Stretch your IT investment rupee
Partner and Leader – IT Advisory Services
Ernst & Young India
Businesses in India are going through a challenging phase. While growth prospects remain strong in the economy, there are significant pressures to improve execution of strategy. Business leaders are looking at IT as a lever to strengthen strategy execution. As a result, there is increasing focus on the business value delivered by IT and the IT investment strategy. Chief information officers (CIOs) are now required to carefully develop their IT investment agenda and create a systematic method to measure the business value delivered by IT. In this article we intend to put forth some of our observations on how CIOs in India are approaching their IT investments and pointers towards an IT investment approach that can enable better strategy execution.
In assessing the business needs from IT and the challenges CIOs face, we could classify Indian businesses under three categories — large multinationals, mid-sized entities and single-product companies.
The large multi-national entities are businesses with turnover in excess of $1 billion that have in the past decade diversified into multiple geographies to tap into newer markets and hedge business risks. The key challenge facing CIOs of such organisations is to make IT an enabler for global business integration and manage the company’s diversity across geographies. The second category of interest to us is the mid-sized entities.
These are entities that have diversified into multiple product lines in the last decade and which are growing their revenues rapidly towards the $1-billion mark. The CIO of such an organisation has to support rapid strategy execution as well as increasing complexity in its business functions.
In the third category, we have companies that have a single product which is the primary cash cow of the organisation with few auxiliary products and services. These organisations typically have nascent IT organisations and have possibly explored various standalone IT systems that support different business functions.
We outline below an approach that CIOs can adopt in creating their IT investment strategy and some key pointers on IT investments these organisations can make in the next two-three years’ timeframe to support execution of business strategies.
IT investment strategy is strongly linked to the stage of the company’s evolution and the maturity of the IT organisation within the company. In creating an IT investment strategy, a CIO has to balance three key objectives, namely, create business value, rationalise cost and manage risk.
A smart IT investment strategy needs to have four key features built into it:
Strategic alignment: The proposal should demonstrate strong alignment with the overall business strategy. It should provide ample reflection of stakeholder consultations, how their views have been factored in and the strength of buy-in available for the proposal.
Effective governance: The proposal should have built-in governance mechanisms with measures to manage changes that may need to be accommodated.
Performance measurement: Building in performance measures and mechanisms to measure them helps build stakeholder confidence and significantly eases pressure on CIO to provide future justifications on business value from the investment.
Efficient operations: Thinking through how the solution(s) to be invested in will be operated will help anticipate any changes in the existing IT operating model that may be required and thus avoid unexpected cost escalations.
Future IT investment proposals can be evaluated from three perspectives:
Business perspective: Key aspects that CIO must consider from this perspective are whether the proposed IT investment:
- Does the investment in IT add value to the business?
- Does the IT investment allow IT to better enable business?
- Would IT create a competitive advantage?
- Does it align strongly with business needs with strong buy-in from functional heads?
- Agility of the proposed systems to accommodate changes so as to enable business
- Is the investment tactical / made so as to keep-the-lights-on?
Risk and security perspective: Managing business risks, regulatory compliance and information security are of vital interest to businesses. Promoting risk management and information security should be the key parameters for assessing business value of IT investments.
Financial perspective: From a financial perspective, CIOs need to consider the cost of building competencies in-house and their return in terms of business value; and the options available for maximising returns from existing investments.
Keeping in view the above considerations, we describe a model below that provides pointers to help CIOs prioritise their IT investments. The model considers the current stage of evolution of a business, the maturity of the IT function and key challenges that the CIO faces as the organisation evolves. Our model looks at five distinct levels of evolution of a company and the areas that a CIO could look at while creating an IT investment strategy.
Level 1: At this level, IT needs are basic. Risk and compliance needs are only starting to be considered. There exists a possibility of unlicensed software in the organisation’s environment. The value of IT is strongly questioned and IT is seen as a utility primarily for office productivity.
The key focus areas for the CIO of such organisations would be to ensure that basic IT systems are in place to support the business and invest in creating a robust IT strategy aligned with business strategy.
Level 2: In these organisations, business needs some level of IT enablement and there is a limited degree of IT systems. Often ERP systems may be considered as a panacea to all its needs. There is a degree of IT needs with respect to risk and compliance needs primarily for payroll and taxation purposes. Value of IT is still questioned primarily in terms of return on investment.
For such organisations, the focus of CIOs should be around rapid IT enablement of high impact business processes and establishing strong IT management processes that will help manage costs in the long run. Initiating infrastructure standardisation will help streamline management and avoid costly standardisation/ consolidation challenges subsequently.
Level 3: Level 3 organisations realise that IT is vital for business and have often successfully implemented ERP systems. Business continuity is often an area of concern in such organisations.
In these organisations, laying the foundations of a robust enterprise architecture will deliver long-term business advantages. Effective control over enterprise architecture will help CIOs support strategic business decisions with a higher degree of confidence. Other key areas of investment for such organisations would be:
- Establishment of a project management office to manage large IT implementations
- Implementing IT asset and cost management procedures that including application rationalisation, infrastructure optimisation and an IT sourcing strategy.
Level 4: In level 4 organisations, the business need is often to enable entire organisation to move towards a singular strategic goal. Often in such organisations, the IT function is mature and is in a position to demonstrate value that other entities in the organisation are willing to pay for.
For such organisations, the CIO should lead changes that can help transform the IT function from a cost centre to a profit centre. The key areas of investment would be in improving management of the IT function through adoption of better management techniques, implementing compliance measures and system audits.
Level 5: Business considers IT essential to day-to-day operations as well as strategic success in Level 5 organisations. IT is often a strong element of major strategic changes including mergers and acquisitions. Adoption of cloud-based strategies can help free the CIO and the IT organisation’s time to focus more on business requirements and less on technical issues associated with in-house IT management.
A good IT investment strategy needs to be supported by buy-in from business leadership as well as employees. To deliver business results, the CIO’s organisation needs focus on business challenges and build alliances across business functions to support investment and cost optimisation decisions. The business value of information technology emerges when the CIO’s team builds a foundation of strong performance and delivers solutions that support strategy execution.