There are no it projects at Kaiser Permanente, says Cliff Dodd, the healthcare provider’s CIO.
Instead, he says, “some business projects have a significant IT component. And like any other project, they have to be rationalised with a business case; every CFO that could be impacted has to sign off.”
“No IT projects” is something of a motto at the Kaiser Permanente. It is one of five principles instituted by Dodd four years ago, continually stressed in PowerPoint presentations and even on placards on the walls. And it’s becoming a guiding philosophy in many other companies as well. One result of this is a demand for rigorous cost-justification of projects that used to be dismissed as unnecessary because the projects were considered too technical to explain or were assumed to be just a cost of doing business.
That puts the onus on CIOs to cost-justify initiatives whose returns may be difficult to quantify to non-technical executives. “This is where a lot of IT departments have a problem,” says Jim Carty, president of IS Value, a consulting firm. “They see a need but cannot get funding approved.”
However, it can be done. Here are three successful approaches:
1. Money talks
While it may be obvious to an IT group that an upgrade is the smart move, business executives don’t necessarily share that opinion — often for good reason. “When I was working with Amex a few years ago, they were running certain parts of their operation on Intel 8088s,” Carty says. “The [PCs] could still do what they needed them to do, so there was no reason to replace them.”
If you believe that a piece of hardware, a network switch or a software package needs to be replaced, be prepared to prove it and remember that dollars talk. For example, when Hatfield Quality Meats sought funding last year to update its Demantra demand planning software, CIO Bob Hardner studied the newer release’s features and translated them into persuasive business terms.
The proposed upgrade would cost only US$20,000 (NZ$31,500), “but we had to uncover net gains”, Hardner says. The answer was clear: while the old version allowed forecasting only in weekly “buckets”, the newer release could provide demand forecasts on a daily basis, he says.
Before proposing the upgrade to the company’s chief financial officer, Hardner looked at the past year’s deliveries and counted the times the lack of daily forecasts had cost the it an order. The tally easily justified the upgrade.
2. Riding coat-tails
If the dollar return on a project remains elusive, another way to make your case is to find legitimate links to an initiative with high ROI.
“You say, ‘To get the CRM done, we’re going to need the network switches,’” says Jon Piot, president of consultancy Technisource. “You’re just adding more cost to the project. It’s like making plumbing changes in your house when you’ve got it all torn apart anyway for renovations.”
This approach, which nicely complements the “no IT projects” mantra, is the one used by Harrah’s Entertainment. In 2004, the Las Vegas-based company, which already operated casino hotels in 13 US states, purchased Caesars Entertainment US$9.4 billion. Harrah’s is only now wrapping up the ambitious undertaking of folding Caesars’ customer loyalty operation into its own.
“As we’ve added Caesars, we’ve had to significantly scale that system,” says David Richter, Harrah’s vice president of infrastructure. “We folded in literally tens of millions of new customers.” That entailed significant IT investment in nearly every area of infrastructure, including redundancy. “Previously, we were on a fail-over model,” Richter says. “We shifted to a high-availability model with two datacentres.”
“In a major project like that, the cost of infrastructure — platforms, networks and so on — is included in the overall cost estimates,” says Harrah’s CIO Heath Daughtrey. “And because that project already has ROI projections, the [infrastructure cost] is already in terms the COO and CFO understand.”
3. Risk and business
To truly talk business, CIOs need to talk risk. But some CFOs say risk is a project element that’s little understood and poorly communicated by most IT executives. “Risk is always part of the return picture and some tech guys don’t see that, which can be frustrating,” says Robert Simmons, CFO at ETrade. “As a CFO, you need [to know] chapter and verse about the reward and the risk.”
While the naive might think highlighting risk will destroy the case for a project, the type and degree of risk can actually be a selling point. “If we’re investing in a technology we understand perfectly, I’m willing to live with a lower predicted return than if it’s a new, untested technology,” Simmons says.
He is quick to note that ETrade’s IT group understands risk. As an example, he points to the company’s move to open source software, which began in 2002.
ETrade CIO Greg Framke led the initiative after the company’s board determined that better scalability was crucial if the company was to grow out of the “dot com” malaise. “Greg came back with a Linux proposal and told us here was a chance to break the vendor stranglehold,” Simmons says.
The risk was undeniable: ETrade would be very early with a broad-based Linux initiative. But Framke hit a home run by convincing the board that one component that would not be risked was the customer experience. Open source might turn out to be a costly technological dead end, he says, but any pain would come in the form of worker hours and money, not angry customers.
That convinced board members that the scalability advantages of open source outweighed the risks. Years later, it’s clear that the gamble paid off. “We made two acquisitions in 2005 and they were enabled in no small part by open source,” Simmons says.
The pressure is on for CIOs to translate proposed initiatives into business terms. Moreover, the discipline required to do so can help them better understand and prioritise projects themselves.
An example of the need for CIOs to be financially literate can be seen in current rising interest rates. Higher rates affect more than just home mortgages — they also make IT initiatives harder to sell to the CFO. At ETrade, “a project that cleared the ROI hurdle two years ago may not today,” Simmons says.
Here’s why: any proposed initiative carries a predicted dollar benefit. Take a theoretical IT project that costs $1 million and is expected to help the company earn an additional $100,000 a year for 20 years. If the interest rate is zero, the value of that project right now is $100,000 x 20 minus $1 million, or $1 million, a no-brainer 100% ROI.
For the five years leading up to 2005, interest rates, although not zero, were so low as to make capital seem almost free in the minds of CFOs. That has changed: the US Federal Reserve bumped up rates steadily in 2005 and has raised them again this year, just as the Reserve Bank in New Zealand has. Analysts see no end in sight. The result: “As rates rise, you have to discount those future cash flows back to today, and they’re simply worth less,” Simmons says.
So expect a higher bar for coming projects. The good news is that if you demonstrate that you understand the effect of interest rates on IT initiatives, you’ll gain credibility with business executives.