Customary practice to Capital Budgeting for satisfying needs of Information Technology development and support pursues a fragmented process and considers requests as stand-alone projects, each with its particular business justification.
The approach bases most of the capital allocation on historical expenditure patterns and financial projections. It handicaps the underlying Enterprise Architecture making it inflexible and layered with unnecessary complexity. The practice results in inferior outcomes with far greater expenditure. It also increases the fixed costs of IT operations because of reluctance to retire legacy systems.
Conventional approach to Capital Budgeting for IT projects is too outdated and sluggish for today’s Digital Age, where technology has taken a more strategic role.
In the Digital Age, technology needs to be rapidly developed to support not only the operations of the organization, but also to directly support Corporate Strategy. Thus, we need a faster, more agile approach to IT Strategy.
Capabilities-driven IT Strategy uses an approach where a comprehensive view to IT is adopted based on unique proficiencies of the company. It shapes an organization-wide justification for Information Technology. It also puts IT function and business unit together for developing the IT Strategy. Capabilities-driven approach highlights the strategic worth of visionary IT leadership, particularly in assisting companies comprehend which strategies are most feasible.
The approach presses the company to base judgment on the manner in which the company creates value, on the investment required for distinguishing capabilities, and on the contribution that IT ought to make. Capabilities-driven approach centers investment on limited distinctive capabilities that set the company apart.
Quite a few companies have employed such strategies, over a short period of time, and have attained a new kind of IT and operational leadership.
Capabilities-driven IT Strategy is achieved through a 4-phase approach:
- Determine our Distinctive Capabilities in Relation to IT.
- Prioritize our IT Project Portfolio.
- Develop Technology Roadmap of IT Investments and Activities.
- Develop Culture and Governance to Support IT Strategy.
The phases are sequential, where in each phase, a fundamental question regarding the role of IT in the organization is answered.
Let us probe some aspects of the phases a little more deeply.
Determine our Distinctive Capabilities in Relation to IT
The question answered in this phase is regarding Distinctive Capabilities of the company—capabilities that sustain the company’s strategic priorities and gives it a Competitive Advantage—and how Information Technology can play a part in improving them.
Prioritize our IT Project Portfolio
The question answered in this phase is how should the IT projects that will enhance the distinctive capabilities identified in phase 1 be prioritized?
To do this, an IT investment portfolio matrix—based on Strategic Importance and Value Potential criteria—is used that places the IT investment in 1 of the following 4 categories:
- Invest to Grow
- Invest to Sustain
- Invest to Refine
- Invest to keep the lights on
Develop Technology Roadmap of IT Investments and Activities
The question answered in this phase is regarding the order of investment and activity that will permit the company to achieve the goals set and fill the gaps that need closing.
Develop Culture and Governance to Support IT Strategy
Interested in learning complete details of Capabilities-driven IT Strategy and its phases? You can download an editable PowerPoint on Capabilities-driven IT Strategy here on the Flevy documents marketplace.
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