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A decision by American Airlines Inc. IT leaders two years ago to use portfolio management budgeting techniques played a critical role in top managements decision not to cut overall technology spending this year despite very difficult business conditions for the airline, said CIO Monte Ford and members of his staff.
Portfolio management is an approach borrowed from the financial services industry in which money managers attempt to balance investments based on their risks and rewards while ensuring that each investment fits into an overall strategy. Managers first establish high-level, enterprise-level priorities and evaluate all IT projects and investments in terms of whether they correspond to those priorities. Investments are then allocated to projects based on the relative importance of the enterprise priorities with which they correspond.
Portfolio management can be particularly useful at companies facing hard times, said Val Sribar, an analyst at Meta Group Inc., in Reston, Va. Thats because it can help nontechnical managers understand IT investments in terms of business objectives and financial goals.
Before embracing portfolio management, Americans approach to IT investment decisions wasnt well-coordinated with overall corporate objectives, said Susan Garcia (pictured left), managing director of IT strategy and financial planning, in Fort Worth, Texas. In fact, until a couple of years ago, 42 different departments in the company controlled pieces of the IT budget. Each applied its own criteria to IT budgeting.
That changed after Ford arrived in December 2000. Like many companies, American had recently compiled an inventory of IT assets and investments as part of its Y2K initiative. Ford and his team decided to evaluate those projects using a portfolio approach. Initially, the 42 budgeting processes were boiled down to 13. Eventually, thats been boiled down to just one overall IT portfolio management process involving five high-level corporate priorities.
The process has helped IT managers at American get better at deciding what not to invest in as well as understanding what deserves support, Garcia said. The company, for example, has decided to send updated reservation and seating information to some other airlines a few times a day rather than every 10 seconds. “That saved a lot of CPU time,” said Garcia. “The savings with just three airlines was over $1 million in messaging costs.”
Not surprisingly, such results have helped build confidence among Americans top business executives that IT investments are going to the right projects.
“Our latest budget process was the easiest Ive been through in 18 years,” said Garcia. “And IT usually isnt that way.”