Measuring Legal Exposure Reply

Mind the gapThe function of a contract is to cover legal exposure.  It does not, by and large, govern the relations between parties.  Those are already established by the community and contracts merely document well established facts.  The way the parties will behave will already be a an established reflection of their education, training and previous business experience.  It is naïve to think, for instance, that a contract will be used by engineers to help manage the construction of a building.  On the contrary, the contract will present a myriad of hurdles, obstacles, impasse and problems as the workers try to get on and do their job – build.  It is a truism to say then that almost all litigation is a function of poor contract management rather than poor contract design.  Indeed, I have never met a client who had either fully read OR fully understood the contracts they were in.

A contract, rather, seeks to cover the inevitable areas of risk when two parties necessarily compromise to enter into an agreement. as my father used to say, ‘there are two parties to a contract – the screwor and the screwee.  One party is always disadvantaged.  The lesser party needs to cover their legal exposure and the greater party needs to ensure that not so much risk flows down that the lesser party is overloaded with risk, making the contract unworkable. Picture1Legal exposure is derived from financial risk.  Contracts will generally cover most financial exposure.  However, in Westminster-based systems much of the law of contract is still based in Equity.  Usually, there is still some degree of exposure that remains.  A party can only be forced to  indemnify so much; can only warrant so much and not beyond the reality of the arrangement.legal exposure

Most contracts, however, do not measure the legal exposure a party faces.  Most contracts stick with the standard blanket coverage formula, i.e. zero exposure.  This approach is unhelpful and in many cases counter-productive, because namely:

  • Phantom Exposure.  contract negotiations become unnecessarily bogged down over non-existent risk.  Arguing for 100% coverage when the risk is well covered already is just chasing phantom risk.
  • Lazy.  Quite frankly, the body of knowledge which exists in each sector, the sophistication of clients and the modern quantitative tools which exist to make contracting easier give no excuse for legal laziness.

Measuring legal exposure is both qualitative and quantitative.  Firstly, deriving financial risk is a mathematical function.  Secondly, as exposure is derived from the limitations of contractual coverage then legal exposure is a function of qualitative assessments.

My own method uses a threefold approach, namely:

  1. sensitivity analysis to measure financial risk, and then
  2. three separate qualitative measurements to define whether an element is a legal risk, then
  3. a legal assessment to determine if the remaining elements are covered (i.e. measure the exposure) and to what degree.

All of this is done as a collaborative process around a single bubble chart (shown below).  As is shown in the chart,

  • the bubble size (Z ‘axis’) relates directly to the mathematical analysis of financial sensitivity.
  • the X-axis is a qualitative scoring designed to assess the relative complexity of each item of volatility.
  • the Y-Axis is another qualitative scoring to determine just how close the item is to the project team, i.e. can they actually do something about it?  The less a team can influence a risk the more such risk needs to be pushed upwards so that the corporate functions of a business (Legal, Finance) can act upon it with centralised authority,
  • the colouring, lastly, deals with the notion of immediacy, i.e. prioritisation.

In this way, if a risk is both very complex and not able to be influenced by the project team (i.e. cannot be mitigated) then it, most likely, needs to be dealt with by the Legal function as there will be no way to otherwise influence it when the risk is realised.

Risk-Based Bubble Chart to engender cross-functional collaboration

Once legal risk is conceptually isolated in the upper-right quadrant of the bubble chart then lawyers may make a qualitative determination as to the amount of legal exposure.  For instance, a builder may warrant the quality of workmanship on a specific structure and cover it with insurance.  Legal may determine that there is virtually no statistical evidence that such risk is likely to be realised.  Therefore, the existing premiums easily cover the risk highlighted in the chart.

Alternately, the chart may have defined financial risk beyond, say, the indemnities provided by a firm’s subcontractors.  In such a case insurance or contractual renegotiation may be necessary.  It is important to know that in such circumstances it is precisely targeted cross-functional management energy that is being expended to determine, define and collaboratively deal with specific  financial risks.  Indeed, there is little more any business could hope for.

Qld Govt On Track to lose Billions Through Poor Outsourcing Reply

In a recent article in online technology ezine Delimiter – “Qld Health Preps Huge IT Outsourcing Deals” – Renai LeMay points out that the Qld government will need to spend an unadjusted $7.4 billion over the next 5 years in order to replace and upgrade 90% of its outdated ICT portfolio.

