Architecture-Based it portfolio Valuation




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Architecture-Based IT Portfolio Valuation

Marc M. Lankhorst, Dick A.C. Quartel, Maarten W.A. Steen,


Novay, PO Box 589, 7500 AN Enschede, The Netherlands
{marc.lankhorst, dick.quartel, maarten.steen}@novay.nl

Abstract. This paper describes the ingredients of an integrated IT valuation method that uses architectural models as its backbone. First, it investigates the link between the organization’s mission and vision and high-level strategy, such as its value center approach and operating model. These strategic choices determine the aspects that need to be taken into account when assessing the value of the IT portfolio. The resulting business requirements can be modeled in conjunction with the enterprise architecture of the organization. This provides concrete insights in the contribution of these elements to the business. KPIs are then associated with business requirements on the one hand and architecture elements on the other hand, and measurement of these KPIs determines the operational performance of the organization and its IT. The paper uses an implementation of Bedell’s method as an illustration of this approach.

Keywords: IT portfolio management, requirements management, enterprise architecture, IT governance, IT investment management, IT value management.

1Introduction


After almost half a century of IT developments, many large organizations face an unfavorable ratio between old (existing) IT and new IT. Because old IT systems tend to be monolithic, unwieldy and inflexible, organizations experience maintenance as difficult and modernization to meet new business demands as improbable. Some organizations spend up to 90% of their IT budget in 2009 on maintaining the existing IT landscape, leaving only 10% for innovation. If this trend of increasing budget requirements for existing IT is not reversed, then in the nearby future no budget at all will be available for new IT. In the worst case, innovation is squeezed out completely and budgets to spend on existing IT may become insufficient to perform crucial maintenance tasks.

By focusing on the value of IT instead of considering costs only, organizations can decide which IT really contributes to their business goals and make a well balanced division into budgets for maintenance, exploration, realization and phasing out. Traditionally, IT has often been regarded only as a cost center in business case calculations. Its less tangible benefits have often been more or less neglected in portfolio management decisions. Furthermore, in the past information systems tended to be relatively stand-alone, supporting a single business silo. This made it easier to attribute their costs and benefits.

IT systems and services are more and more interwoven with the business and may support many different activities, generate independent revenue streams, attract new business, et cetera. To provide insight into these effects, a valuation approach is needed that encompasses the coherence of the entire organization, its products and services, processes, applications, and infrastructure, i.e., the enterprise architecture. Our study of existing literature showed that some IT valuation approaches have close associations with enterprise architecture. However, the process of translating architectural benefits into value needs a complete understanding of the relationship between architecture and business benefits. Unfortunately, little research is currently addressing this. With this work on architecture-based IT valuation we aim to fill this gap.

This paper describes the ingredients of an integrated IT valuation method, which uses architectural models as its backbone. First, we must investigate the business requirements that result from the organization’s mission and vision and from its high-level strategy, such as its value center approach and operating model, as outlined in the next sections. These strategic choices determine the aspects that need to be taken into account when assessing the value of the IT portfolio. The resulting business requirements can be modeled in conjunction with the enterprise architecture of the organization. This helps in realizing traceability between business requirements and IT artifacts, which is needed to perform a well-founded portfolio assessment, and it provides concrete insights in the contribution of these elements to the business. KPIs are then associated with business requirements on the one hand and architecture elements on the other hand, and measurement of these KPIs determines the operational performance of the organization and its IT.

Business requirements and enterprise architecture are the main inputs to calculate the ‘value’ of IT systems and projects. The importance of different criteria to assess this value depends on the strategic direction of the organization. Strategic choices are linked to one or more business goals from which valuation criteria and performance indicators are derived. Depending on these criteria, different valuation techniques may be selected to analyze IT with respect to these criteria. Separate IT budgets may be allocated to limit the IT investments for each value center.

This paper is structured as follows. First, in Section 2 we introduce portfolio management as a way to control IT investments in an integrated way. Naturally, IT strategy and investments must be in line with the organization’s strategy as a whole; this is addressed in Section 3, which describes the value center approach to IT strategy. Sections 4 and 5 then describe the implementation of the IT strategy in terms of the organization’s operating model and the role of enterprise architecture in defining this. Section 6 describes how business goals and requirements can be made more concrete and related to the enterprise architecture, in order to realize the desired architecture. In Section 7, we describe Bedell’s method [1] for assessing the contribution of IT assets and projects to these business goals, in order to build a balanced portfolio that provides an optimal allocation of investments. A tool implementation and example of this method is shown in Section 8. Sections 9 provides more detail on assessment criteria that may be used in this method, including quality attributes such as the well-known ‘ ilities’ from software engineering and risk analysis criteria. Section 10 describes so-called valuation profiles, which link the IT strategy described in Section 3 to relevant assessment criteria. Section 11 provides an overview of related work, and Section 12 presents our conclusions and ideas about future work.
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