Communications of the ACM

One way to change this counterproductive reality is to apply the strategic-gating process that results in a portfolio of software-development projects that maximizes value for the organization. 5 Counterintuitively, the portfolio leading to maximum value in many cases consists of only a small number of projects. The strategic-gating process consists of evaluation and selection that prioritizes IT requests according to their expected contribution to value creation relative to their IT resources requirement. It also ensures requests are well in line with the company’s strategy and plans for growth.

The strategic-gating process is done annually or (preferably) quarterly. The requesting division provides for each software-solution request a value-creation estimate backed by a business plan, while IT experts provide a rough-cut estimate of their total cost of ownership, or TCO. Software solutions required by regulations are given an infinite value since they are mandatory.

It is advisable to exclude very small software solutions and change requests (CRs) from the strategic-gating process and put aside 15%–25% of the overall IT budget, allocating it among the various divisions. A high proportion of effort/budget dedicated to CRs usually increases internal users’ satisfaction, while a large proportion of resources devoted to large- and mid-size software solutions contributes more to the organization’s overall value. Determining the desired balance is a strategic decision.

Selecting software solutions can be done through the following procedure:

˲ Software solutions are listed and tagged with value-creation and TCO estimates (see Table 1); 11

˲ Software solutions are mapped in a focusing matrix according to their value creation and TCO (see Figure 2); 11

˲Candidates for incorporation in the realization portfolio are selected mainly from the upper-right-hand quadrant of the matrix (highest value, lowest cost); and

˲ Selection continues until the available TCO budget for the relevant period is exhausted.

Value creation is also the appro-
priate criterion for approval of scope
changes during delivery of software
solutions. There is a spectrum of po-
tential scope changes, from small
modifications of features to substan-
tial scope change or even a project
swap. A scope change is justifiable if
the result creates positive net value—
the estimated increase in value cre-
ation of the software solution due to
scope-change minus the cost of scope-
change realization minus the cost of
project disruption minus the cost of
possible delay in delivery.

Strategic-Gating Process

To demonstrate the numerical and graphical strategic-gating mechanism, consider an example in which seven software solutions are proposed by various corporate divisions for the strategic-gating process. The solutions’ total estimated TCO budget is $188 million. Selection is required since the approved TCO budget for the forthcoming year is limited to

$110 million; Table 1 lists the soft-
ware solutions that are then mapped
in a focusing-matrix according to their
value creation and ease of realization,
as in Figure 2. The most valuable soft-
ware solutions reside mainly in the
top-right-hand quadrant of the fo-
cusing matrix. Software solutions are
picked by top corporate management
with the aid of the matrix up to the to-
tal TCO limit of $110 million. In this
strategic-gating process, corporate
management picked software solu-
tions A, C, D, F, and G as the realiza-
tion portfolio.

Selecting software solutions for inclusion in the realization portfolio can also be achieved by ranking the software solutions according to their specific contribution, or ratio between the value of the software solutions and their TCO. 11 However, the focusing matrix allows management to adjust the portfolio according to strategic considerations and account for intangible aspects of the business and the market.

Table 1. Software solutions selection through the focusing table.

Software Solution Value ($ millions) Ease = TCO ($ millions) A Customer relationship management 550 45

B Asset management 45 29 C Bills transparency Regulation 10 D Call-centers knowledgebase 170 15 E Human resources 25 55 F Business intelligence upgrade 145 25 G Campaign management upgrade 55 9