The question is whether it has learnt from the Qld Health outsourcing debacle with IBM and will it move forward with its best foot?  It is unlikely, given that HSIA seems thrust into the contracting process too early with too little.  With the pace seemed to be set by the Costello audit, the HSIA is now engaging in early vendor ‘discussions’ (IBM notably excluded) without even a detailed set of business requirements, system parameters and financial boundaries.

In letting vendors shape the early development of these outsourcing contracts the government is on track to lose billions.  This will happen for 3 primary reasons:

  1. Service Management will be overlooked – The failure of virtually all contracts is not in the structure but the management.  Although most experienced litigators have gasped at contracts (usually government) which seemed to have been designed to fail (largely due to something bordering on corruption or undue influence), most are not so designed.  Outsourcing contracts, more than any other, require detailed attention to the management of the service.  Ultimately, the difficulty lies in the paradigm shift from network support to service management.  In other words, the personnel in charge of servicing are now in charge of service management.  In most cases, these jobs are made redundant as the vendor takes them over (unlike TUPE laws in the UK).  Consequently, the knowledge is lost.  Purchasors can protect themselves against service decline by making the vendor buy key personnel.  Better yet, Purchasors should transition these key roles from performing the work to managing the service/contract.
  2. Deals will be too long – Vendors will push longer outsourcing contract lifecycles.  Although, prima facie, there is  nothing long with a long contract it is imperative that such contracts are designed to be managed, i.e. the focus is on the delivery and management Schedules and not the boilerplate of the Operational clauses.
  3. Tech bundles will lack modularity – Qld government loves to re-organise.  After each government their is always a paradigm shift in the Machinery of Government (MOG).  Departments shift and with them so do budgets and internal processes.  These are generally managed within departmental parameters with necessary roles and functions often going unfunded and unfilled for entire cycles of  government.  To reinforce Renai LeMay’s point, it goes without saying, therefore, that the government needs to develop a modular, multi-bundle architecture wherein departments can buy and sell service credits between themselves without limiting the overall strategic cost savings.

In summ, there are numerous ways in which Qld government can guard against the inevitability of cost overruns and poor, overly simplistic outsourcing contracts.  On the other hand, the vendor which offers these first will have a significant advantage.  in many cases, the difficulty will be in convincing QGCPO that novel and innovative contracting vehicles are there for the benefit of the Purchasor and not just vendor voodoo. 

Benefits-Led Contracting: no immediate future for outcome based agreements Reply

The IACCM rightly points out that key supplier relationships underpinned by robust and comprehensible contracts are essential to the implementation of significant strategic change.  Their research identifies a 9.2% impact on bottom line from contract weakness.  Top 5 causes being:

  •      Disagreement over contract scope,
  •      Weaknesses in contract change management,
  •      Performance failures due to over commitment,
  •      Performance issues due to disagreement over what was committed,
  •      Inappropriate contract structures or responsibilities.

Two things are given in this mess:  (i) Firstly, that contractual structures are weak and inappropriate to deal with high levels of operational complexity and technical risk, and (ii) secondly, that legal means of enforcement are cumbersome, expensive and ineffective.

That business is ready to solve this legal problem by contracting for outcomes is (a) nonsense and (b) missing the point.  Business is already dealing with the operational and technical risk of large and complex contracts.  Business is already structuring many of its agreements to deal with outcomes.  Large prime contracts,  alliance contracts and performance-based contracts are already commonplace in PFI/PPP and Defence sector deals.  That neither are wholly efficient or effective is for another time.  It is, however, for the legal community to devise more sophisticated ways of contracting in order to solve their side of the problem.

Picture1

PEOPLE ARE THE KEY

The primary reason for not being able to contract for outcomes is that the vendor doesn’t own the people.  This is critical because without the ability to control and intervene in the delivery of work the risk increases exponentially.  Consequently, the risk premium paid for outcome-based contracts will either make them (a) prohibitively expensive, or (b) impossible to perform (within parameters).  So, a business which offers you an outcome-based contract is either having you on or just about to charge you the earth.

