Technology portfolios don't come in "one-size-fits-all" packages, so here are some guidelines to follow when deciding how best to invest your company's money
Technology spending is an important factor in an organization's cost structure, and an enabler of revenues. Technology cost and capabilities are ever-changing as new technologies arrive and existing technologies mature. In this turbulent environment, managers must establish a consistent and complete framework for establishing which technology portfolio best fits the organization's desire for return, tolerance for risk and business goals.
Maintaining an optimal balance of risk, return and strategic direction in the acquisition and management of a technology portfolio requires that organizations obey a consistent and complete process for assessing individual components and the portfolio. Business cases for each component are the foundation of this process; they provide a forecast of possible financial returns. The organization's internal risk factors are then identified and applied to derive a range of probable outcomes and to identify certain influential variables in those outcomes. Next, the portfolio is reviewed as a whole to rank the components by return, risk and strategic alignment. This ranked list is then laid against resource constraints to identify a range of possible portfolios. Finally, these portfolios are plotted by risk and return to find the optimum portfolio for a given level of risk or rate of return. When diligently applied, this process gives managers a consistent measure for disparate technologies and a firm foundation for the application of their strategic direction.
Valuing Individual Projects
Building a business case for a technology component requires the thorough investigation of each of the component's benefits at a technological, operational and economic level to derive an expected return for that benefit. To reflect the uncertainty in this forecast, benchmark data is applied to produce a range of returns (worst case, most likely case, best case). This range is narrowed conservatively to allow for degree of causation. Finally, these benefit returns are aggregated to produce a forecast of economic effect for the component. It is very important that this foundation-level work be done diligently and thoroughly, as the value of the final analysis is entirely dependent on the quality of this initial work.
Assessing benefits requires a careful investigation of the technical, operational and economic effect of the benefit. In reviewing these effects, it is useful to sort benefits into four categories: cost reductions, reduction in headcount or materials; revenue increases, increased sales or price points; cost avoidance, a reduction in the growth of budget item; and revenue protection, retained market share in the face of new competition or new marketplaces. The resulting four-by-three matrix provides a sound framework for this task. As a simple example:
* Technical benefits — new word-processing software enables printer sharing, reducing the number of printers required for a given number of users. However, the new software might also be incompatible with existing printing resources, requiring the purchase of new printers.
* Operational benefits — the printer sharing cited above might reduce the number of printers required, but might also slow document preparation as users would now have to walk further to retrieve their print jobs. However, the newly shared printers may have more functions (as a reduced printer cost would allow the pooling of advanced functions on fewer, but more expensive machines), and thereby reduce the need to go farther afield when advanced functions are needed.
* Economic benefits — efficiencies gained through the new word-processing tools may allow the organization to expand its markets and increase revenues. If, however, the new software is incompatible with some existing clients' technology, revenues may decrease.