Taking a Portfolio Perspective of Digital Investments
How does your organization manage the money it spends on digital? Does it treat all digital investments in a similar way? Every year, some organizations can spend millions of dollars on digital initiatives and are likely to have spent several multiples of this over previous years. Indeed, it is the many systems that have resulted from these legacy investments that all still rely on to run their business today. Moreover, most organizations don’t explore the possibilities that digital technologies can offer their business and, consequently, either don’t invest or under invest in innovative opportunities. We also know that a lot of IT spend is wasted or sub-optimal, for example, continuing to maintain legacy investments when they don’t make any real contribution to today’s performance.
This situation exists because a lot of organizations don’t have any mechanisms to help them understand and manage existing and planned digital investments. This is where taking a portfolio perspective can greatly help a leadership team. In taking such a perspective, an organization manages the evaluation, selection, monitoring and on-going adjustment of digital investments to achieve clearly defined business results while meeting clear risk/return requirements.
My research is unambiguous: digital investments must be planned and managed according to their current and future contribution to business performance. Just think about it: not all digital investments make a similar contribution to business success. For example, some may provide a source of competitive differentiation like the investment that German manufacturer Bosch is making in its internet of things (IoT) data platform or the mobile services being developed by some retail banks. Others are essential to running the business, such as the core banking systems of retail banks, the ERP systems of pharmaceutical companies or the point of sale (POS) systems of retailers; or are necessary to help in meeting mandatory regulatory requirements.
The portfolio model I use suggests a classification of all existing, planned and potential digital investments into four categories based on an assessment of the current and future business importance of these investments. With this model, an investment can be defined as strategic, key operational, support, or high potential, depending on its current or expected contribution to business success (see Figure 1).
Strategic investments are critical to future business success. They create or support a transformation in how the organization conducts its business, with the aim of providing competitive advantage. For example, it might be a new business model shaped by digital technology or the digital investments of a budget airline to support its low cost strategy. Note that whether the technology used is ‘leading edge’ does not indicate that the investment is strategic—assessment must be based on business contribution.
Key Operational investments sustain existing business operations, helping to avoid any disadvantage. These are often referred to as “core systems” and the organization currently depends on them for success. It can be argued that in many industries, substantial numbers of digital applications, for example electronic point of sale, online channel to customers and ERP systems have become so pervasive that they have become ‘mandatory’ for survival in the industry. For Key Operational investments, the focus is about improving the performance of existing activities; often looking for opportunities for integration and rationalization to speed up business processes and remove inefficiencies. Digital investments to assist meeting specific industry legislation also fall into this category.
Support investments are those which improve business efficiency and management effectiveness but, in themselves, do not sustain the business or provide any competitive advantage. For support investments, it is about achieving cost reduction and efficiency improvements through automation and meeting the requirements of general legislation.
Executives can sometimes struggle differentiating between Key Operational and Support investments. In such instances it is useful to pose the question as to what the impact of non-availability of any system would be. If it would have an immediate business impact, such as the loss of its core banking systems (as happened at Royal Bank of Scotland in 2012) or the reservation systems of an airline (such as the recent systems outage at Delta Airlines), then it is likely to be a Key Operational investment. For most businesses, email, payroll, HR systems, and general ledger would, for example, be categorized as Support investments.
Figure 1 The digital investment portfolio.
High Potential investments are those which may create opportunities to gain a future advantage or enable core operations to be conducted more efficiently, but are as yet unproven. This is essentially R&D investment where an organization proactively seeks out innovative opportunities to use digital technologies. High potential investments are driven by novel ideas or perhaps a new technology. Today, for example, many banks, insurance companies and law firms are exploring how they might exploit blockchain technologies.
In essence, the Strategic and High Potential investments are about gaining advantage by exploiting digital technologies. Key Operational and Support investments are concerned with avoiding disadvantage.
The four investment types will require quite different approaches to achieve successful planning, development, implementation and operation. Why? Because each fulfills a different role in the achievement of business results.
Armed with an understanding of the basis logic of the portfolio understood, it can be used as a common frame of reference to shape discussions in in many different decision making areas relating to digital, including investment appraisal, risk assessment and mitigation, and outsourcing decisions. Let us look at a few of the ways it can be used to guide management action.