 

 

Sometimes the best defense is deletion – CSO Online – Security and Risk Reply

Sometimes the best defense is deletion – CSO Online – Security and Risk.

data mining. big dataThe point is prescient.  In these early days of Big Data awareness the battle between information management v. store now/analyse later can obfuscate other issues:  Cost and Necessity.

ONE BIG POT

Is there really the practical technology that an organisation can actually move away from structured databases and just stick all its information into one big ‘pot’, to be mined for gold nuggets at a later date?

Storing information (as opposed to just letting stuff pile up) is a costly business and the decision to store information usually comes from people on higher pay bands.  The decision of where to locate is often a manual decision which not only has a significant management overhead of its own but also involves co-ordination from other high pay bands.

THE COMPLEXITY OF INFORMATION

Picture1

Add to this dilemma the complexities of  ‘legal hold’ on material and the identification of ‘discoverable’ items.  Suddenly information management looks a lot harder and the siren song of Big Data seems a lot more alluring.  The problem is that information that is not valuable to some is valuable to others.  Who is qualified to make that decision?  Should all information be held given that it will likely have some enterprise value?  The battle is between cost and necessity:

  1. Cost:  Deciding what to keep and what to get rid of takes management time and effort that costs money.  The problem is that it is neither cost effective nor good policy to to push hold/delete decision making down to the lowest clerical level. The secret is to have those decisions made by more senior case-workers but only within their limited remit.
  2. Necessity:  The secret is to categorise management information to determine necessity.  Use a workflow to cascade and delegate (not to avoid) work.  As it moves it accumulates metadata.  No metadata means no necessity and therefore it should be disposed of automatically (eschewing arguments of regulatory compliance).

THE ANSWER

The answer is to automate the deletion of information (other than ‘Legal Hold’).  Once a document/question has reached the end of the workflow without accumulating any metadata then the information should be disposed of automatically.  Case-Workers make the decisions to act on the document/question and metadata is attached by more clerical staff (on lower pay bands) as the item moves through the workflow.  If no metadata is attached it can be assumed that the item is not important and is therefore disposed of.  Cost is minimised by letting case-workers make decisions of relevance within their own sphere of expertise without the additional management overhead for de-confliction/meetings etc.   In this way, the enterprise makes a collective decision of importance and stores the information accordingly thus answering the issue of necessity.

Improving Contract Management: manage the deal not the database 1

The guys at Selectica have some great points but to make expensive enterprise software work it’s important to work a system and not to work the software:

  1. Don’t try and put all your contractual information in one single database at once.  Not only do individuals have different ways and systems (what I call the e-Hub of someone’s daily life) from which they manage their data they may also run into legal issues around probity and confidentiality (by cross-contaminating case management with archival material).  Businesses do not need to invest in costly customisation but do need to strike a financial balance between customisation and counter-intuitive vendor processes.  One neat tool is to create  a visual model of the deal (its structures, functions and concepts) and provide hyperlinks to the various file systems.  This removes the need to develop a common taxonomy as workers now have a visual reference point (rather than a word) for their own understanding.
  2. With process automation it is critical to ensure that the business doesn’t  codefy its culture.  This will only calcify bottlenecks.  A firm needs to make sure that it re-engineers its CLM process before it creates a workflow from it.  Remove non-tasks and automate simple clerical work and approvals.
  3. The business also needs to make sure that experts are not only notified but they are also edified  and contextualised.  When pushing workflows out to experts, such as in-house counsel, outside counsel etc then these people must have a clear view of the dependent components of the deal’s architecture.  Businesses can speed this process and reduce its costs by linking their own systems to online legal databases such as Thomson Reuters (Westlaw AU, FirstPoint), Lexis Nexis or CCH.

In summ, good contract management needs a highly cross-functional and multi-disciplinary approach if it is not only to be successful but also if it isn’t going to add additional cost and friction to business operations.  Enterprise products such as Selectica’s are a great start but customers must be careful to make sure that the software supports their own system otherwise they will spend all their money and time working the software.

