All IT Is Not Created Equal

Does this sound like your firm? IT is managed as one massive homogeneous lump, where the executive committee's key concern seems to be managing (read: reducing) costs.

Now, reducing costs (or increasing productivity, or mitigating risk) may be fine for "normal" IT operations—what can be characterized as keeping the lights on or having the trains run on time. But if your IT department is a heads-up organization, and if your senior management appreciates the differentiation IT can, optimally, provide, there may be a better approach.

I call it the "portfolio" approach, and McKinsey analogizes it to venture capital.

Here's what we both mean: Not all IT investments are equal, just as not all financial investments in a diversified portfolio are equal, and there should be room for different approaches and different evaluative metrics depending on whether the IT project is:

Infrastructure support and maintenance (think wordprocessing)
Competitive "must-have's" (think extranets)
Potential rule-changing applications (say, creating an ability for clients to generate their own standard documents on the fly, online, from your firm's site).

And the evaluative criteria?

For infrastructure support, simple cost savings or productivity enhancements. This is rather elementary; it either saves more than it costs, or not.
For competitive "must-have's," net present value, or NPV. Slightly more sophisticated, but your HP-12C can calculate it in moments. The fundamental principle is that you get your money back, taking into account the cost of capital, within a timeframe you consider reasonable. And finally:
For potential game-changers, the Venture Capital model: Would we place a calculated bet on this, knowing that the outcome is highly uncertain?

The first two are fairly easy, routine matters to manage. But what about the third?

The key to making the "VC" approach work involves:

Unreserved endorsement and buy-in from senior management; a willingness and even an enthusiasm for experimenting on high-risk/high-reward initiatives.
A capable IT department within your firm (be brutally honest about this, and if you don't like the answer you come to, be brutally honest about fixing it). And
The willingness to understand that the "VC" model means you will experience both of the following:
- Test, succeed modestly, refine, test, reinvest, test, succeed quite nicely, deploy; and
- Test, fail, refine, test, fail, reinvest, test, fail, move on.

Not all IT initiatives are the same. Buy yourself an IT "portfolio" instead of larding up all on Treasury bills or all on dot-com's.