontal governance across functions and business lines. Unfortunately, our old governance models, rooted in vertical business units and functions, have been unable to keep up. We see the result in a steady decline in the ability of project teams to manage down risks even after they have been identified. Too often they lack the power, influence and levers to fix the problem. Ten years ago this was a new problem; today it is an epidemic. 

Sounds easy to fix?  Well it’s not, because power still flows vertically through most organizations, and any investment lacking support from an existing business or function stands little chance of success. But this essential constituency support can bring with it an outdated governance model. So long as the investment is aimed primarily at the narrow interests of the vertical business unit things can still work. But if the aim is pan-corporate and horizontal in nature then problems in governance soon surface.  The team may find flaws in the value proposition, distribution assumptions, marketing plans or partner dependencies that fall beyond their purview. In short, even when they know what’s wrong they haven’t the power to fix it.

And the problem becomes exponentially more difficult the longer it goes unaddressed. Once the spending machine heats up, commitments get made and careers are on the line, it is hard to change course. At some point the momentum is so great nothing can stop the inevitable train wreck.

NEW MODELS EMERGING

The good news is that new models are emerging to help business cope with new demands. New metrics, investment optimization processes, risk management tools and governance models are coming on line. Today it is possible to test the efficacy of the governance process for an investment in advance to see if it is weak or strong. We can test the strength of proposed value propositions (always a lethal investment killer) or the execution readiness of the team and its external partners. There are new metrics that can track the cost of achieving each incremental dollar of revenue against the IT cost to achieve it. As for tracking progress across the lifecycle of the investment, we have always been able to do that. Comparing promised value, schedule and budget against actual performance is not hard to do but few organizations have the stomach for the resulting accountability.

The problem is not the absence of tools but the absence of leadership. Embracing new methods requires discipline and imposing discipline requires leadership. The military has learned the hard way that operational planning requires a set of steps that are followed every time a mission is planned.  These drills consist largely of questions—the better the answers the greater the likelihood of success. These questions are constantly tested for efficacy and updated… and they are never skipped. The problem in IT investment is that vital steps are skipped all the time thus injecting unnecessary risk into the investment cycle. It may take time for these risks to manifest themselves but eventually, like a ticking time bomb, they blow.

Let me give you a simple example of how an investment gets inadvertently put at risk: a major cross-functional project is shown to have inadequate business involvement in both value and requirements planning. The business owner misses an important early planning meeting or sends a subordinate with inadequate knowledge or power. Any good risk model will immediately scream danger. The answer is to STOP and not proceed. But the tech leader, anxious to be a good partner and under pressure to get the show on the road to meet some arbitrary deadline, proceeds anyway. Think of it as a sort of co-dependency with one party facilitating the self-destructive behavior of the other. This sort of thing goes on every day and results in enormous waste of shareholder money. Yet when the organization tries to impose the necessary planning discipline these same people raise a hue and cry that it isn’t necessary. “If we would only exercise sound judgment and good management we wouldn’t need these drills.” This is akin to saying that if we were all honest we would not need GAAP protocols or audits. Yet this resistance, more often than not, is sufficient to forestall needed discipline thus allowing the dysfunction to continue.

The answer clearly comes down to leadership—as it always does. If business leaders, including and especially CEOs, want to improve performance and margins then follow the money and insist that the necessary planning disciplines are a non-negotiable.

[1] CHAOS 2004 Report, The Standish Group;

Study: Less Chaos in Development Shops by David Rubinstein, SD Times, February 12, 2007