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
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What CIOs can learning from Angel and Venture Capital Investors

When I look at today’s IT Economics arena, I’m rather surprised that it has not progress much further than the level of sophistication of the mid-80s when IBM Investment Strategies for Information Systems (ISIS) and BEAM came into being. TCO came about a little later which included a hint of lifecycle costs, taken from the engineering economics activities that Logistics Engineers had been doing for years. Later Rapid Economic Justification (REJ) was created to link IT Investments to Business Benefits. When we created REJ we knew there was further to push the envelope than what we released. However, just REJ seems a large jump for field to take on IT Economics.

A brief stint back at IBM working corporate strategy/marketing and research into Rita McGrath’s concepts of managing product investments as a portfolio segmented by market maturity. The idea was to divide product development investment by time horizons (H1 – H3) where H1 represented existing product lines and H3 represented emerging business opportunities. During that time I saw an opportunity to apply these concepts to IT Economics. However, the idea of IT as an investment, working out the mechanics of multiple investments and time horizons in a portfolio still needed to be worked out.

Typically, an enterprise will not consciously want to invest in several of the same investments, as the payoff is not the same as multiple investments in the stock market, so how then does one create an IT portfolio? The answer was less complicated that initially thought. If fact is was right in front of me. Enterprises already have portfolios of IT projects. What they have is trouble determining which investments to make. This becomes an issue of balancing long term and short term, enabling (infrastructure) and line of business (applications). In general, how to line up projects so as to enable the future without killing the present.

The past few months I have spent investigating engineering economics, decision theory, stock and private capital markets. The stock market –even with its meltdown– provided several good ideas that I am translating to the IT economics arena [Real Options, Hedging]. The private capital market provides insights on risk mitigation and a different perspective on ROI. The ah ha moment occurred to me prior to attending COFES 2012 Special Session: A Chat with Dick Morley. Dick is a rather unusual fellow; physicist, inventor and investor. Most of my discussion with him was just prior to his chat session. In which we discussed the process of bringing new ventures into being.

One of the interesting disclosures was his investment strategy, which seem to match my experience with other venture capitalist organizations. He invested in multiple projects; typically ten or more. Here the law of averages theoretically should take place. That is at least some percentage of ventures will be successful over time. His statement seemed obvious, but the question was which ones? His reply was shocking at the gut level: “I don’t care” This is gambling and I am not trying to beat the house, I am the house. As long as I establish the rules of the game in my favor over time, I will win. Below are a few attributes I’ve collected so far regarding private capital investor types

Angel Investor

Investment Span 10:1 portfolio as a risk mitigation strategy

Scorecard: ROI, Cause, Bragging rights

Venture Capitalist

Investment Span 10:1 portfolio as a risk mitigation strategy, T&Cs, Seat at Table, Due Diligence (Business Model, Market, Leadership Team)

Scorecard: ROI, Time to time, Bragging rights

Investment Banker

TBD

This became my ah ha moment.  IT Investments are often looked at as either Bank CDs with guaranteed returns or trying to beat the house. Both perspectives are equally flawed. However, since these are probabilities of return and the math is complex Enterprises often turn away from such calculations to simple ROI or gut feel decisions –of which the statistics are just as poor or worse when it comes to benefits realization vs. successful technical or task achievement.  With that insight, I have been researching how to build a framework that will enable Enterprises to employ the appropriate level of Economic tools easily for a possible series of White Papers.