This case study provides an overview of how Vsolution Management Consultants assisted a major South African company to design, develop and implement a project governance and portfolio investment management framework that yielded Net Present Value (NPV) benefits of R600m over 5 years.
The client was facing a project investment landscape that was not poised to add value. In general, the IT organisation was ill-equipped to add strategic insights and business value back into the business units (BU), and in truth, it was more of a support function, as opposed to a strategic enabler. The existing project portfolio was misaligned to the strategic imperatives of the business and according to industry benchmark surveys, was not indicative of what was required to remain relevant in the industry. In addition, the project governance process was not producing the desired business support and the required agility to succeed.
Project expenditure was mostly misaligned to strategic imperatives:
-Less than 10% of project expenditure was focused on transforming the business, despite ongoing rapid industry transformation;
– Less than 7% of project expenditure was focussed on generating significant income growth;
– Whilst over 80% of project expenditure was focused on ‘running the business’. As a general rule, projects were perceived as IT projects, with limited business ownership of the project and commercial benefits. Only 50% of projects had approved business cases. The remaining 50% either had business cases without business unit (BU) signoff or no business cases, but the projects were still being undertaken, without a sense of whether or not the projects had positive benefits for the business.
In addition, the existing business cases indicated that the project portfolio had a highly negative NPV, in excess of R300m, with limited measurable benefits identified.
The client released funds for projects and enhancements through a centrally managed IT area, with no BU accountability for expenditure. As a result there were many instances of over expenditure, without a corresponding business case. In addition, in the BU space, it created the impression that funds for enhancements were limitless and it created the culture of ‘us vs. them’. The prioritisation of enhancement requests was performed by IT and not the BU’s requesting the enhancements. Hence prioritisation was driven by IT capacity and constraints as opposed to business value potential. In addition, BU’s that shouted the loudest were prioritised.
The environment was not conducive to demonstrating the value that IT could add to the business. It was difficult to adjust and align budgets with business needs as meetings between investment committees and governance bodies were irregular. Benchmarking was infrequent and only occurred annually. The major challenge was to create an effective “IT Governance” that put business in the driving seat of IT and ensured strategic dialogue and alignment between IT and business management as well as to create a model for business to take accountability for – and have the means – to design and deliver business change. It was also important for there to be strict governance such that investments were
not made if they did not serve the business.
Against this background, the goal was to design and implement a framework that would easily and sustainably map business requirements to technology decisions, and ensure that accountability and ownership rested with the business and not with IT; transforming performance and producing business value through the right technology.
Vsolution wanted to entrench 3 objectives into the mindset of managing the project portfolio:
1. Maximising the value of the portfolio and return to the business;
2. Aligning the portfolio with business goals; and
3. Balancing the risk/reward potential within the portfolio.
As a first step, a diagnostic was concluded on the entire portfolio. The purpose of this exercise was predominantly to gain an intrinsic understanding of business priorities (as reflected in the portfolio mix of projects and planned projects) as well as to build a case for change. Were investments in IT projects and enhancements actually adding or expected to add any value to the bottom line? – was a key question we wanted answered.
The results were very revealing. Not only did the diagnostic indicate that the portfolio mix was not in line with industry benchmarks, but it was not supportive of:
– 333Group growth strategy;
– The competitive environment; and
– Regulatory environment.
Additional insights from the diagnostic revealed:
– A portfolio with a massively negative NPV that would destroy value for the client, in an environment of increasing competition from new entrants, downward pressure on pricing and limited opportunity for product differentiation;
– Only 5 percent of planned projects had a positive return over the next 5 years;
– Only 55% of project budget allocation was being allocated to projects, the remainder was being spent on items that required the release of funds for small tweaks to existing systems and applications;
– A whopping 80% of the enhancements spend was concentrated in a handful of BU’s; and
– A disproportionate amount of planned investment was for ‘running the business’ as opposed to transforming and growing the business to be able to compete and remain relevant in the years ahead.
Having now determined the point of departure, it was clear to the client management that change was needed, and resultant buy-in to the process was attained. We needed to ensure that all investment decisions were aligned to the business strategic priorities, get agreement on this, and then ensure that a robust process was in place for business units to submit business cases. These business cases then needed to be ranked, vetted and prioritised appropriately and with the appropriate level of consistency in governance.
As a result, Vsolution designed the governance and investment management process that was based on value to the business and BU strategic and financial priorities. The process gave ownership of critical decision points to the BU, whilst at the same time, allowing for critical IT expertise to be part of the decision making in a manner that enhanced value creation and was not dependant on or driven by IT constraints.
The very high level approach is shown —>
There were challenges with this approach, and control measures were designed into the solution from the start. The following challenges were anticipated:
– BU’s may not be well placed to understand various enhancement interdependencies, and technical feasibility and cost estimates;
– BU’s may not have the resources or skills to do the prioritisation or cost / benefits evaluation;
– BU’s might overspend on their enhancement allocations; and
– Disputes could arise between BU’s on resource allocation to enhancements.
The control measures were a variety of communication and discussion forums, both formal and informal. Formally, the following two forums were created:
1) PROJECT PORTFOLIO INVESTMENT COMMITTEE (PPIC)
The PPIC consisted of the heads of the various business units, as well as the IT director. In line with the existing background that the client was facing and the challenges that it posed, the primary objectives of the PPIC were:
– Annually during the strategic planning process; and
– To set clear benefit targets for the project portfolio (expected hurdle rates and required portfolio mix).
