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Capabilities-driven IT Strategy

Customary practice to Capital Budgeting for satisfying needs of Information Technology development and support pursues a fragmented process and considers requests as stand-alone projects, each with its particular business justification.

The approach bases most of the capital allocation on historical expenditure patterns and financial projections.  It handicaps the underlying Enterprise Architecture making it inflexible and layered with unnecessary complexity.  The practice results in inferior outcomes with far greater expenditure.  It also increases the fixed costs of IT operations because of reluctance to retire legacy systems.

Conventional approach to Capital Budgeting for IT projects is too outdated and sluggish for today’s Digital Age, where technology has taken a more strategic role.

In the Digital Age, technology needs to be rapidly developed to support not only the operations of the organization, but also to directly support Corporate Strategy.  Thus, we need a faster, more agile approach to IT Strategy.

Capabilities-driven IT Strategy uses an approach where a comprehensive view to IT is adopted based on unique proficiencies of the company.  It shapes an organization-wide justification for Information Technology.  It also puts IT function and business unit together for developing the IT Strategy.  Capabilities-driven approach highlights the strategic worth of visionary IT leadership, particularly in assisting companies comprehend which strategies are most feasible.

The approach presses the company to base judgment on the manner in which the company creates value, on the investment required for distinguishing capabilities, and on the contribution that IT ought to make.  Capabilities-driven approach centers investment on limited distinctive capabilities that set the company apart.

Quite a few companies have employed such strategies, over a short period of time, and have attained a new kind of IT and operational leadership.

Capabilities-driven IT Strategy is achieved through a 4-phase approach:

  1. Determine our Distinctive Capabilities in Relation to IT.
  2. Prioritize our IT Project Portfolio.
  3. Develop Technology Roadmap of IT Investments and Activities.
  4. Develop Culture and Governance to Support IT Strategy.

The phases are sequential, where in each phase, a fundamental question regarding the role of IT in the organization is answered.

Let us probe some aspects of the phases a little more deeply.

Determine our Distinctive Capabilities in Relation to IT

The question answered in this phase is regarding Distinctive Capabilities of the company—capabilities that sustain the company’s strategic priorities and gives it a Competitive Advantage—and how Information Technology can play a part in improving them. 

Prioritize our IT Project Portfolio

The question answered in this phase is how should the IT projects that will enhance the distinctive capabilities identified in phase 1 be prioritized?

To do this, an IT investment portfolio matrix—based on Strategic Importance and Value Potential criteria—is used that places the IT investment in 1 of the following 4 categories:

  • Invest to Grow
  • Invest to Sustain
  • Invest to Refine
  • Invest to keep the lights on

Develop Technology Roadmap of IT Investments and Activities

The question answered in this phase is regarding the order of investment and activity that will permit the company to achieve the goals set and fill the gaps that need closing.

Develop Culture and Governance to Support IT Strategy

The issue to tackle in this phase pertains to the nature of Cultural and Governance support needed to put this IT strategy into practice.

Interested in learning complete details of Capabilities-driven IT Strategy and its phases?  You can download an editable PowerPoint on Capabilities-driven IT Strategy here on the Flevy documents marketplace.

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About Mark Bridges

Mark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.

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