Much like an under-funded baseball team that hasn’t won for a while (aka the Oakland A's from Moneyball), the IT function plays the underdog in many corporations. IT is often asked to bring home the wins despite increasing cost constraints.
Case in point—I received a call from a CIO in Q2 2017 that went something like this:
The CIO: The CEO and Board of Directors have asked me to present my blockchain strategy. They even want to know our readiness in offering Bitcoin as a payment mechanism on our customer-facing online properties. I know you’ve been involved in this space for five years. I want you to come in and review this for us.
The CIO: Also, I want you to explain to me how to fund my innovation programs (AI, machine learning, natural language processing for sales, blockchain, etc.) in this hybrid IT environment with significant cost constraints.
These aren’t easy challenges but they are commonplace. It is also not unusual for teams to expect different outcomes from antiquated methods or to experience paralysis and resist change. In this article, we will look at how the use of a mindful TBM (Technology Business Management) practice helps CIOs embrace "the art of the possible" to address such challenges.
Understanding what is possible
The art of the possible in IT is about sidestepping the antiquated ideological battles and determining not only the best course of action but more importantly, the likelihood of success in the context of your unique IT environment. Success requires mindfulness and a laser focus on the key steps that can be taken to maximize IT investments and improve performance.
Here are four recommendations for CIOs facing these challenges:
1. Embrace TBM
TBM is the value-management framework that allows IT leaders to align costs, consumption, and performance with business capabilities. TBM is upending decades of social norms for IT budgeting and transforming discussions previously limited to IT “costs” into a more productive dialogue about value delivered.
The practice achieves this through a shared taxonomy that standardizes the way IT reviews, compares, and communicates IT costs. A powerful enabler for various functions in an organization, the methodology and associated tools accelerate insight and decision-making, helping corporate strategy, finance, product management, and procurement teams maximize the technology estate holistically.
A Forbes article by Apptio CEO Sunny Gupta ["What CIOs can learn from Moneyball"] outlines a few of the metrics that forward-thinking CIOs look out for: TCO of IT products and services, fixed vs. variable cost ratio, Opex vs. Capex ratios, and run-the-business vs. change-the-business spend composition. A CIO must deploy these and other metrics to undertake a Moneyball-like, analytics-fueled transformation. Using a page from the old playbook instead (with outdated metrics such as IT as a % of revenue/spend) in order to compete is a recipe for disaster.
The art of the possible in this instance means businesses should stop deferring TBM execution for perfect circumstances. Instead, they should start using relevant aspects of TBM immediately and gradually scale it to other aspects of the principle.
2. Develop a culture of transparency
The currency of leadership is transparency. Facebook’s Mark Zuckerberg, LinkedIn’s Jeff Weiner, and Bridgewater’s Ray Dalio are known for their principles of radical truth and transparency. These leaders have leveraged transparency to cultivate ‘meaningful relationships’ in their ecosystems, amassing sustainable competitive advantage and making their positions virtually impenetrable.
Transparency boosts innovation through a constant feedback loop as business metrics are linked to apps and finances.
For instance, in a recent Masters of Scale podcast, Mark Zuckerberg explains why, in effect, any engineer who wants to test out an idea, within reason, can launch a version to a limited user-base and self-study the business capabilities and metrics such as user-connectivity, sharing metrics, cost efficiency of running the service, and revenue-impact.
"Giving people the tools to be able to go get that data, without having to argue whether their idea’s good through layers of management before testing something, frees people up to move quicker." Mark Zuckerberg CEO, Facebook
TBM allows top-performing technology leaders to bring this principle of transparency to their services portfolios. It also enables them to:
- establish trust with IT consumers
- shape demand for higher value-adding activities
- shed inhibitions around taking risks on innovation
- communicate the value of options, manage the risks on the option bet, and realize benefits
- above all, build a sustainable competitive advantage!
3. Ask the right questions
"Judge a man by his questions, rather than his answers." Pierre-Marc-Gaston Lévis
Composing valuable strategies requires new and unique perspectives, which raise insightful questions.
Wise CIOs ask themselves:
- Have I determined the real problem? Is this a technical problem or a business problem? Valuable strategies require CIOs to see the art of the possible, which is often what others can’t see. This allows the CIOs to align resources wisely.