– Annually during the budgeting process; and
– To provide a budget to projects that will deliver set business objectives. (approval mechanisms for provisioning funds, project prioritisation).
– Monthly; and
– Review and gated submission of business case processes.
2) BUSINESS GOVERNANCE OF IT FORUM (BGIF)
The BGIF also consisted of the heads of the various business units as well as the IT Director. The role of the BGIF however was more facilitating the understanding and co-operation between the various business units and the IT organisation. Specifically:
– Dispute resolution on resource allocation; and
– Disputes – to merge IT understanding and skills of what is possible and technically feasible, with what the business requires from a functionality point of view.
In such a dynamic and competitive market and environment, it was imperative that the client quickly implemented a better way to measure, value and prioritise IT initiatives. In balancing risk and innovation, it was critical to develop methods that enabled the business unit leaders to make informed decisions about their business/IT investments and facilitate value based discussions. This involved managing IT products and services as investments and demanding a return on quality, functionality and availability.
IT assets, just like assets in a personal portfolio, need to be managed with an investor’s mentality, buy, sell or hold. Most organisations we have found (including the client) are pretty adept at the buying part but lack the processes, procedures and governance structures to determine when is the best time to sell (to move away from certain technologies or applications).
We used portfolio management principles in a project review environment which then acted as an input into the budgeting process. We identified with the client, the major IT investment categories, which gave the business the opportunity, based on the desired strategic positioning of the client, to allocate funds to the most appropriate categories.
We also agreed the definitions of these categories with management, so as to avoid any duplication and confusion with regards to which investment category a certain project belonged to. Being clear on these definitions assisted with the speed at which projects could be classified.
The IT investment categories that were used to categorise expenditure and planned expenditure were:
1. ‘Transform’ the business
2. ‘Grow’ the business
3. ‘Run’ the busines
We ensured that the portfolio was closely aligned to the overall risk/reward profile of the client, based on the above classifications and moved beyond the gross number of percentage of revenue allocated to the IT budget and dug deep into the ways that the money was spent – This formed a key guide to the strategy. Once we obtained agreement as to the appropriate budget allocation (on a percentage basis) to the above IT categories, the PPIC had to evaluate all project requests (presented in business case format) from the BU’s. No projects would be considered without a business case, and more importantly, signoff from the BU accountable executive. This also ensured ownership of the costs and benefits and a more accurate representation of what these were likely to be.
However, before business cases could be submitted to the PPIC, they had to be screened and stress tested by an independent panel review committee, so as to ensure they were complete, realistic and defendable. This ensured speed of assessment at the PPIC, as all business cases submitted were in the same format and had been prepared with the same level of rigour and analysis.
Deadlines were set for business case submission which was strictly adhered to. The PPIC then had the task of assessing all submissions. Each business case was given a desirability score, based on the following assessment criteria:
– Strategic alignment – enabling strategy;
– Financial – economic cost and benefit;
– Business Impact – contribution to business performance;
– Risk – likelihood of success or failure; and
– Architectural fit – compatibility with guidelines.
The PPIC had the responsibility of managing the portfolio. The PPIC met monthly, and agenda items, amongst other things were:
– Gated review submissions;
– Scrutinise project progress and benefits realisation against plans; and
– Scrutinise revised project business cases (costs and benefits breakdown).
The emphasis of these portfolio management meetings was to make decisions with respect to releasing funds for the next stage based on a review of the outcomes of the preceding stage and the business case for continuing the project. Hence, the reviews above resulted in approval for the release of funds, halting or deferring projects or reallocating funds within the portfolio to more suitable projects with better and more certain business returns.
We wanted to go further than simply tracking costs against budget, as this often is without an accurate sense of progress. The continual governance of project investments and business cases ensured that projects were on budget and on plan and funds were being ring-fenced to those initiatives that were most likely to succeed and add value to the bottom line.
– An institutionalised best practice approach to investment management and project governance;
– Agreed structural changes to the IT organisation to enable it to support business strategy;
– Increased expenditure on IT investment categories most likely to make the most impact, transform and grow;
– Rationalisation of external spend due to centralisation of needs from business and a strategic framework to determining business needs and requirements;
– Increased business ownership and accountability. All projects now have:
– A business owner accountable for project costs and benefits; and
– An Exco level accountable executive who supports the project (representation on the PPIC).
– Portfolio value and benefits are now measurable, indicating:
– Over R600m movement in the NPV of the portfolio; and
– Year on year cost reductions of R30m from existing projects, for investment into new projects.
– IT investment & portfolio management is the cornerstone process for maintaining dynamic alignment between business and the IT organisation. Managing IT from a project investment perspective – with a continuing focus on value, risk, costs and benefits – will help businesses reduce IT costs by significant margins;
The value of consistent governance means that troubled projects can be terminated. Early visibility into troubled projects enables intervention and remediation to avoid major disruptions to the business;
– From an IT organisation perspective, the ability to provide strategic support to the BU’s and assisting them in understanding the risk/reward tradeoffs is critical in delivering value to the business; and
– The portfolio mix will vary over time, in response to changing business goals and economic conditions. The overriding goal must be to maintain a continual focus on reducing the costs of running the business assets (the price of keeping the lights on), whilst continually rebalancing the ‘grow’ and ‘transform’ investment categories in a way that reflects the goals of the business.