Demand Shaping: Changing the Conversation About IT

In the digital economy, the number of ideas about how to use IT is exploding, but there is a limit to how many ideas organizations can fund and consume. As a result, IT investment committees must focus more than ever on identifying their company’s most important strategic initiatives, bypassing the “nice to have” in favor of the “absolutely must do.” In addition, projects must be completed in a timely manner, and change management efforts must wring out all the potential benefits. Few leaders dispute these objectives, but rarely does a leadership team feel confident that the company’s project portfolio will indeed optimize the opportunity to digitize the company for both near-term financial results and sustainable competitive advantage.

MIT CISR research has found that a growing number of companies are addressing the need for more valuable project portfolios through what we call "demand shaping."[foot]Contributors to this research included Karthic Kosgi of the MIT School of Engineering and the Sloan School of Management and Rajiv Kohli of The College of William & Mary.[/foot] Demand shaping is a process of ongoing negotiation and learning about a company’s most valuable and achievable business change opportunities through which leaders develop a prioritized list of IT-enabled business capabilities. In earlier research we identified six demand shaping tools.[foot]See J.W. Ross and C.M. Beath, “Demand Shaping: The IT Unit’s New Passion,” MIT CISR Research Briefing, Vol. XIV, No. 1, January 2014, https://cisr.mit.edu/blog/documents/2014/01/16/2014_0101_itsd_rossbeath.pdf/[/foot]

More recently we conducted three case studies, a dozen CIO interviews, and a survey of IT leaders at 195 companies to explore further how demand shaping might help companies succeed in the digital economy. In this briefing we share our results.[foot]For complete results, see B.H. Wixom, K. Kosgi, J.W. Ross, and C.M. Beath, “The IT Unit of the Future: Novel Approaches to Delivering Value to the Enterprise,” MIT Sloan CISR Working Paper No. 397, October 2014, https://cisr.mit.edu/blog/documents/2014/10/16/mit_cisr_wp397_demandshapingsurvey.pdf/[/foot]

The Myth of the IT Steering Committee 

For many years, CIOs have been pressing senior leaders to participate on IT steering committees to enhance decision making on the IT portfolio. They assumed that engaging the right people in IT investment decision making would lead to better decisions. But our research found that any positive effect of a steering committee on IT portfolio quality is overwhelmed by two other factors: senior executive understanding of IT and maturity of demand shaping practices.

We measured senior executive understanding as the percentage of senior executives who could describe (1) the IT investment process, (2) the key milestones in project methodology, (3) realistic expectations for their company’s IT spend, (4) change management requirements of individual IT projects, and (5) what new technology can and cannot do. Demand shaping practices include (1) cost transparency, (2) roadmapping, (3) business relationship management, (4) agile methodologies, (5) post-implementation value assessments, and (6) strategic program management. These two factors, combined with a broad definition of IT governance that includes decisions about which data and processes will be standardized and how the company will fund IT infrastructure, account for two-thirds of the variance in the quality of companies’ IT portfolios. 

And IT portfolio quality matters! Our analysis found that IT portfolio quality is related to executive perceptions of financial performance. For the 106 companies in our sample with publicly available financial results, perceived performance was correlated with actual industry-adjusted profitability. As summarized in figure 1, our research suggests that executive IT understanding, demand shaping practices, and IT governance processes create a virtuous learning cycle that leads to consistent improvements in the IT portfolio, and ultimately, improved financial performance.[foot]The survey research confirms relationships among the three factors listed here and between those factors and IT portfolio quality. The survey research cannot confirm causality as proposed in this briefing. However, MIT CISR has conducted five case studies and interviews with twenty-six IT leaders that support the causal relationships discussed here.[/foot]

Changing the Conversation about IT 

Governance and demand shaping contribute to executive IT understanding by fostering productive conversations about IT across the organization. Over the years, governance processes have increasingly engaged the right people (i.e., leaders who can fund projects and authorize change) in IT decision making. Discussions leading up to those decisions have increased executive understanding about IT. In turn, these better equipped leaders are designing better and more effective governance processes. But improvements to portfolio quality have been slow to materialize. This is why demand shaping is so important. Demand shaping practices force constant dialogue between IT and business leaders—about how the business will succeed, what capabilities are needed, what changes are possible, what can and should be shared—and in the process they accelerate organizational learning, which in turn improves the IT portfolio.

Demand shaping practices fundamentally change the things executives discuss among themselves and with IT staff. Each practice impacts the conversation in its own unique way:

• Cost transparency enlarges discussions from “How much does a project cost?” to “What is the lifetime cost of developing and leveraging a new capability?” 
• On the flip side of the cost question, post-implementation value assessments encourage executives to ask, “Did this project achieve its business case and can we generate more value from the new applications?” instead of the more typical question, “Why was this project late and over budget?” 
• Business relationship managers (BRMs) stop asking, “What projects do you want?” and instead ask, “What capabilities does our enterprise need to meet the customer’s desires?” 
• Roadmapping helps communicate beyond “What capabilities do we need?” to help executives grasp, “What business changes are we ready to absorb?” and “How do we most effectively sequence adoption of those changes?” 
• Strategic program management packages projects into strategic initiatives, thereby shifting discussions from “When will this project be delivered?” to “Should this project be accelerated or cancelled?” 
• For each strategic initiative, agile development elevates the discussion from “What are the requirements of our business change project?” to “Will this solution meet our requirements?” and “What requirements can be surrendered to accelerate delivery?” 

