Tuesday, June 16, 2009

IT Project Kill Switch

Waldo Moreira pointed me to the article How to Make Profit which brings an important lesson for IT and project decisions. The article is based on a decision made by the CEO of Rakspace Managed Hosting, Graham Weston, when he passed on a $20 million deal with Morgan Stanley. His decision was based on the fact that the deal was not profitable enough. To be more precise, it was 5% less than the original 15% profit margin for Rakspace.

The article explains that many companies lack the discipline of true profit or economic value added,
...Lots of big corporations don't make a true profit. That is equally true of small businesses, which can be so desperate to close deals early on that they neglect to really look at the numbers. As a result, line managers are clueless about the cost of capital and the returns — or the lack thereof — they are generating.

Jim Collins wrote in his master piece Good to Great how leaders "Confront the Brutal Facts". The great leaders had the following patterns: all of the them gather data before making a decission, then make excellent use of it, and finally use it to confront their decisions head-on. This is what Weston end up doing. After analyzing the venture with Morgan Stanley, he noticed that Rakspace was going to make 10% profit, 5% less than the original 15% profit margin. In his new book, How The Mighty Falls, Jim Collins talks about the five steps that companies take before failing. The second step is called "Undisciplined Pursued of More",
...More scale, more growth, more acclaim, more of whatever those in power seem as success...Although complacency and resistance to change remains dangers to any successful enterprise, overreaching better capture how the mighty falls.
There has to be some type of threshold that allows senior management to take the bold step and say "no" to specific projects. Senior management need to look beyond the numbers. In the HBR essay, The Truths About IT Cost, Susan Cramm writes about what drives up IT costs. She identified seven such truths. Perhaps the most interesting is "Project Failures are too High". Being an IT director, I'm faced with different "wish list" of projects from marketing, sales, and senior management. IT should not be the one to define whether or not a project should launch. As Cramm explains,
Managing these truth is tricky. IT can't do it alone, because simply saying no to business partners harms relationships with them.
Senior Manager should provide a threshold, a magic number, like the 15% of Weston and IT should raise the flag when a project is going down the wrong path. As Cramm says,
Establish a "kill switch" rules for projects.
If a project is out of the initial budget and has been modified twice and beta deployment still not occurred, KILL IT!

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