Financial ROI has always been the most politically-correct driver for the funding of IT-enabled business initiatives, even though actually being able to demonstrate this after the fact has always proved next to impossible (bar the obvious exceptions that confirm the rule). As author Harwell Thrasher mentions in my article on the subject, ROI – RIP?, “the project with the highest ROI on paper tends to be the one with the most creative proposal-writer”.

For cloud computing, financial ROI still remains high on the list of criteria for project approval. In other words, if you really want to ensure funding for your cloud initiatives, focus mainly on financial ROI. And yet, even when taking into account those cloud initiatives that do yield spectacular ROI (and they do exist, eg 65-70% for one US company on p3 of this report, Heading into the Cloud with Confidence, and 100% for a Swiss HR and training company I met last week), financial ROI is not the main reason companies embark on cloud initiatives. [Read more...]

While most people are reasonably familiar with the term PPM (Project Portfolio Management), fewer have heard about its poorer cousin, APM (Application Portfolio Management). The main reason is that PPM is about shiny new initiatives, which everyone wants to be associated with, whereas APM is about managing production applications and understanding their cost base. Or, put more crudely, nobody ever got promoted by keeping the lights on – even though it accounts for 80% of the IT budget.

In simple terms, APM is a framework for inventorying and managing a portfolio of applications from a value perspective (ie costs vs benefits) as opposed to a pure cost perspective (ie what it costs to run them). The objective of APM is to justify ongoing operational and investment funding of applications from cradle to grave. In the absence of APM – unfortunately the norm – applications fall into a black hole after project delivery, and many years later you end up with a smogasbord of different systems built at different times, by different people, for different reasons, which essentially end up being funded by default year after year. Hence the CFO’s burning question to the CIO: “where does all the money go?” [Read more...]

In the first of this two-part post about the effect of exchange rates on project budgets, we looked at exchange rate risk and how firms mitigate it from an overall company perspective, and whether this would include IT projects. In this second post, we’ll go into further detail on IT projects specifically and look at the mechanisms for managing exchange rate risk and how it figures in project reporting.

MANAGING EXCHANGE RATE RISK IN THE ABSENCE OF CORPORATE HEDGING

If, for whatever reason, your project is not covered by Treasury hedging (covered in Part I), you might very well decide not to do anything about it and to take the gains or losses as they come. Indeed, this was the case for most of the people I spoke to, eg a PMO Director at a global Swiss pharmaceutical company, the Director of Corporate Project Management at a European airline and a Director of Information Management at a Swiss-German Chemicals and Pharmaceutical company. In all three cases, the people acknowledged the existence of exchange rate risk, but had no processes in place for managing it – and neither were they aware if they were covered by Treasury hedging or not.

If, however, you want more control over your budget, here are some basic mechanisms to help you mitigate exchange rate risk: [Read more...]

In this two-part post, we’ll look at the effect of exchange rates on project budgets. In part I, we’ll look at exchange rate risk and how firms mitigate it from an overall company perspective, and whether this would include IT projects. In part II, we’ll go into detail on IT projects specifically and look at the mechanisms for managing exchange rate risk and how it figures in project reporting.

HOW CURRENCY FLUCTUATIONS IMPACT PROJECT BUDGETS

Even before the global economy’s rollercoaster ride of August 2011, which saw both the US and Europe in the line of fire from investors and rating agencies, currencies had already been yo-yo’ing for some time. For example, between Jan-May 2011, the US Dollar (USD) depreciated 10% against the Euro (EUR). As for the Swiss Franc (CHF), a safe haven currency, it appreciated over 20% against the USD between Jan and Aug 2011.  (For a really neat chart of these movements, plug in your currencies and timescales into the following historical exchange rates feature on Oanda).

Besides making a cup of coffee in dollars outrageously expensive in Geneva, and enabling European vacationers to throw money around in New York, what’s this got to do with IT projects? Well, quite a lot actually, if we’re talking about projects with significant exposure to foreign currencies, eg a global ERP implementation budgeted in EUR with international resourcing invoiced in USD. [Read more...]

THE COLOURS OF MONEY

Money comes in various colours, from green in the US to all the colours of the rainbow in other countries. In IT, money comes in only two colours – capex and opex.

There are various national and international regulations and accounting standards (eg FASB and IFRS) which lay down clear guidelines for capex vs opex when developing software for internal use.  Note that these guidelines don’t dictate whether companies have to capitalize or not, only the rules they have to follow if they decide to do so. As we’ll see further on, some companies capitalize their software development while others expense it.

Now regardless of where your IT department sits on this, you should still be able to understand the underlying debate, because, at the end of the day, it all comes down to the numbers – capex or opex. [Read more...]

International projects – you go first!

International projects are frighteningly expensive and fraught with complexity, both technical and organizational. The theory behind cost savings, synergies and process standardization hardly ever materializes, as anyone who has ever managed one can probably attest to. If you now also throw chargebacks into the mix, things can really become messy.

Unless affiliates or countries that are candidates for an international project have some sort of mechanism in place for sharing the risks (see previous post, “Why chargebacks should take into account project risk”) and the costs with Corporate or with IT, they will end up having to bear all of the costs. And this can be really tricky. [Read more...]

When the IT budget is defined during the annual planning phase (see “Your personal IT financials reality check”), most companies do a project-by-project prioritization approach in which projects are approved as a collection of individual and often unrelated items. This lack of categorization makes it difficult to invest rationally. It also makes it difficult to react to a changing business environment. So instead of adjusting spending based on investment criteria, we end up doing so based on individual project criteria (suitably biased by business-sponsor influence …).

Enter portfolio management, [Read more...]