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In fact, an incoherent approach to it can lead to negative effects such as escalation of costs and lowering of efficiencies. It portfolio management addresses this key issue right from the conceptual stage of projects. The portfolio approach ensures that it projects are implemented with shared commitment, within the statutory framework. Some of the important measures implemented are:
Collaborative decision making for key and large scale projects
Stakeholder commitment and support for successful implementation of it projects
Internal stakeholders justify the it projects to external stakeholders and accountable for successful implementation
Stakeholders offer expertise and grant resources to address and overcome the project challenges at various stages
Specific project requirements are in line with the common-user, shared, state it infrastructure
Strategic value of it portfolio management: Four investment categories have been identified in the portfolio approach, within which every it investment can be measured in terms of strategic value to the business. (Sullivan, 1985)
Strategic Systems: These provide innovation and irreversible changes in the way business is conducted and ultimately gives competitive edge to the organization to combat competitive forces in the market. The high level of risk involved requires unstructured decision making and hence the results may be difficult to predict or quantify.
Key operational systems: By streamlining and leveraging existing processes, the business can derive more value and thus justify the investments already made. This also triggers review of the need for fresh investments and it may be possible to either postpone or altogether eliminate new investments.
Support systems: Designed to eliminate unnecessary business processes and simply complex functions, such systems are generally continuously upgraded as the benefits are immediately realized and the investment levels are not very significant. In this case the risks are relatively lower and hence decision making is simpler.
High-potential projects: High-risk projects, arising out of considerable research in new areas and involving major investments and radical changes in processes fall in this category. The risk is high, but so is the future benefit and hence organizations view this as an important element in the it portfolio. Decision making usually takes a long time, as the project needs to be reviewed and approved by internal and external stakeholders.
Perspective of it portfolio management:
In the United States, the Information Services Board - ISB is responsible for ensuring that the common-user state it infrastructure is capable and flexible to meet the ever changing public needs, governmental initiatives, legislative and technological changes. The portfolio approach has resulted in a series of steps that would help the government upgrade and meet the it requirements of the public on a consistent basis. (Department of Information Services, 2004)
Planning for it investments:
New it investments are like the doubled edged sword - they can either contribute significantly to the development of the organization or may result in wastage of resources. The portfolio approach provides the platform for identifying the potential benefits and drawbacks of investments. A comprehensive it planning process ensures the involvement of state authorities, business managers and funding agencies before deciding on the style and quantum of new investments. The ISB views that such decisions are more likely to succeed in the long run especially since new it investments are approved after a thorough baseline assessment of the agency's business requirements and existing it portfolio.
The portfolio management emphasizes continuous assessment of the computing power, network infrastructure, data management, applications and deployment of emerging technologies for the improvement of the organization. This exercise also provides an insight as to whether the organization is capable to implement the investment program and derive the expected benefits. More importantly, it also highlights the extent of the internal and external defense mechanisms within the organization to overcome the several challenges that are likely to prop up during the implementation processes.
Since portfolio-based strategies are based on time tested theories and practices, it allows the organization to rank the it projects based on the required parameters. For instance, it will allow speeding up of critical projects, overriding other projects, without affecting the overall balance of investments and at the same time, keeping the strategy on track. It is also possible to avoid implementing projects in isolation, thus eliminating integration problems, which can undermine the very purpose of a particular investment. This approach is perhaps ideal for meeting the dynamic demands of businesses and providing the infrastructure to support the delivery of services to the relevant markets.
IT portfolios essentially include state development and hence, they have the potential to be one of the pillars for state planning and development. A professional approach leads to greater focus in ensuring discipline to the planning and co-ordination between various agencies in the ambit of the portfolio. Such a systemic approach provides the opportunity to leverage resources and evolve a continuous planning and implementation it strategic framework.
IT portfolio management focuses on the key risk factors that can affect the returns on it investment. For instance, in the U.S., the ISB and the Department of Information Services (DIS), in a coordinated effort with the public it sector, have evolved threshold limits of various risks, to assist in decision making and sanctioning new projects. In essence, there are two defined criteria - risk and severity. Risk criteria classify projects based on their impact on the organization, development effort, technology and organizational capability. Severity comprises four elements - impact on the public, transparency to the citizens and law, impact on the state and finally, the consequences of not making the investment.
As the portfolio principle is built on maximizing returns and value, it will ensure that the organization undertakes a detailed feasibility study before deciding on investment. A typical study will throw up alternatives and the organization can choose the best after understanding the risk-return profile of each case. A further step is to develop prototypes that resemble the initiative on a smaller scale with short-term time horizons. With the prototype, pilot studies can be conducted and if the results are satisfactory, then investments can be made with greater confidence. This also helps to correct the pitfalls that may be encountered during the pilot study, thus greatly increasing the chances of achieving the objectives of the investment.
Applications portfolio analysis:
review of the current portfolio of it applications is important for formulating future strategies. Current applications such as human resources, financial management and manufacturing may not be among the priority list of future investments and will continue to function as such. However, it investments will always be a part of the future investment strategy as technology changes compel the need for constant upgrading of systems. (Tjan, 2001) Thus, the it investment strategy can provide extra competitive edge for the business which can make a huge difference in today's competitive market place.
Enabling outsourcing decision:
One of the key trends in the it sector is outsourcing of one or more functions, for realizing a variety of benefits. Organizations get their jobs done by competent external agencies on a contractual basis in return for a fee. It is widely believed that outsourcing leads to significant savings in costs and provides the organization access to external expertise. Even government agencies in advanced countries have resorted to outsourcing, which is an indicator of its tangible benefits. However there is a lot of controversy as to whether organizations are really saving costs through outsourcing. Research studies have shown that outsourcing provides the expected cost savings only under certain circumstances and can actually impose the burden of hidden costs. In fact, recent research has shown that big firms which offered high value outsourcing contracts to external firms actually delivered negative returns on investments over a four-year period. (Strassmann, 2002) This uncertainty leads to a dilemma as to whether an organization should go for outsourcing and if so, to what extent. The portfolio management approach can support this decision since its goals are similar to that of outsourcing - cost reduction, quality enhancement; reduce risk of project failures and implementation of strategic objectives of the organization.
Risk analysis for it investments:
Research experience over the past several years on it strategies of companies across the world suggests that it initiatives suffer from three major deficiencies: (a) failure to identify the entire risks of the project at the time of financing (b) neglecting to assess the cumulative risk that the project can have on the existing it portfolio and - overlooking the ground reality that different it projects even within the same organization require different managerial approaches. (Applegate et al., 1999) Implementation risk address the question of what type of change would the portfolio undergo, after the project is completed. The portfolio approach recognizes that project implementation risk is one of the underlying causes for failure of the investment and hence requires detailed risk analysis.
Among the factors influencing risk, those involving the project dimensions are directly relevant for the investment decision. Three key dimensions generally confront…[continue]
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