Building a Risk Culture is a Waste of Time 3

The focus of a good risk management practice is the building of a high-performance operational culture which is baked-in to the business.  Efforts to develop risk cultures cultures only serve to increase risk aversion in senior executives and calcify adversarial governance measures which decrease overall profitability.  The right approach to risk management is a comprehensive, holistic risk management framework which integrates tightly with the business.

risk management. waste of timeThe financial crisis is largely due to the the failure of risk management and over-exposure in leading risk-based institutions.  More specifically, the failure of risk management is linked to:

  • The failure to link link risk to investment/project approval decision making.  The aim of risk management is not to create really big risk registers.  Although, in many organisations one could be forgiven for thinking that this is the goal.  The aim of identifying risks is to calibrate them with the financial models and program plans of the projects so that risks can be comprehensively assessed within the value of the investment.  Once their financial value is quantified and their inputs and dependencies are mapped – and only then – can realistic and practical contingency planning be implemented for accurate risk management.
  • The failure to identify risks accurately and comprehensively.  Most risk toolsets and risk registers reveal a higgledy-piggledy mess of risks mixed up in a range from the strategic down to the technical.  Risks are identified differently at each level (strategic, financial, operational, technical).  Technical and Operational risks are best identified by overlapping processes of technical experts and parametric systems/discrete event simulation.  Financial risks are best identified by sensitivity analysis and stochastic simulation but strategic risks will largely focus on brand and competitor risks.  Risk identification is the most critical but most overlooked aspect of risk management.
  • The failure to use current risk toolsets in a meaningful way.  The software market is flooded with excellent risk modelling and management tools.  Risk management programs, however, are usually implemented by vendors with a “build it and they will come” mentality.  Risk management benefits investment appraisal at Board and C-Suite level and it cannot be expected to percolate from the bottom up.

RISK MANAGEMENT IS COUNTER-INTUITIVE

All this does not mean that risk management is a waste of time but rather it is counter-intuitive to the business.  It is almost impossible to ask most executives to push profits to the limit if their focus is on conservatism.  Building a culture of risk management is fraught with danger.  The result is usually a culture of risk aversion, conservatism and a heavy and burdensome governance framework that only adds friction to the business lifecycle and investment/project approval process.  Executives, unable to navigate the labyrinthine technicalities of such a systems achieve approvals for their pet programs by political means.  More so, projects that are obviously important to the business actually receive less risk attention than small projects.  Employees learn to  dismiss risk management and lose trust in senior management.

If risk management is to be an effective and value-adding component it must be a baked into the business as part of the project/investment design phase.  If not, then risk management processes  just build another silo within the business.  The key is to forget about “Risk” as the aim.  The goal must be a performance culture with an active and dynamic governance system which acts as a failsafe.  The threat of censure is the best risk incentive.

risk management. immature disciplineAWARENESS IS NOT MANAGEMENT

risk management. immature disciplineManagement has long been aware of risk but this does not always translate into true understanding of the risk implications of business decisions.  Risk policies and practices are often viewed as being parallel to business and not complimentary to it.

Why is it that most businesses rate themselves high on risk management behaviours?  This is largely because businesses do not correlate the failure of projects with the failure of risk and assurance processes. 

In a 2009 McKinsey & Co survey (published in June 2012 “Driving Value from Post-Crisis Operational Risk Management”) it was clear that risk management was seen as adding little value to the business.  Responses were collected from the financial services industry – an industry seen as the high-water mark for quantitative risk management. 

COLLABORATION IS THE KEY

Risk management needs to become a collaborative process which is tightly integrated with the business.  The key is to incentivise operational managers to make calculated risks.  As a rule of thumb there are 4 key measures to integrate risk management into the business:

  1. Red Teams.  Despite writing about collaboration the unique specialities of risk management often requires senior executives to polarise the business.  It is often easier to incentivise operational managers to maximise risks and check them by using Red Teams to minimise risks.  Where Red Teams are not cost effective then a dynamic assurance team (potentially coming from the PMO) will suffice.  Effective risk management requires different skills and backgrounds.  Using quantitative and qualitative risk management practices together requires a multi-disciplinary team of experts to suck out all the risks and calibrate them within the financial models and program schedules in order that investment committees can make sensible appraisals. 
  2. Contingency Planning.  Operational risk management should usually just boil down to good contingency planning.  Due to the unique skill sets in risk management, operational teams should largely focus on contingency planning and leave the financial calibration up to the assurance/Red teams to sweep up.
  3. Build Transparency through Common Artefacts.  The most fundamental element of a comprehensive  risk process is a lingua franca of risk  – and that language is finance.  All risk management tools need to percolate up into a financial model of a project.  This is so that the decision making process is based on a comprehensive assessment and when it comes to optimise the program the various risky components can be traced and unpicked.
  4. Deeper Assurance by the PMO.  The PMO needs to get involved in the ongoing identification of risk.  Executives try and game the governance system and the assurance team simply does not have the capacity for 100% audit and assurance.  The PMO is by far the best structure to assist in quantitative and qualitative risk identification because it already has oversight of 100% of projects and their financial controls.

