I like this example chart, featured in McKinsey’s recent quarterly newsletter, about how IT investments generate short and medium-term profitability improvements. It highlights, by business process, which types of technology investments can provide which types of returns. There’s an associated longer article that you can get through your free subscription to McKinsey’s newsletter. It talks about how IT shouldn’t be solely targeted for cost cuts, since IT can sometimes generate more value through smart investments that improve business profitability. Not a mind-shifting read, but it has a couple of good examples and may be a good article for CIOs to pass along to their business executive peers.

But back to the chart. I like how McKinsey has narrowed down types of IT investments that improve profitability to two: improving information and optimizing processes. That may not be the only way to slice it, but it works. What McKinsey doesn’t really talk about is how to make this practical. It strikes me as a perfect strategic addition to a standard application portfolio planning exercise.

We’ve done application portfolio planning in the past by mapping out the core business processes of each company and then reviewing how well applications support these business processes, as well as their technical health. That drives the highest priority investment decisions as well as the type of investment decision (e.g. rearchitect, replace, repurpose, renew). For example, if a key Customer Care application is generally supporting a business process and is holding up from a technical perspective, it should probably be renewed; if it is neither supporting the business process nor holding up from a technical perspective, it should probably be replaced. From a portfolio perspective, viewing the applications by processes helps uncover redundancies and gaps that should be addressed in individual decisions and the overall strategy. This is a very useful planning tool, but it could be enhanced with something like what McKinsey is recommending here.

Say we continue with the example of the Customer Care process. Perhaps there are a few different applications in use by the various call centers, but no central repository of customer information. This may be a process that could be made more efficient by consolidating and improving the applications, requiring fewer representatives to provide better support. It may also be a process that could be improved with better information, where customer care representatives could drive cross-sell or up-sell opportunities if they had the right information at their fingertips. So in the application portfolio assessment, this Customer Care would have its technologies individually and collectively, but also include a high level summary of the opportunities for value.

Any decent governance process ensures that investment decisions are based on expected benefits achieved, but I’ve seen few processes that use a framework like this to evaluate potential opportunities in a common language, which is great when prioritizing limited spend. This framework could improve portfolio planning. It would be even better if it highlighted the magnitude of the opportunity … but that’s for another day.