By eweek  |  Posted 2003-11-07 Print this article Print

as Stock Value"> CIO Insight: Denise, weve talked about Wall Street and portfolios, about separating out different kinds of value and analyzing them separately. Would this pass muster with you sitting in the CFO seat?
Fletcher: Well, I guess I start off back at what Christopher Gardner said earlier. I start off with shareholder value. That is the driver, nothing else is. Then the next step is: What drives shareholder value? The only thing that studies have shown actually truly correlate to shareholder value is free cash flow. Free cash flow is an element in the ROI analysis. It is, as I said earlier, subject to a lot of vagaries because youre doing projections. In my view, the whole key is not bucketing or anything like that. In my view, the key is to start your process, [as] Joe Barkley said earlier, with a strategy. Where are you taking the company? Once youve identified where youre taking the company, the next step is to identify the strategic drivers that are actually going to shift the company to where you want it to go, and where youre going to increase shareholder value. Then you look at the strategic driver and you say, what is the role of IT, what IT do I need? Its not really the role, but its really what infrastructure, what do I need to make the strategic driver happy? Well, I need to have a CRM system, I need to have 250 salespeople, I need to get rid of 25 number-crunchers, etc. Put all of that together. Once youve put the together, you then say, what is the impact of this on my company, and that has to be added to the budget. And if I cant swing that because maybe for the first couple of years Im going to have negative free cash flow [before] its going to turn around, I obviously have to get rid of some of the things that Ive been doing until now. Joe was alluding to [this] before, when he talked about looking at how we do things every day in our business.
So as I see it, the benefit of going through a process like this, where you identify the strategy first, is that IT flows in as an enabler of the strategy, not as somebody who is running around trying to implement a specific thing. Why do I want to have this enabler? ROI, and I have to really push back on this, ROI is just a tool. As you say in IT, if the input is lousy, the output is lousy.

Barkley: Garbage in, garbage out.

Fletcher: Thank you, sir. But garbage in, garbage out is also true of ROI. Again, going back to what Joe said, whether its ROI [or] any number of other techniques, you just really need them because you have to set priorities at some point. But if theyre all going to be positive and youre a very cash-flow rich company, you can afford to do all of them, and sometimes your gut tells you the numbers are there.

CIO Insight: Is there an example from companies where this works very well?
Fletcher: Well, in my last position at MasterCard we did implement a process that we called a two-phase budgeting process. Phase one was in the first and second quarters of the year, where we really only focused on strategy. And then the goal in the fall was that the numbers would flow from the strategy, as opposed to the numbers driving the strategy, which is what I think a lot of companies do. It becomes a mechanistic budgeting process. Who cares about the decimal points? The CEO doesnt make decisions based on decimal points. The reality is, if youre going to have an after-tax return and its a positive return, unless you are bidding one project against the other, you really dont care if its 15 percent after-tax or 25 percent after-tax. And Ill be honest with you: When I get a number like 3,000 [percent ROI] or whatever Christopher was talking about, I do the exact same thing Christopher does-I slash. I say thats nonsense. I discard it and I say, okay, its greater than my cost of capital, and thats really all I care about.

CIO Insight: I want to continue going around the table getting reactions and specific suggestions on what we need to do to do a better job of looking at value. Whats the optimal approach that we need to take? Tom, let me get your response.
Murphy: Well, Ive kind of articulated what our approach is. We have aligned our strategy, but each element of that Jumpstart initiative does go through a review process. We do go through a process of evaluating value. We do some bucketing. We have a lot of safety, environmental and regulatory issues as a company that we have to address. Obviously, those become high-priority items that go onto the project list with relatively little review. We do have revenue-benefit, cost-efficiency and business-expansion projects that get a little bit more financial focus in terms of ROI than some other projects. Then we have our strategic and goodwill projects, and under goodwill we have guest and employee satisfaction, which are harder to measure with pure financial elements, but we spend a little bit more time focused on business objectives. And those go into the formal evaluation process, and we do go back six months later and determine if they, in fact, had a return. Were the objectives met? Were the actual financial goals met? We meet on a quarterly basis with all of the senior officers of the company and review the project prioritization and modify it as we go. And then, depending on how well the company is doing, we can pull back on our capital investment or increase the capital investment relatively easily, based on our project portfolio process and prioritization process that we use. Theres a very strong sense of engagement on the part of the business leaders that they are part of the decision-making process, that theyre part of the valuation process as opposed to IT being in that cat bird seat.

Hirji: I think the cardinal rule has to be to keep it simple. Anyone can take something and make it overly complex. It looks very precise, tons of man-hours get chewed up doing it, and everyone feels better, but the reality is youre no further ahead. So the real genius is turning decision-making and making it simple. So let me walk you through how we do it. We think we do a reasonable job. Its a little strange to me to have a conversation about IT not being connected with the business, because in our case IT is the business. So theres never a disconnect. We are the product, therefore, for us to not be connected with the business is impossible. Second, my role, for example, is half shaping and executing the strategy of the firm, and half running the IT organization. So there is no major decision that is made without IT being at the table; similarly, IT would not make any major decision without the business being there. We never have the situation where the "R" and the "I" are in different places. Third, we have very specifically identified what our strategy imperatives are. So getting back to making sure IT is aligned with the strategy, in our case, is very simple. We are the low-cost producer with the highest margins, therefore, priority Number one is things that bring that cost structure down. Number two, we provide the best tools in the industry for our traders, so were always looking at creating the next generation toolset. And, third, were creating new tool sets. So, again, we have three very clear goals. We can align all the projects against one of those three goals. If it doesnt meet one of the three goals, its off the table. The next thing that happens is [that] every single week the business and technology folks get together and run through the [project] prioritization. They basically list it one through ten in terms of what they want. We do that weekly. Why? Because our projects are small [and] because we dont bother trying to estimate something thats a year or two out. The marketplace changes; what was important last week may not be important this week. The one rule we have is [that once] a project is being coded, its too late to call it back. But that creates the trust in the business; if you change your mind about what you want to do, you are at worst four weeks away from getting it implemented. Before any project gets on that list, it has had a validation or business case; it has a number of things in it that say this is why its important. Sometimes its ROI, sometimes its customer [service], sometimes its a bunch of things. The important point is that that process gets both the IT folks and the business folks to say, we jointly believe this should be on the list and its important, and we think it should be number X out of 50 or whatever the number is. Thats why you do the process. Its irrelevant what the number is. Whats more relevant is getting alignment.

CIO Insight: Does this begin to address some of the concerns you have about bringing back the human element to looking at value?
Riazi: Im not certain. I mean, Ive heard a lot of great ideas here. We always fall back on our comfort zone, and I think in a debate we fall back to our analytical approach and a logical approach to a problem


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