Traditional risk management practices only provide broad oversight. With the added cost pressures that businesses now feel it is impossible to create large risk teams funded by a fat overhead. The future of risk management is not for companies to waste money by investing in costly and ineffective risk-culture programs.  Good risk management can only be developed by tightly integrating it with a GRC framework that actively and dynamically supports better operational performance.

ALIGNMENT: Building a Closer Relationship Between Business and IT Reply

alignment. team workjpgThe business gurus Kaplan and Norton describe “Alignment” as a state where all the units of an organisational structure are brought to bear to execute corporate strategy in unison.  When Alignment is executed well it is a huge source of economic value.  When it is executed badly it is a colossal source of friction which can cripple the business.  The authors go on to note:

Alignment

IT DOESN’T NEED ALIGNMENT, IT NEEDS BETTER UNDERSTANDING

IT and the Business speak of alignment in two radically different ways.  The Business talks about alignment between business units.  When speaking of tech they use words and phrases such as ROI and operational performance.  IT talks about alignment in a way that makes them feel as though they matter to the business.  That profitable, customer facing business units could achieve more if the corporate centre where to align business units under a single, cohesive strategy is one thing.  That IT depts fail to execute strategy or even deliver operational effectiveness through poor understanding of requirements, an inability to see the technical reality of commercial value or realise some of the social cohesion which enterprise software systems need is not mis-alignment – it is just bad practice.

THE RELATIONSHIP BETWEEN THE BUSINESS AND ICT IS DIVERGING

The increasing capabilities of a smarter, more mobile , more virtual workforce means a greater commoditisation of knowledge work.  With this comes the polarisation of Business and ICT.   A broader ICT function with a wider array of narrower and deeper areas of expertise will, increasingly, be incapable of coding the more subtle and complex social aspects of human collaborations.  In such a world the ICT agenda must be set by the corporate centre.

mis-alignment

ICT NEEDS TO FOCUS ON EXECUTION NOT ALIGNMENT

ICT’s economic value will be realised when it (and therefore Enterprise Architects) can support business units to reach across each other to create valuable products and services which justify the corporate overhead.  McKinsey & Co, for instance focus heavily on central knowledge management.  This enables research to drive service line improvement in relevant sectors.  IBM spends over 3 Bn GBP on R&D and the development of leading-edge products way beyond their years.  ICT needs to focus on the execution of corporate strategy and not alignment. Alignment is a structural issue whereas execution is a functional issue.  Stop tinkering with the structures and focus on the functions/operations.

GOVERNANCE – ALIGNMENT AT A PRICE

Moves to improve the business relevance of ICT usually result in heavier, more burdensome technical governance.  The finance function imposes capital project controls on technology projects and insists that benefits be quantified.  Although greater cost transparency will bring IT closer to the Business, heavier ICT governance only serves to drive ICT investment underground.  Pet-projects abound, useless apps proliferate and ICT costs continue to rise.  In the meantime, in a perverse inverse relationship, assurance becomes even lighter on larger programs. 

Alignment takes strong leadership and clear definitions of business intent.  A fancy set of IT tools are not necessary for alignment rather they are important when it comes to agilityMis-alignment is the fault of deep rooted cultural divisions which can only be overcome through the strict adherence to financial value and the use of a lingua franca engendered through a common architectural framework.   If ICT is to realise its potential and add real financial value then it must actively support the real-time execution of business operations.

Enterprise Architecture:why EA programs fail to deliver Reply

Enterprise architecture has long promised the alignment of the technical ICT of the organisation with its business strategy.  For the same length of time it has steadfastly failed to deliver this.  In order for enterprise architecture to (a) deliver alignment, and (b) execute strategy it must incorporate commercial concepts within the metamodel so that it may directly use both financial analysis as well as legal parameters.

