by Sai Machavarapu

Prioritizing IT Projects Based on Business Strategy

Jul 15, 20067 mins
IT Leadership

Most IT project evaluations are like the tail wagging the dog. They begin with IT strategy, rather than the goals of the business. In fact, IT strategy should be the third link in a chain that begins with business strategy, which in turn governs the product or service strategy, which then drives IT strategy. Let’s look at how this could work in the context of a fictional midsize CRM software company:

Business strategy: Increase the customer base by 20 percent in the next year by providing increased functionality such as business operations analytics and executive dashboards.

Product strategy: Develop an alliance with a business intelligence (BI) software company to add analytical capabilities to the CRM software.

IT strategy: Create a new software platform that allows for easy integration with the BI software company and others.

IT projects: Develop a Web services–based platform that offers universal data exchange and messaging between the CRM software and the BI software.

While this hierarchy reveals whether IT projects are aligned with the IT strategy (and therefore, the business strategy), it does not determine the specific value of those projects to the business. To do that, you need to look at four (and only four) distinct drivers:

Expense reduction: In this CRM integration example, the new platform reduces the cost of developing links to other vendors’ software because it is based on Web services standards.

Revenue increase: Overall revenue should increase as a larger customer base considers the CRM software.

Strategic: The software platform project has a direct impact on the CRM product and the company’s competitive position.

Legal/regulatory/security: Security is important in the new CRM software platform because sensitive data (Social Security numbers, for example) should probably not be stored outside of the CRM system.

Each project needs to be evaluated under all four of these drivers to determine their priority and value to the business. These drivers should not be considered in isolation from the others, however. They need to be linked together in a meaningful, repeatable process for process prioritization.

The Prioritization Mechanism

The first step in creating a prioritization model is to take a top-down approach and break down each driver into various parameters. This should be done by gathering insight from business leaders across all departments to understand business focus areas and performance measurements. At the CRM company, executives decided to break down the “expense reduction” driver into four parameters: customer service expense, customer acquisition and retention, back office efficiency gains and other expense.

The second step is to score each project across all parameters, a bottom-up approach, to determine the overall project score. Projects are scored by presenting executives with a set of statements and asking for their degree of agreement on a scale from 1 to 10 (also known as a Likert scale), with specific criteria assigned to the scoring range. For example, in the CRM integration project, when executives were asked, “Do you agree that this project will result in savings for the company?” a rating of 1 meant no savings, while a rating of 10 was associated with $20 million. This bottom-up scoring will result in final scores that will automatically prioritize the projects.

The third step is to adjust the two prioritization levers by assigning weights to the overall drivers (prioritization lever 1) and their specific parameters (prioritization lever 2) according to the current business priorities. As those priorities change, the weights can be adjusted correspondingly, so that the score for each IT project is always in line with the business strategy. These levers should be set based on business priorities for the entire project portfolio and not alter among projects.

For the CRM company, the weights for the strategic drivers and parameters might look like this:

Prioritization lever 1 (overall strategic driver weights):

Expense reduction (20 percent), revenue increase (20 percent), strategic (40 percent), legal/regulatory/security (20 percent). Revenue was stagnating because the CRM product had little differentiation from competitors.

Therefore, big strategic moves, such as alliances, had a higher priority than incremental revenue growth. Alternately, if the company had been in financial crisis, expense reduction would get a much higher weight than strategic.

Prioritization lever 2 (strategic driver parameter weights):

Expense reduction: customer service expense (20 percent), customer acquisition and retention (50 percent), back-office efficiency gains (20 percent), other expense reduction (10 percent). Because the CRM company is attempting to reach a larger market, reducing customer acquisition and retention costs are important. The integration project with the BI company will allow the two companies to pool sales and marketing efforts.

Revenue increase: One-year revenue increase (40 percent), one-year retained revenue (20 percent), three-year incremental revenue (25 percent), gross margin improvement (15 percent). With a strategy that calls for increasing the customer base by 20 percent in one year, the CRM company weights short-term revenue improvements higher than long-term. The integration project will give the company immediate access to its alliance partners’ customers.

Strategic: First mover/innovation/market defining (10 percent), fast follower (40 percent), brand enhancement (20 percent), builds awareness/upsell (30 percent). The CRM company is well-established but needs crossover into other established markets—thus, the high weighting to “fast follower” and “builds awareness/upsell.” Again, the integration project with another software company fits those priorities.

Legal/regulatory/security: Legal, regulatory requirements (20 percent), labor issues (10 percent), security and fraud prevention (40 percent), compliance with corporate policies (30 percent). Customer data security is critical to the CRM company.

To prevent subjective scoring of the parameters, simple templates should be developed with objective measures that determine the scores. For example, the CRM company could create a template for “one-year incremental revenue” that includes common values such as the percentage of increase in the customer base and incremental revenue increase per customer. A template for the “customer service expense” parameter could include “headcount reduction” or “call handle time reduction,” which can be plugged in to determine value to the project. This value can be translated to a score between 1 and 10. This will prevent managers with a higher political influence from inflating the scores on their projects.

Once all the projects are scored, they can be sorted to determine the projects that make the cut. This cutoff point can be based on total number of projects an organization can absorb, total investment funds available or other constraints that the company is operating under.

Manage the Model

Of course, all models work well on paper. No prioritization model is going to be completely accurate, and people will inevitably try to manipulate the results. To minimize the problems, you can take a number of basic steps. First, develop criteria to define what constitutes a project and enforce these guidelines so that projects are compared on equal footing. Having a clearly defined project scope and a project charter will be necessary first steps in enforcing these guidelines. Second, don’t score every project—for example, maintenance projects (such as database software upgrades) should not be subjected to strategic analysis. Finally, consider limiting the total number of projects a department can request within a given year so that the process is not flooded with requests. This limit has to be different for different departments based on business priorities. For example, because the CRM company is trying to grow its customer base through product enhancement, it will allocate more investment dollars (and thus a higher project request limit) to product development than it will to sales or marketing.

IT Moves with the Business

The most important benefit of the model is that it can shift with the fortunes and goals of the company—just as stock analysts adjust their investment portfolio priorities as the markets move up or down.

Even better, the strategic levers give CIOs the capability to prove the value of projects that may have relatively low ROI while lowering the priority of projects that may show high ROI but have little strategic value to the company. This broader analysis aligns IT strategy with business strategy and ensures that IT project prioritization isn’t just about projected cost savings.