Finding the Dogs to Love
What kind of strategies should CIOs adopt to identify and love their dogs? Prosko says his experiences have left him in no doubt at least two of Quarls's three simple rules also apply to IT. That is, fixing your dogs can yield unexpected levels of shareholder value and improving operations is an important management lever for adding shareholder value. Since a large part of a firm's SG&A spend is in the IT area, it is vital that IT managers get the most out of their IT spend. This means all parts of the systems portfolio and infrastructure components must be operating effectively and efficiently.
"It is important to fix the IT dogs because there is very little appetite for new IT projects, especially multimillion, multi-year projects," Prosko says. "We have seen several examples in the last few years where companies are willing to hand over pieces of their IT applications portfolios to outsourcing companies that will commit to improving the 'dogs'. For example, these outsourcing companies commit to decreasing the number of system bugs and errors, improving the processing speed, and upgrading the infrastructure to newer, more modern platforms."
As a result, CIOs should take a very holistic view of the IT systems portfolio, Prosko says. For example, they should start by cataloguing all of their application systems and quantifying the total cost of ownership (TCO) for each of those applications. A TCO view of the portfolio requires CIOs to quantify the amount of labour, hardware, software, consulting and telecommunications needed to run and support the application. Then, armed with this information, the CIO can group each application by the business process that the application supports.
"Seeing the TCO by business process will highlight the imbalances in the portfolio such as the high TCO, low-value applications (that is, it will show the dogs). The CIO can then focus on either decreasing the TCO, increasing the value, or both," Prosko says. "We have seen this work in several industries. I've recently worked with a major telecommunications provider in which we recommended they turn off and retire several parts of their portfolio and focus their energies on a few forgotten parts of their portfolio that would add more value, such as customer-facing portals to handle Internet enquiries on a new mobile phone plan. The result was the IT organization was able to provide more customer friendly Internet-based portals. This resulted in more traffic to the mobile phone business unit," he says.
Booz Allen Hamilton has also done some analysis around the ERP area that suggests there can be a payoff from examining the amount of effort or amount of IT ERP spend in each area. For instance, Prosko says, a refining operation might compare the amount of throughput at a refinery against the amount of ERP spend. Looking at such data points across a company can help to identify which global sites are doing well and which are underperforming.
"We try to take a very holistic four-walled approach and look at all of the costs that are associated with an IT area. And if it is an ERP area, that not only includes the hardware and the software spend but also includes the labour, telecommunications, consulting and so on.
"There's an idea of a kind of total cost of ownership that we try to pick up and you're looking for the ones that don't compare very well to their peers within their company. So we would look at, say, total cost of ownership for the ERP program per the number of transactions that are going through that system, if it is an accounting transaction, or maybe more of a business metric might be the amount of IT spend per barrel of oil produced or barrel of oil refined, for example."
You can also compare the ERP spend in a country like Australia to the ERP spend in a country like Canada, Prosko says. Again in a refining operation, if both country's operations are a similar size from a refining perspective, you would expect their ERP spend to be similar. If spending in Canada were "off the charts" you would want to dig into that more.
"It really is about fully utilizing what you already have in place," Prosko says. "What you are allowing your business to do or your shareholders to do really is defer some types of investments that they might think they need to make on the IT side. They may be looking at a new $100 million IT program because they feel that their IT is underperforming or getting old, but we can look at some of these areas and basically defer such big investments."
Prosko, like Quarls, has done a great deal of work in the global energy arena. He says if you think of each region or each country as a portfolio or as the data point, it can quickly become very clear which ones are the dogs and which of those dogs need more attention.
"There are a number of different ways that we have sliced it," he says. "One way that we sliced it, as I talked about, was that we took a look at an IT operation for a refining business unit across multiple regions and found some that really were dogs and ones that were operating really, really well. We tried to take the best practices from the ones that were running well and apply those to refining business units that weren't running so well," he says.
"[The latter] primarily tended to be in Europe because they were a bit more sub-scale in the sense that they weren't taking advantage of the entire, say, UK-Europe footprints. They would have an IT organization for the refining operations in France, and they wouldn't share a whole lot of resources or expertise or capabilities with the refining guys in Germany for example, even though they are right next door," Prosko says.
"So it caused a lot of sub-scale type situations there, whereas if you looked at countries like Canada and the United States, Canada tended to leverage the scale the US guys had so they weren't trying to build their own capabilities and build their own systems or make something too specialized for Canada because they realized that right next door they already had these capabilities - and refining is refining. Whether you do it in Australia or whether you do it in Canada it is basically the same practice, so why try to reinvent the wheel?"
You Can Talk It, But You Have to Walk It
Prosko says overall, CIOs should never lose sight of the fact that there are two ways they can add value. The first is through those financial transaction processes that keep the corporation out of trouble. Introducing those is fine but will encourage business units to see you as the "back office" and will inhibit efforts to align closely with the business units. "What CIOs have to do is get involved in what I call front-office processes; they have to be very involved with the businesses and help them understand how their under-leveraged systems can add a lot of value.
"I think there are two types of CIO: I think you see people that are managing corporate affairs and you see people that are business partners, and usually you see greater value leveraged from the people that are business partners. The problem is that it is easy to talk about it. It seems every CIO I have ever talked to says that they are a business partner, but really making it real is something different," Prosko says.
"What distinguishes those that make it real is the number of times they are proactive rather than reactive. There are very few of those. I think they are mostly reactive and they're falling behind the business and they're so busy trying to serve corporate needs around the financial transaction, they are never proactive along the lines of: 'Hey, if we spend $500,000 here, I think we could deliver an extra $10 million of value'."
In this sense behavioural economics can give CIOs a framework that can help them get those dogs off their leash and give them a good run.
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