Enterprise architecture has never been solely about infrastructure.  Enterprise capacity can easily be catered for in data centre management.  Enterprise architecture has been largely focused on enterprise applications integration.  Integrating data models and their schema across the distributed enterprise to create harmonious workflows for the fewest people promises to realise the goal of reducing labour whilst purchasing the cheapest software.  Enterprise architecture should be about driving the development of ICT architectures and business process directly from the value chain.

Enterprise architecture still provides businesses and departments with the greatest hope for the harmonious analysis and development of the enterprise.  It fails largely, however, for the following reasons:

  1. Complexity of Metamodel.  Financial language is not generally incorporated in the language of metamodels.  It is possible but not generally done.  When I was at EDS Value Management was an architectural discipline within the Agile RightStep® architectural framework.  Whilst at Serco a number of us tried to incorporate value against the various objects in architectural models withing the MEGA® modelling suite.  However, in order to take advantage of financials modelling tools would need to incorporate stochastic simulations and not just discrete event simulation into their analytical capabilities.  This explains the disparity, often large, between architectural models and financial models.
  2. Systems Engineering.  EA still remains largely focused on enterprise systems engineering.  It needs to shift its focus to enterprise engineering systems.  Where the former focuses on the minutiae of systems interaction the latter is concerned with the integration of one engineering system to another.  If the enterprise sees the financial function as an engineering system then enterprise architects should be able to use their ontological skills in metamodelling to create seamless pull-through of analysis from Finance to Design.  Some of these concepts will be explored in a later blog.
  3. Complexity of Programs.  EA still remains an ICT skill used to support large programs.  In order to capture enterprise relevance it needs to elevate itself from the technically complicated to the organisationally complex.  Given that information systems largely exist to reduce organisational entropy, one of EA’s greatest benefits will be to realise the harmonisation of working practices and not merely implementing monolithic technology.
  4. Lack of Financial Relevance.  EA needs to support value management and not just technology management.  This is as much a problem of program selection as it is the extension of the metamodel.  Automating the Balanced Scorecard  still remains one of the best initial EA programs there is.  It is relevant to both the C-suite as well as providing a direct and tangible impact on the measurement of strategy execution and financial management.

The answer, therefore, is to focus on capabilities and not on architectures.    The former delivers measurable commercial value but the latter will consume the enterprise in a needless pursuit of perfection.  In our next blog we will examine how to architect capability directly from the value chain.

How will enterprise Architecture Reduce Legal Costs? Reply

In mid 2009 I received an e-mail from Mark Hurd, then CEO of Hewlett Packard.  This wasn’t unusual because I was at EDS UK and we all got an e-mail from our new CEO.  He wanted to explain that over and above the 26,000 people he was already getting rid of in the new enterprise there would be further reductions.

Why?

He went on to write that earnings were down 20% so his investors wanted to know when he was getting rid of another 20% of his workforce.  He went on to add that he was resisting their advice as it would hurt us on the rebound.

Clever Mark.

The point of the story is how one determines, precisely and effectively, what are the right parts of your cost structures are the ones to get rid of?  Typical commercial reasoning suggests that the best cost structures to cut are: headcounts, marketing, training, procurement and travel.  These are the easiest but you don’t have to be Lou Gerstner to realise that you shouldn’t cut marketing or travel in a downturn.  Pick up any edition of HBR and you’ll know that you need to focus on core business and cut the rest.

So how do we find core business and what on earth does it have to do with my legal costs?

Have you ever done a push-up?  What muscles do you think are used? Chest? Yep. Triceps? Oh yeah.  What about anterior deltoid? What about the supraspinatus or the infraspinatus or the teres minor? What about the teres major and the suprascapularis? These are all synergistic muscles in the push up that help hold your shoulder girdle stable and stop you toppling over to one side.  Likewise with business.  There are an enormous number of synergistic activities which assist core processes.

Don’t worry we’re getting to the bit about legal costs.

Your core business will be the fundamental raison d’être of your company.  For instance.  You might think that you own a network outsourcing company but when you ask yourself why your company really exists and what it seeks to really achieve, you might find the answer being that it transforms the customer relations of client companies? Now you need to determine what are all the essential processes which support transformation (which we’ll look at another time)After that one must discover the dependent, people, information, systems and infrastructure for these processes.