Fidelity Investments’ Asset Management business offers a good example of how demand shaping can change the conversation about IT.

Changing the Conversation at Fidelity Investments Asset Management[foot]In a video interview, “Demand Shaping at Fidelity Investments Asset Management,” chief technology officer Mihir Shah details the application of demand shaping practices at his organization.[/foot]

By the time the financial crisis hit in 2008, Fidelity was already attempting to address both a firm-wide mandate to reduce IT costs by $1 billion and the need for greater integration across product lines to meet changing customer demands.[foot]See A. Quaadgras, J.W. Ross, and C.M. Beath, “Fidelity Investments: Investing in IT for Greater Strategic Impact,” MIT Sloan CISR Working Paper No. 395, March 2001, https://cisr.mit.edu/blog/documents/2014/03/19/mit_cisr_wp395_fidelity_quaadgrasrossbeath.pdf/[/foot] Management was particularly concerned about how long it took to deliver on those demands: 

We need to continually improve our time to market. Is it bad compared to others? Probably not, but that shouldn’t matter. It needs to get better for us to remain competitive in the marketplace.

Howard Galligan, Chief Administrative Officer

Against this backdrop, business leaders were asking questions like, “Why does it take so long to introduce new capabilities?” and “Why are ‘baseline costs’ (mostly maintenance and operations costs) overtaking ‘discretionary costs’ (new projects)?” 

Despite these concerns, LOBs were submitting long wish lists of local projects. So IT leaders in Asset Management started applying demand shaping practices to change the conversation. First, the architecture team designed a high-level blueprint for shared capabilities within Asset Management—most notably a common data environment and shared development platform. An accompanying roadmap sequenced the introduction of shared infrastructure capabilities and the elimination of redundant systems (and non-value adding costs). Executive management quickly bought into the value proposition that the roadmap offered. 

IT then appointed strategic program managers, called product leaders, to take responsibility for horizontal functions like research, trading, and portfolio management. Product leaders worked with LOB leaders to identify and roadmap common requirements for these functions (products) across Asset Management's six lines of business, which include Equity, Institutional Money Management, and Money Markets. This was not an easy conversation for business leaders who were accustomed to specifying and funding their individual preferences for such activities. 

IT also initiated a value tracking process—to help business leaders learn where adoption of new systems was lagging and thus where value was not meeting targets—and automated the collection of adoption and usage metrics for all new applications. Value tracking data raised helpful questions about proposed new systems: 

Should we be building that next thing, or should we be educating both the technology staff and the business staff around “that’s actually a capability we already have, how about we use this?” In some cases they say, “I didn’t even know that existed.” 

Jon Jamen, Head of Money Market Investment 

IT also appointed business advisor leads (i.e., BRMs), high-level IT executives who worked all year long to make sure that business leaders understood the impact of their IT investment decisions in a holistic, integrated way and that they were engaged in development of their roadmaps. Meanwhile, adoption of agile methodologies enhanced learning about essential requirements for individual projects as systems were developed. 

Complementing demand shaping efforts, senior managers created two new governance bodies. The Executive Committee (EC) took on responsibility for approving IT projects, authorizing key cross-business initiatives, and setting total IT funding levels—previously set within each business unit— across Asset Management. The Operating Committee (OC), which consisted of the EC plus the functional heads, provided oversight for major IT initiatives. Members of the committee appreciated how better understanding of IT contributed to a more strategic IT portfolio: 

By providing the business better, more complete information, they can make the proper tradeoffs with their technology spend.

Howard Galligan, Chief Administrative Officer 

Both business and IT leaders are proud of their new, shared capabilities and the higher quality of the IT portfolio. Like other companies we’ve studied, however, Asset Management leaders recognize that they still have much to learn: 

I can see the number of applications that are out of compliance going down. I can see middleware being reused. I can see fewer databases. I can believe we are provisioning things faster. I've got to believe that eventually translates into better time to market, lower cost. But I can’t quantify it. 

Bill Dailey, Chief Financial Officer 

Persistent Conversations Are Essential 

Ultimately, the virtuous cycle of executive understanding, IT governance, and demand shaping processes depends on very different conversations than executives once had about IT. These conversations are moving from discussions to negotiations, with fewer complaints and more inquiries, less focused on short-term solutions than long-term capabilities. Most importantly, they are more persistent. The IT portfolio decision-making process is a perpetual, not an annual, affair.