Structure in Threes: IT Investment Strategy Lessons

This week as I continue to research IT Strategic Planning issues for a series white papers I’m writing I’m noticing more gaps in the average IT organization’s planning approaches.  Despite more sophistication in technology, the planning efforts are still rather primitive.   Many IT Planning organizations spend significant time on the technology requirements, functions and interactions; which they should.  However, when it comes to the effects and benefits to the business which they serve, these functions come up fairly short still.  The average business case just little more that a primitive ROI based upon very weak assumptions.  It is not wonder why CFOs and Controllers are tightening the screws on IT projects and considering outsourcing and cloud alternatives.  A few organizations I’m aware of are looking at eliminating their IT function entirely and moving everything to the cloud.

Review of prior Portfolio Management R&D at IBM

This coming week’s agenda is to develop the optimum means for presenting the Modern IT Portfolio Management process to executives and managers.  During the initial portfolio management R&D for business investment at IBM an interesting reaction was observed.  Executives and Managers disliked operating on models with more than two to three factors, preferring two factor matrices with binary values.  This was rather interesting observation in that each Stakeholder when surveyed asked for multiple factors to be evaluated.  However, in practice only a couple of factors are examined for consideration.  These factors typically center around near term monetary consideration.   optimal portfolios with high risk.  Thus other factors or strategies should be considered which infers a more complex matrix of considerations.

Lessons learned from Venture Capitalists

Venture Capitalists (VCs) evaluate investment candidates based upon returns like other investors, however, other factors are often used to classify and filter opportunities.  These are often used in what has been called a stage-gate process.  This is a series of smaller decisions that in effect gate weaker opportunities out of the pool of candidates.  This makes the decision not a single yes/no but a series of yes/no decisions.  The other aspect of a VC‘s investment process is the core to the portfolio management concept; multiple independent investments.  Typically this is accomplished by VCs teaming with other VCs enabling them to make smaller bets but spread amount a larger group of opportunities.  This strategy reduces risk by eliminating the eggs all in one basket approach.  The final strategy many venture capitalist used to mitigate risk is employing a variation of options theory.  Employing this strategy, VCs will often stage release of funds based upon a business venture’s ability to meet specific goals.  If a venture does not meet these goals the VC has the option to discontinue funding and cut their losses or potentially take a more active role in the management of the venture.

Other Research

Other areas of investment research under current study for this practice include:

  • Stock Brokerage [reviewing interview notes]
  • Investment Bankers
  • Insurance Actuaries
  • Natural Resource exploration enterprises

IT Portfolio Management: Asset Classes and Portfolios

Multi-order Interconnections of Assets

Comments from yesterday’s post regarding the difference between IT Assets and Traditional Investment Assets I had a tendency to agree with in the past.  However, since the changes in law and the economy the independence between assets no longer exists as once was believed.  As the most recent financial meltdown the economy is still recovering from demonstrates.  This phenomena of interconnectedness pointed out in Albert-László Barabási’s book “Linked” points to the fact that everything is connected.  The issue becomes how these are connected and the depth of the effects of that connection.  This is the area of systems dynamics which I continue to study at the Center for Understanding Change.  My objective is understand the 1st, 2nd, 3rd, etc. levels of consequence to the ever widening web of connection we live in and how to apply it to ITSM and Enterprise as a whole.

Applying these concepts to IT Portfolio Management the relationships between the traditional assets classes under management became first a hierarchy and second not much to my surprise like the taxonomy originally developed for the conceptual underpinning Has Witt and I discussed for Active Directory. This hierarchy points to ITSM (Services) as the bridge between Enterprise concerns and IT Functional concerns.  It is the IT Services which enable the enterprise capabilities which at the corporate level are the assets.

Accounting for temporal relationships

Below is the initial brainstorming of the hierarchy and its relationship to both enterprise and time.  The time dimension in most portfolio management methodologies is limited to the time value of money typically in the form of NPV.  However, not accounting for the effects of time on the various attributes under consideration for the enterprise is where I see the limits to using time in present portfolio management methodologies.  A White Paper, still under development, “The Optimum Path to an Uncertain Destination” is one approach I’ve found to address this situation and is included in the Modern IT Portfolio Management methodology I’ve been creating.

IT Asset Class Hierarchy

Investment Management and ITSM: Lessons to be Learned

Spent several hours yesterday with a brokerage firm, consolidating various financial accounts.  I’ve worked for various corporations over my career naturally choosing to take the 401k investment options that each had offered.  My belief is if the place is good enough to work at why wouldn’t you invest in it also.  On the surface the logic makes sense.  However, as I’ve delved deeper in Portfolio Management and Enterprise Risk Management (ERM) concepts the past several months I’ve gained a deeper appreciation of the concepts of diversification and attention capacity or economics.


Most modern portfolio management discussions introduce the topic of diversification as a means of risk mitigation.  The theory suggest that having a broad set of investments reduces one’s risk as if one element in the portfolio crashes or under performs it will be made up by others.  This only hold true if each investment is independent of the others.  That is to say, there is causal relationship between the two components.  However, if there are causal relationships then these components are not truly independent and the portfolio you’ve create still has risk exposure.  Take the most recent financial meltdown of the economy.  Stocks, Bonds, Real Estate, and other investment all tanked crashing the economy.  In theory this should not have occurred as these are separate asset classes, independent of others.  However, as the laws, rules and regulations changed regarding banks, brokerage houses, Real Estate Mortgages, and other financial vehicles subtle interconnections between these components were established.  These connections were either not well understood or completely ignored.  Investment vehicles such as collateralized debt started to appear.  These created the linkage between other assets which established the potential for what eventually happened.

