Power PMO

  Governance   ProjectsAtWork  

With delayed, over-budgets projects all too common and little IT synergy, Xcel Energy did what many companies have in recent years: it created a PMO. Then it gave it authority and meaning. Staffed by a handpicked team, and backed by a governance methodology and portfolio management system, this PMO took control of $100M in projects that have delivered $600M in value. Here’s the first in a three-part series on how.

Ray Gogel starts his mornings with a close look at his dashboard. Not the one in his car, the one on his office desktop. The chief information officer of Xcel Energy is setting his daily agenda by reviewing the status of his company’s IT projects. He speeds through the projects marked with green lights, slows down to scrutinize those marked yellow, and stops to focus on those in red. The portfolio management system instituted by Gogel and his team has already winnowed out low-value or redundant projects, so everything on Gogel’s dashboard is critical to Xcel’s business.

The stark clarity of his dashboard display focuses his attention on projects that aren’t currently making their metrics — projects that are falling behind schedule or deviating from budget, in addition to recognizing the improvement of projects that have moved back to a green healthy status. Gogel sees an important part of his CIO’s job as getting those yellow and red projects back to green, as they not only are an indicator of his group’s delivery levels but also are key value drivers for the organization. As the majority of his portfolio generates a positive return on investment, any delay or problem in delivering the project also means a reduced return to the company and its shareholders.

A decade ago, it might have been uncommon to see this kind of innovative information technology in the utility industry. Gas and electric utilities in the United States were almost all regulated by government, commonly guaranteeing the utilities a specified rate of return after covering approved costs. This regulatory structure did not generally encourage cutting-edge approaches to cost reduction or service delivery, since the perceived risk usually exceeded the likely reward. But the wave of deregulation that swept the industry in the late 1990s changed that picture forever. Utilities sought ways to improve efficiency as they were freed to reap the benefits of those efficiencies. Scale became more important, spawning a wave of mergers and acquisitions. The 21st century seemed to promise a much different utility.

"My goal when I arrived at Xcel Energy was to apply commercial rigor and accountability to IT to gain credibility with the corporate and business unit leadership. This in turn provides a solid foundation for evolving IT into a transformational agent and value driver for the business," says Gogel.

As it turned out, this rapid deregulation spawned some excesses and exploitation, such as the Enron experience. Yet beyond the headlines, mainline utilities were making big strides towards innovation and agility — changes for the better, changes that would endure.

Xcel Energy provides an excellent example of a "transformed utility." Formed in 1999 by the merger of New Century Energies of Denver and Northern States Power of Minneapolis, it is the fourth-largest combination electricity and natural gas company in the United States, with five million customers in 11 states, 11,000 employees and annual revenue of $9.5 billion.

When the merger closed, Xcel found itself with two, sometimes three, of every system and application a utility would need. Beyond the disparate systems stood different ways of managing and approaching IT. At first, this wasn’t necessarily seen as a problem, since the trend toward deregulation led management to believe they would end up with a group of autonomous business units anyway, each with its own systems.

But as the deregulation trend waned, IT strategy shifted toward consolidating these disparate IT systems and functions. Why? Xcel Energy’s leadership found that distributed IT made it essentially impossible to get a consolidated picture of overall IT demand, to control aggregate IT spend, or to create technology synergy across the company. Beyond that, the multiple IT organizations were contributing to a technology footprint that was already out of control and getting worse. To cap it all, delayed and over-budget projects had become too common.

Organizing for Change

The business and IT leadership of Xcel Energy had a good handle on their business goals. They already had a set of key performance indicators to evaluate business performance. They also believed with a single system and consolidated, reliable, real-time data, they could deliver far more IT value to the business. But they were keenly aware that the existing business units were accustomed to running their own chunks of IT relatively autonomously. A centralized IT would need authority and standing in the corporate structure to succeed. So a new business unit was established to house IT — Business Systems — with 950 employees including business analysts. As the new CIO, Gogel, who arrived in April 2002, would report directly to the chief operating officer. This replaced the old structure where corporate IT was part of the Shared Services organization reporting to the Chief Financial Office.

Xcel Energy delivers IT services in close partnership with IBM Global Services. Xcel characterizes this as a "third generation" relationship because of its maturity. IBM is a full partner, sharing the same scorecard for success. The same indicators drive the behaviors of both partners. In the past the relationship was traditional vendor-client with discernable walls between the two. Now, work is seamlessly performed in an integrated team; it’s hard to tell who gets a paycheck from which company.

Working with IBM, Xcel Energy’s Business Systems unit set out to govern and run IT as a business, with clear processes, accountability and commercial rigor. The goal: deliver higher value to the business at lower cost. The primary focus: shift the balance of IT spending away from routine "keep-the-lights-on" activities and toward more strategic IT projects that improve business performance and competitiveness. The means: effective governance to provide IT services more efficiently and deliver strategic projects to market more efficiently by improving the decision-making and delivery processes. This focus on project delivery is also a key component in Gogel’s efforts to drive business transformation, with his stated mission to "Drive business transformation that results in an extraordinary difference at Xcel Energy."