- With my current service catalog, am I aligned with the business needs and corporate strategy? This helps calibrate perspectives around: a) business demand—linking the business capabilities and services demand, sharing the TCO of services and applications for said demand, establishing an objective investment governance, and learning to say ‘No’ to a demand not aligned to prioritized business capabilities and b) supply capability—using unit cost benchmarks to drive execution excellence. A sharp focus on fixed vs. variable cost ratio can help determine cost structure relative to strategy.
- Given my current resources, if I weren’t providing this business service today, would I get into it? This helps guide sourcing decisions.
- How do I know I’m right? Have I stress-tested my opinion relative to what the analytics and algorithms say? When developing a strategy, testing assumptions in a logical order gives the best chance to make course corrections early and avoid wasting resources.
Mindful CIOs answer these questions and augment their decision-making through analytics and algorithms. Like a Jedi, a true TBM master can’t give in to their feelings or to environmental emotional and political hijacking. The antidote is a trifecta of transparency, a shared TBM taxonomy, and a good TBM system to have a consistent view to manage the business of technology.
4. Think like a portfolio investor
High performing IT leaders measure and manage investment levels in their services as a portfolio over time. Use the Core-satellite concept to construct and manage the services portfolio.
The Core-Satellite portfolio approach is a method of portfolio construction designed to minimize costs, tax liability, and volatility while providing an opportunity for the organization to outperform peers.
The Core includes run-the-business activities, whereas the Satellites involve the change-the-business (including grow and transform) activities. The Core helps meet expectations, while the Satellites generate accolades, recognition, and a seat at the Board table.
An innovative CIO must put Core activities management on auto-pilot, decentralizing risk management and delegating to service owners. This allows leaders to focus instead on the optimization of services with industry benchmarks for unit cost comparisons. Using appropriate benchmarks, the CIO can communicate the value through cost versus performance for this portion of the portfolio.
A prudent CIO will intentionally construct a portfolio section of Satellites using the efficient frontier (of risk-reward) and include certain satellites with optionality. For instance, the CIO mentioned at the beginning of the article communicated the optionality provided by the Blockchain program in his meeting with the CEO and received accolades for the same. However, the Satellites cannot be all Vegas-style, moonshot bets. A savvy CIO sets business capability-linked goals, manages risks actively, and communicates the tracked benefits.
The way to apply analytics-fueled management style differs in Core and Satellites due to the varying nature of activity style and risk profiles of the activities involved. For Core, sample techniques include:
- Sourcing decisions based on unit costs (in-house v/s managed service provider)
- Tax analytics-driven asset management and compute-geography decisions
- Relative valuation of applications and services based on TCO and business capability alignment
For Satellites, some management techniques include:
- Monte-Carlo simulations for computing the value of the option when the Satellite is truly an option
- Risk-adjusted NPV (net present value) instead of regular NPV
- Portfolio selection using a relative ranking of the strategic score and then overlaying execution capability (see Figure 2)
As the comfort level with Moneyball-like analytics improves, so too does sophistication. With increased transparency, CIOs find they are:
- Comfortable with higher allocations to satellites
- Able to tolerate volatility associated with bets in the Core and the Satellites alike
- Disciplined about sticking with a strategy
- Able to devise and use hedging strategies to reduce risk
An appropriate blend of Core and Satellites provides a sustainable competitive advantage. Core services help consistently break the cost curves. Satellites can provide the breakthrough innovation in business capabilities.
The art of the possible
"To develop a complete mind: Study the science of art; Study the art of science. Learn how to see. Realize that everything connects to everything else." Leonardo da Vinci
CIOs who aspire to become value creators must also aspire to see what others cannot. This is the art of the possible. Valuable strategies that sustain a competitive edge demand novel insights that inform not only the best course of action but also the likelihood of success.
These insights are accelerated by the analytics-fueled portfolio management enabled by TBM. TBM environments breed a culture of radical transparency, which enables and fuels meritocratic innovation and gives your business its best shot at creating a sustainable competitive advantage.
Manik Patil is Global Senior Director at American International Group (AIG)*. Manik combines his TBM expertise with an understanding of strategy, accountability, governance, and performance management to help CxO’s plan and manage business transformation. He holds a Masters degree in Information Systems Management from Carnegie Mellon and is a principal member of the TBM Council.
*Note: The views and opinions expressed in this article are those of the author and do not represent that of his employer.
This post was originally published January 2018