That’s the easy bit.

Now you need to architect it into some form of commercial reality and make it happen.  Once this beautiful strategy is executed in a new and improved operating model you will be left with a pile of paper which enshrines the agreements you have made with partners to make this reality.  Contracts – and they don’t come cheap.

Did you notice a theme?  I talked thereabove about the seamless architectural process which blends to bring synergy to the design and form of your new business.  The realistic amongst us will know there is always a great crash as the momentum behind any deal brings it into contact with the immovable object of the law.  The beautiful deal we created is then mangled through lawyers until what we wanted is barely recognisable.

What if this horrid legal process was an integrated part of the architectural process?  What if our business architects, our technicians and deal-makers were all joined in a common, collaborative architectural process which derived legal clauses directly from the technical and commercial detail of the deal?  Wouldn’t the contract then become a dynamic and fluid document which formed part of the management of the program?  Wouldn’t the contract(s) be lean, precise and swift to negotiate and put in play?

Welcome to Citadel, where enterprise architecture meets the law.

Strategies for Increasing Return-on-Information Reply

The key to gaining more financial return from corporate IT systems is to increase the value added by management.

Technology which is implemented by profit centres and is specifically designed to support operational, revenue raising workflows (such as in the financial services or insurance sectors) may be measured through standard Net Present Value calculations.  If it directly increases cash flow then there is little problem in measuring its value.

In corporate systems which are generally considered ‘overhead’ it is much harder to assess whether a system has been worthwhile let alone profitable.  How does a business assess the value of the company portal?  How do they assess the value of information management systems?  In most of these instances the business case for a new portal can simply be justified on the basis of (a) better user interface (often classed as the ‘user experience), (b) need to upgrade the current application, and (c) need for greater compliance.  A cost analysis does not need to be run because the business needs some sort of portal and is not going to get rid of it, so the point is moot.

This is an appalling way to buy large corporate IT.  Companies which purchase systems without rigorous cost analysis and a commitment to longer term cost reduction may reduce the lifetime costs for the simple capital purchase but massively increase the overall cost of IT throughout the enterprise in 3 ways:

  1. Increased Support Costs.  The cost of support, training and change per user is colossal for corporate IT systems.  Not only are support staff expensive but management increases to control support staff and management costs are infinitely more expensive and harder to control.  With non-transactional systems such as portals and information management systems, management’s variable expenses also increase as the business tries to make the system work and fit into the business.  In such circumstances, CFOs should monitor variable expenses in cost centres as such costs would not have appeared in the cost model for the initial business case.
  2. Increased Transactional Costs.  Corporate transactions (the train of workflow) increases the further away information is from the customer.  Portals and information/knowledge management systems are about as far away from customers as information can get.  With each ‘transaction’ comes increased ‘setup’ costs as information is passed from management to management.  Imagine, as a customer request is passed from the service centre to management it gets closer to a portal system and passes into almost a corporate black-hole as management attempts to find answers to questions which loop endlessly.  Uncontrolled corporate workflow which increases transactions not only has the ability to increase management costs but it also has the ability to increase management.  Management needs to ensure that transactional costs are minimised by keeping workflows as close to customers as possible.  This is enabled by empowering service representatives to resolve customer disputes and queries themselves.  Management should, ideally, not seek to micromanage but rather train well and guide through detailed, flexible policy.
  3. Increased Vertical Integration.  With the complexity of modern systems, businesses have a propensity to duplicate roles or application functionality from shared service centres.  Companies can reduce vertical integration by (i) ensuring that non-operational workflows are stripped out of profit centres, and (ii) cost centres have a lower management-to-capital ratio.  Surveys have shown that companies can spend less than 10% on ICT budgets whilst still delivering 2% better productivity results.

Information is an incredibly valuable commercial asset.  In many cases, companies hold vast reserves of ‘intellectual capital’ which can be commercialised and valued with a modicum of effort.  In fact, companies should seek to understand the value of their information by constantly assessing the viability of divesting discrete parts of the business (for more on the value of an M&A approach,  follow this link).  Unfortunately, most businesses burn most of the value of their information through clumsy and blanket approaches to managing it.  By purchasing systems which can be directly associated with higher transactional workflow and reduced variable management costs the return-on-information is vastly increased.