Investment appraisal: A defining aspect of the digital portfolio is that different criteria should be used to evaluate the business cases for investments in the different quadrants. As investments in each quadrant make a different contribution to business success, it is only sensible that they should be evaluated differently. This is in contrast to the situation in most companies where all digital investments are typically appraised in the same way using the same criteria. So while strategic investments should be evaluated against the achievement of strategic objectives and meeting key business drivers, support investments should be assessed based on demonstrable reductions in costs.
Budget discussion: Some companies allocate the percentage of planned total digital spend for a fiscal year to each of the four quadrants. The CIO of one pharmaceutical company that I have worked with sees this as a great way to fuel a discussion among the senior leaders of the business during budget discussions. Recently, he was able to illustrate that budget cuts were going to significantly reduce the amount that was being planned to spend in the top two quadrants, posing the question as to whether his business colleagues were comfortable with this. Being familiar with the portfolio framework, they were aware of the consequence of underinvesting and immediately agreed to increase the overall spend on digital.
Implementation criteria: For each investment category the generic critical success factors of ‘time,’ ‘cost’ and ‘quality’ will be different, requiring trade-offs to be made. For strategic investments, time-to-market is critical as the window of opportunity is likely to be narrow and once you go live with a customer facing application it is only time before competitors look to imitate what you have done. The ‘perfect’ solution, fully integrated with core legacy systems, may not be feasible in the timescales available. Moreover, it is probably not going to be possible to provide full functionality is the early version, but rather to add features as the application evolves, incorporating customer feedback and reaction in later iterations.
Given that a company depends on its core systems, non-availability or sub-optimal performance is not an option so maintaining quality in any development or enhancement is the key criteria and this cannot be compromised. For Support investments, cost is the watchword and should be the key criteria driving any implementation.
Development approaches: Because of the uncertainty over outcomes (and customer reaction), what is to be built, and the cost of change, investments in the top two quadrants are more suited to agile approaches (such as scrum) for software development. In contrast, due to both greater certainty in investment context and the criticality of systems in the bottom quadrants for current operations, following either a lean approach or the more conventional waterfall methodology to any development effort is recommended.
Selecting project managers: The individuals managing investments in each of the quadrants of the portfolio should also have different skills, attitudes and motivations. For example, project managers leading High Potential investments should be entrepreneurial, personal achievers, perhaps even a bit of a maverick and risk taker. It is unlikely that we would want such an individual managing projects in the Key Operational quadrant (remember our business currently depends on these!). As we are seeking long term/quality solutions in this quadrant we need stability, therefore associated projects should be managed by someone who is going to reduce business risks.
Investment lifecycle management: Over time, the contents of the portfolio will change, and, for any organization, the contents of segments of the portfolio will be influenced by a variety of internal and external factors. Many ideas and technologies enter the portfolio in the High Potential quadrant where they are evaluated, perhaps via a pilot, following the organization’s innovation process. Some will exit the portfolio after having been deemed inappropriate, immature or possibly too costly. The objective is to identify a small number that can move into the Strategic quadrant, subject of course to meeting the investment criteria of this quadrant. Overtime, investments that were once the source of competitive differentiation move into the Key Operational quadrant, becoming part of an organization’s core systems. It is critical that they now become fully integrated into the core operating environment and are possibly re-engineered for long-term use; remember that the business now depends on these and they are mandatory to avoid disadvantage.
It is important to point out that Key Operational and Support digital investments can also be made directly without necessarily emanating from the High Potential quadrant, assuming of course that investment criteria are met. An example might be the decision to deploy a software package or cloud based software solution to replace a bespoke application.
Where an organization has multiple business units (BUs), there will be a different portfolio for each BU. The reason for this is that each BU will have its own particular strategy and these different strategies will have different digital requirements. Once the digital strategy for each business unit can be described in terms of these application portfolios, it becomes easier to identify a range of further benefits across the organization, from taking advantage of successful innovations to meeting similar needs more economically (see Figure 2).
Figure 2 Portfolio management in a multi-business unit environment.
These types of opportunity can only be identified if the existing and required future portfolios of the different businesses are compared, within the context of the competitive environments and strategies of those businesses. However, there is an inherent danger in this approach if business units are ‘forced’ to accept systems from other units for largely economic reasons, without due recognition of their differing business situations, competitive priorities and organizational resources and competences. The main objectives are to ensure that opportunities are not missed or that time, resources and funds are not needlessly wasted.
The power of the digital portfolio is that with one tool executives have logic, a common frame of reference and the starting point for meaningful discussions around digital that does not focus on technology but centered on the business imperatives.