All Posts in Strategy and Tactics

|In: Career Management|Last Updated:

IT management and business leadership often think differently about investing in the business. How about you?

Here’s an exercise worth doing for any IT leader:

Canvas your company’s top executives. The question: They have $1 million to allocate. They can invest it in revenue enhancement, cost reduction, or risk management — the three bottom-line metrics for any for-profit business. How much do they put in each category.

If you have an IT Steering Committee and its members aren’t the company’s top executives, ask its members, too.

Finally, ask your IT leadership team members the same question: If they were running the company, how would they invest?

Average the results for each group and graph them. They’ll probably look something like the figure.

What’s going on? In my experience, business executives tend to focus more of their attention on cost-reduction than anything else. That’s because it’s generally possible connect the results of a project that’s supposed to reduce costs to actual cost reductions.

Projects that are supposed to increase revenue? Unless it’s a direct marketing campaign, a website change tested through the use of software that presents the old view to one set of visitors and the new view to a different set, or a new product, it’s embarrassingly difficult to prove that any particular action a company takes results in more revenue.

Strange to say, investments in revenue are riskier than investments in cost reduction.

Entrepreneurs are different: They tend to emphasize revenue enhancement more than cost reduction.

And risk management? For both entrepreneurs and business executives, investments in risk management are beyond risky. Here’s why:

There are three ways to invest in risk management: Prevention (aka Avoidance), which reduces the odds of a bad thing happening; mitigation, which reduces the damage done by a bad thing that happens; and insurance, which spreads the cost if a bad thing happens.

If a bad thing doesn’t happen, there’s no way to know if it didn’t happen because of the company’s prevention efforts, because there was no risk in the first place, or the company was just lucky.

If a bad thing does happen, there’s no way to tell whether, without its risk mitigation efforts, the cost would have been higher or not.

It is true that if a bad thing happens then at least the company knows whether it insured for the right amount. But if a bad thing doesn’t happen then the money paid for insurance that year was wasted. Maybe the risk isn’t high enough to warrant the cost of the insurance.

Or maybe the company was just lucky this year. There’s no way to tell.

IT’s investment profile tends to be quite different. IT tends to get beat up all the time about What Technology Costs. More, since businesses first started to invest in computers the rationale has mostly been increased productivity — information technology is supposed to reduce costs. It’s no wonder IT management tends to focus heavily on cost reduction.

But even though we get beat up about What Technology Costs, that doesn’t hold a candle to the extent we’re beat up about when something bad happens to our technology. Whether our systems are hacked, a virus invades, or the systems are down for some other reason, we get beat up. And even if we don’t, we expect to get beaten up.

So IT management’s instinct is to invest in risk management more than in anything else.

That, coupled with what’s invested in cost reduction, doesn’t leave very much to help increase revenue.

Go through the exercise — make the numbers real. If your company’s business executives and IT management line up well, good for you. You’ve achieved “IT/business alignment” and are ready to take the next step: Business/IT integration, if you haven’t already.

If not, it would appear you have work to do.

One place to start: During each business planning cycle, suggest the strategic plan include investment targets for each of the three categories of investment: Revenue, cost, and risk.

You might even guide everyone involved through the exercise of listing the major ways to invest in each of them to get to a finer-grained level of investment planning.

However you approach this, your goal is to get everyone thinking about this subject the same way.

Because if you don’t succeed at this, it doesn’t matter what anyone said. The moment something bad happens … the moment a risk turns into a reality … all bets are off.

That’s when the blamestorming starts.

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|In: Industry Commentary|Last Updated:

The Third Axle Alternative is alive and well.

The third axle alternative, in case you don’t recall it, is deciding to weld a third axle onto your car when a nail punctures one of your tires, instead of fixing the flat.

Before we get to why it’s important to you, let me take a few moments to talk about me, and a bank that’s working hard to lose my business.

When I opened IT Catalysts, I worked with the bank that already took care of my personal checking, my wife’s personal checking, and our household checking, all of which were free checking accounts … excuse me, they were FREE! Checking Accounts as I recall how they were advertised at the time.

So were my two business checking accounts (one for IT Catalysts, one for IS Survivor Publishing).

For convenience, I had the same bank provide my business Visa card. A few years later I switched my personal Visa card to the bank as well.

And then the service charges started to appear.

On every single checking account.

I called customer service, explained that my idea of FREE! Checking isn’t compatible with paying service charges, and asked what had changed.

What had changed, it turns out, was that the bank had redefined the types of checking account it offers, along with the conditions necessary to maintain FREE!-dom. Long story slightly less long: The bank couldn’t stop the service charges, but it could automatically refund them right after it charged them, welding on another axle as it did so.

The fix lasted a year, at which point the service charges reappeared. Another call to customer service; another discovery that the terms had changed. For my business accounts, this meant:

  1. Switching to a different class of checking account.
  2. Opening two business savings accounts.
  3. Transferring $150 from each business account to one of the savings accounts on the first day of each month.
  4. Transferring $150 back from the savings accounts to the checking accounts on the third day of each month.
  5. Sticking my left pinkie in my right ear.
  6. Pushing my left foot in and my left foot out, pushing my left foot back in and then waving it all about.

We didn’t long ago switch banks for two reasons. The first is our suspicion that all the rest are just like the one we’re already working with. The second is the inconvenience of switching all of our accounts, automatic payments, and so on, to a different financial institution.

Why am I telling you this? To vent, of course.

But also as a cautionary tale.

Unencumbered by facts, I can nonetheless make a pretty good guess that the Third Axle Alternative is at work. It matters to you as an IT leader.

But first, back to me and my venting. Here’s what I think happened: FREE! Checking sounded like a terrific idea to the banking executives when money was plentiful and there was more competition. And so they offered it. Then, with banking consolidation eliminating competitors and an ongoing need to grow profits, the bank decided to use the lure of free (as opposed to FREE!) checking as an upselling tool — customers could still get their checking at no charge, but only if they were good customers — the kind that buy several products and services.

Instead of figuring out products customers actually want — fixing its metaphorical flat — my bank created a set of artificial financial upselling incentives, built around an ever-more complex collection of bank-account types — a third axle.

(What banking customers actually want: I’m pretty sure most of us want no choice at all with respect to our bank accounts. We want one type — one where we can put money in when we have it, take money out when we need it, and send money from it to someone else when the situation calls for it. As the bank already makes money by loaning out depositors’ money, and more on float when we use on-line banking to pay someone … we figure the bank makes a profit without charging us an additional fee.)

Anyway, instead of ending up with more-profitable customers, my bank ended up with the $150 back-and-forth transfer — a fourth axle developed by bank staff as a way to placate customers like me who were irritated by the third axle.

Brilliant!

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