IT's backbone system

Manufacturers spend hefty amounts on IT—budgets near 2.5 percent of annual revenue are fairly common, according to analyst research. At LifeScan, CIO Madeleine Fackler says the IT budget is the third-largest in the company, trailing only areas including direct materials procurement.

Trouble is, says Fackler, despite the amount spent on technology, most IT organizations "haven't had tools on par with what other functions have for managing their operations. Most IT organizations have cobbled together information, and usually don't have the time to do that."

But LifeScan says its ability to manage its technology investments has improved via an enterprise application for IT portfolio management. The Milpitas, Calif.-based manufacturer of blood glucose monitoring systems uses the software to prioritize its IT investments.

Analysts and IT portfolio management vendors agree that uptake of portfolio solutions is just getting started.

"It's difficult to administer IT with just desktop [software] tools, but that has been the norm until recently," says David Hurwitz, a VP with IT portfolio management vendor Niku Corp. "Running a complex IT organization without the right tools is like trying to run a complex supply chain with spreadsheets and whiteboards."

Dennis Gaughan, a director with Boston-based AMR Research, says IT portfolio management software complements IT governance council activities by tracking investments a company has made, and in deciding what use a company should make of its resources. "IT portfolio management software helps companies prioritize their investments based on larger strategic and operational goals," he says.

Successful management of a complex applications portfolio, however, isn't as simple as plugging in a portfolio management package. For one, the company's IT choices should be guided by an executive steering committee, not just by software. Then there is the question of just how large an organization has to be before it can justify an IT portfolio management system. Most experts agree, however, that good IT management starts with having better information about IT inventory and new demands.

Portfolio management systems capture data about IT assets, resources, and projects, and organize it as usable information. "IT governance is a process and a discipline," says Gaughan. "The technology helps automate that process, but the process is more important than the software."

That being said, there are specific IT portfolio management functions. Beyond basic asset tracking, there are modules for resource management, to track where IT resources are assigned; demand management, to capture requests for new systems or enhancements; and financial management, to analyze payback and costs.

If this list of functions sounds ambitious—akin to a backbone system for IT—perhaps that's because that's what it amounts to. Says Gaughan, "In a way, what ERP vendors do for the enterprise, the IT portfolio management vendors are trying to do for the IT function."

And bringing together the bigger picture appeals to LifeScan, which uses an IT portfolio management suite from ITM. "The way it's set up, the functions are integrated," says Fackler. "You can see our IT systems, projects, and activities, and more important, what function or goals they support."

The next step in the use of ITM's suite, says Fackler, is to deploy a vendor management module that will be the master record for IT vendor relationships, including data on licenses, maintenance contracts, and key vendor contacts. Even though LifeScan is resident on a single ERP system from PeopleSoft, Fackler says LifeScan's portfolio of vendors is complex enough to benefit from an automated system.

"It's a huge opportunity for improvement," says Fackler. "There is a vast amount of acquisition of software packages and services. We see this as a way of being more effective with our vendors."

But Fackler agrees with AMR's Gaughan that IT governance is primarily a business discipline. At LifeScan, she says, an information management, or "IM," council helps guide decisions. Fackler is on the council, as are seven other executives drawn from non-IT positions. "I ask them to come in with deep knowledge of their particular area, but when it comes to making recommendations, they do that with their IM hats on, not the hats they wear in their usual roles," says Fackler.

Niku's Hurwitz agrees with Fackler that governance councils are crucial to managing IT well. While council or steering committee members would not be power users of a portfolio system, they would typically make use of reports generated by the system. Hurwitz says steering committees or councils are fairly common, but some are more progressive than others.

"There are four maturity stages with IT governance," says Hurwitz. "The first stage is to have no steering committee whatsoever. The second is to have a steering committee, but composed of people from IT. The third level is to have a committee in which the business leadership participates, but that is largely IT-driven. The fourth, or world-class level, is having a council that is business-driven, with IT participating."