Collateralized Debt has as its root a portion of Portfolio Management.  That is investing in multiple elements to reduce risk, in many cases high risk mortgages.  The theory being that may be one or two mortgages might fail but overall the majority of these would not.  However, the conditions that created failure for several of these mortgage failures where the same for most of the others.  This when one failed it was only a matter of time for the others. As such this pool was a collection not a managed portfolio.  Add to this other investment vehicles such as derivatives which further linked real estate to other types of investment in the economy and the causal chain was completed with few people realizing the risk that was just created.

ITSM’s relationship to Investment Management

ITSM seeks to create an ecosystem for the enterprise where the Information Technology function creates a catalog of services for the rest of the enterprise to consume either to perform its knowledge work or provide to its external customers.  One the surface this is a great concept.  In practice creating an catalog of services that are tightly integrated brings to it the same risks to the enterprise as tightly linking the various financial vehicles did in the general economy.  This serious strategy and due diligence in risk management and mitigation is called for least an enterprise crash like the economy over an IT failure.  Consider if your network infrastructure failed for several days and you just recently migrated all your voice (phones) to voice of IP (VOIP):  Your financial functions can not access your general ledger, not billing can go out, nor paying vendors; Your in house sales staff either cannot call prospects or have to use their personal cellphones to make calls, further expense and they can’t enter orders anyway your systems are down; other negative effects propagate throughout the enterprise and compound the situation.  In a very short period of time an enterprise could be so overwhelmed with the consequences it could take years to recover or might never recover.

Some vendors might say move to the cloud that will solve the problem…but will it? What happens if your cloud provider fails, or access (your internet connection is down), or both.  You are back to that same perfect storm scenario.  So is the answer go back to a paper based system?  Not likely, the scale and speed of business today prevents going back to such methods.  The answer I believe lays in a more comprehensive approach to the strategy and design of enterprise.  An approach the unifies Executives, Line of Business Management and Information Technology is an effort to view and manage the risk in a coherent and conscious manner.  This suggest enhancing current portfolio management practices advocated by vendors that only prioritize investment by ROI (gain) to include the downside aspects (i.e., Risks such that ERM typically works to mitigate).

Attention Economics

The problem with such an approach is that it requires greater attention to detail and in an age where businesses have caught AD/HD, this is a hard practice to employ.  Its easy to ignore the risks as did the investment and economics communities prior to the financial meltdown.  Many corporations are focused on multiple targets and this one is left to the IT function, typically without effective governance or oversight my the executive suite.  Possibly due to the fact that discussions often arise around the technology’s structure rather than the capability ad risks of applying.  This tends to overwhelm the attention span of the rest of the business as those not involved with IT capability creation and management don’t have the time to learn the details.  This is where Enterprise Architects and Technology Strategist should play a role, however, oft times they are used for designing applications rather than helping to guide technology application for the enterprise.  A subtle difference but critical to understand if your EA function is to provide the highest value to the corporation.

The one leverage point that may eventually cause corporations to focus on this arena -in spite of all the standards and methodologies out there– is that Corporate Executives are now held responsible for governance actions.  And whether they understand the ramifications or not of new laws and regulations such as SOX, Patriot Act, HIPA, and others not understanding how to govern corporate information and information processing will eventually put both a business at risk and executives out on the street or worse.

Structure in Threes: Modern IT Portfolio Management – Establishing a Portfolio: Step One

While the typical rational for Portfolio Management  is closely associated with finance.  I think because that is the easiest domain to track; the finance concept has a developed measurement system.  Other intangible goals are harder to track as these don’t have well established metrics.  There are not well published and accepted coordinate systems for risk, happiness, wellness, etc.  The systems of measure I’ve found through research so far are very subjective.

One example of note that illustrates this point; risk.  Risk as defined by William Rowe is a fairly simple mathematical formula Risk = Probability of Loss x Quality of Loss.   While the formula is fairly simple is appearance two aspects cloud the issue:

  • First, obtaining the Probability of Loss; this is not a generally well understood or robust activity.  Ask the average corporate employee about the probability of an event and you are likely to get a very vague answer or inconsistent answers all over the spectrum
  • Second, the assessment of risk or risk tolerance.  Is a risk of say $1,000 dollars high, medium or low?  This tolerance classification is very subjective and conditional.  Factors such as past and current economic conditions effect the psychological state and thereby tolerance levels.  An example in the investment domain:  Someone that has a portfolio of hi-tech stocks or mostly hi-tech stocks would be considered to have a high risk tolerance; One because it is heavily weighted in stocks and two because the investments are in an industry that is very volatile.

These two issues make risk measurement less concrete in the minds of average employees compared with every day finance.  While there are aspects of risk people inherently are aware of (not a good idea to jump off a building) these are internalized and typically a explicit conscious decision process (e.g., if I jump off the building the probability of survival is x percent…)

Applying intangible goals to IT Portfolio Management thus becomes an exercise in not only creating the goal, but the measurement system for monitoring achievement to that goal.  While on the surface this too sounds rather simple to execute.  Again appearances can be deceiving.  Example; make an unnumbered list of ten nonfinancial priorities for yourself, project or company.  Duplicated the list and circulate to a dozen or so people around you in and outside of your workplace.  Ask each to prioritize the list 1 to 10, without consulting anyone and return the list to you.  It is likely you will find that not everyone agrees with each other on priorities.  Without discussing priorities which are strongly tied to value systems within a corporation setting and measuring intangible goals will be frustrating at best.

Thus the first step in establishing a an efficient and effective Portfolio is to discuss values and priorities of the firm and obtain alignment of the stakeholders.  A word of caution, like other concepts above, this is easier said than done.  Using a workshop, surveying, and applying Bayesian logic to assist in weighting the consensus outcomes is likely to give you a higher probability of Portfolio success or at least know what success looks like to everyone.