Companies often track IT assets using spreadsheets, but the problem with that, say experts, is spreadsheets are difficult to share on an enterprisewide basis without version control problems. "Many IT organizations don't keep an inventory of all their systems, and if they do, it's only when they get a new CIO, and then all the data is manually entered into a spreadsheet," says Hurwitz.

Niku's Clarity suite spans three high-level processes: selection of systems and assets via IT portfolio planning; delivery (i.e., execution) of the selected portfolio plan; and assessment and benchmarking for continuous improvement. According to Niku, some 250 IT leaders use the solution, including process manufacturer Eastman Chemical, Kingsport, Tenn.

One of the most commonly cited savings from IT portfolio management is the proper retirement of duplicate or replaced systems. "One of the effects of mergers and acquisitions is that when a company buys a new division or a plant, it suddenly finds itself with multiple shop-floor, inventory, or financial systems," Hurwitz says. "IT portfolio management gives you the data and insight to rationalize and consolidate those systems going forward."

Sometimes, if no process is in place to shut systems off, they are kept running. Bob Parker, an industry strategist with AMR, says there are instances where manufacturers have paid software maintenance fees for enterprise applications that are no longer running. "What's required is an effective rationalization process, and discipline in rolling out new applications so that as systems go live, legacy systems are decommissioned as part of that," says Parker.

Alex Lobba, a VP with IT portfolio management vendor Mercury Interactive, says the "low-hanging fruit" in IT governance includes a better view of new requirements. "You need a consolidated view of all the demands, and how those relate to the different lines of business and to your strategic goals," says Lobba. "Then, you can plan what is the best way to fulfill those demands, and how much it will cost."

Mercury is well-known as a vendor of software that tests the performance of applications such as ERP systems. It expanded into IT governance solutions via its acquisition of Kintana.

Mercury's customer surveys have found that organizations spend close to 70 percent of their IT dollars in "keeping the lights on" with current systems, says Lobba. One goal of IT governance, he contends, should be to find efficiencies with current systems via tactics such as consolidation. Says Lobba, "If you can save 5 percent to 10 percent in keeping the lights on with current systems, those are resources that can be pumped into strategic initiatives."

The potential benefits of IT portfolio management sound fine, but can smaller organizations justify the software? Niku's Hurwitz concedes the heaviest use of such tools tends to be among Global 2000 companies, though smaller, acquisitive companies often have the sophistication to benefit from a solution. Says Hurwitz, "It's a phenomenon similar to the early days of ERP, when you first saw ERP adopted by the Global 2000. But there are midsize companies that can benefit from a solution today."

Lobba agrees that most users tend to be larger companies, though he sees some companies with $50 million in annual sales that have enough complexity to warrant a solution. "Size has something to do with it, but so does complexity and how mission-critical IT is to an organization," he says.

AMR's Gaughan says the need for portfolio tools ties back to how much value they can bring to an IT governance process. "The tipping point is when the software begins to help set priorities in your IT investments," he says. "Without a solution, people end up spending all their time manually collecting data, and not doing any analysis."

However, warns Gaughan, return-on-investment on the software can be hard to quantify, especially with softer benefits such as striking the right mix of strategic applications and must-have systems.

"One of the ironies of this space is that the vendors have done a better job of measuring returns on users' portfolios and almost none on the model [for IT portfolio management] itself," says Gaughan. "But you can get better visibility into what IT people are doing and where the money is going."

The easier-to-quantify benefits, says Gaughan, are on the cost-savings side. Examples would include being able to identify and kill redundant projects, or defer or cancel projects that aren't a strategic fit.

At LifeScan, Fackler admits that the economic downturn of a couple of years ago held up further investment in IT portfolio management. But after a nine-month postponement, the deployment was back on, and today, Fackler says the software helps manage IT resources for cost savings, and find the right strategic mix of applications.

Concludes Fackler, "Portfolio management absolutely helps on both sides of the equation [cost savings versus finding the right mix of systems]. We know where our resources are, and what our demands for IT are. You can see which applications support a crucial area like sales, what the cost structures are for those applications, and you can start seeing what the right mix should be."