Involving the Business in IT

Gogel knew he couldn’t reach his goal without full participation by the company’s business units. As the company recentralized IT, he felt it was essential that the business unit leaders develop trust in the new structure.

"When we designed our IT governance structure, the first thing we did was reach out to the business units to understand their strategic and operating requirements," Gogel said. "We then translated these into an enterprise-wide technology strategy, and put in place a structure that kept the business side involved by giving them real-time visibility and control over the IT initiatives and operations important to them. Our partnership with the business side is so much stronger as a result because they can see the value we deliver every day."

The strategy calls for keeping the business side involved in IT programs and projects to maintain alignment with evolving business goals and priorities. "We want to demonstrate value and resolve problems," said Mike Carlson, Xcel Energy’s vice president of business transformation and customer value. "We are trying to eliminate the black hole between users and IT." This required finding a comprehensive way to capture, analyze, and prioritize IT demand while providing business units clear, easy-to-access views of IT processes and activities.

In other words, Gogel and Carlson wanted to make IT transparent to the business. The participation of business leaders would be both welcomed and facilitated at every stage of projects being created to help their units.

Two Major Initiatives

Gogel, Carlson, and their team envisioned two major initiatives to transform IT. These two initiatives, implemented in sequence but closely interrelated, were designed to drive down the cost of routine, "keep the-lights-on" IT activities to free more funding for strategic projects, while more effectively governing both kinds of activities with improved visibility and control.

The first major initiative encompassed a program management office (PMO) to manage delivery of projects and a formal portfolio management system for evaluating and prioritizing strategic IT projects. The PMO was initially set up to manage $100 million of mostly discretionary spend, including all mandatory regulatory and compliance initiatives, via a set of standard and consistent metrics.

The second major initiative: implement an automated demand management system to capture all routine requests on IT, insert business governance, and manage fulfillment of the demand. Requests captured by the new system include a wide range of typical IT activities for which no consistent corporate-wide processes existed, and which were largely handled manually at significant expense. Purchases of hardware and software; employee additions, subtractions and moves; password resets; and similar activities contributed to a $135 million annual O&M budget for this "keep-the-lights-on" portion of IT. The demand management initiative would be implemented as a second phase, following successful implementation of the portfolio management system. These two initiatives, combined with consolidating all company-wide IT functions into one business unit, enabled Xcel Energy manage the complete portfolio of IT investment and begin to drive transformational change into the organization.

Because they wanted these initiatives to be integrated with each other and with overall IT operations, Xcel Energy selected Mercury IT Governance Center software for portfolio management, program management and demand management. A particular appeal of these products, Carlson said, was their use of customizable desktop dashboards to provide real-time status on requests and projects, with the ability to roll up the data in ways that generated metrics meaningful to Xcel Energy’s operation. These dashboards could be personalized on both the IT and business sides, advancing the goal of making IT initiatives and operations transparent to business stakeholders. Due to the strategic nature of these initiatives and the success Xcel Energy has had, Mercury has also become one of Xcel Energy’s "third generation" partners and a member of its Strategic Advisory Board along with IBM and three other companies.

Methodology and People First

Following Ernest Hemingway’s famous dictate, "Never confuse motion for action," Xcel Energy’s Business Systems group resisted the temptation to dive into its new PMO, determining instead to first establish a solid governance methodology and build an effective team. They started by identifying essential ingredients for a successful PMO. These included:

• Clear and consistent governance policies, standards, and processes
• Automated core processes
• Support from and mentoring of project managers for the PMO’s new ‘end-to-end’ processes
• Achieving and maintaining close alignment with business units on PMO goals and processes
• Special emphasis on the financial management of projects
• Creating an understanding of commercial rigor and accountability
• Driving recognizable business transformation through existing IT investment
• Leading with a "practice what we preach" example by running the PMO initiative itself as a project

Team members were selected based on specific skill sets determined to be necessary for success. The PMO director position required not only organizational management skills, but also business process re-engineering and transformation experience. The manager for policy, process and standards had to have extensive project management skills and process engineering experience. The manager overseeing PMO finance came from the financial organization and helped build the foundations. The PMO project manager had to be not only an experienced project manager, but also an experienced process engineer with extensive subject matter expertise. Business unit liaisons had to be able to promote and facilitate the use of the end-to-end process inside their organizations. All of these people had to have what Carlson calls "a bias for results" in addition to a passion for process.

Of these ingredients, the financial portion of the process soon emerged as especially important. Company leadership wanted a standard measure of value delivered against which the performance of all IT projects could be judged. The measure chosen, economic value add (EVA), is very similar to return on investment (ROI) with a weighted average cost of capital. Throughout the portfolio management process EVA is recalculated, and serves as a key criterion for project approval. EVA serves as a barometer of health. For example when EVA is strong, potentially lower return infrastructure projects can be taken on to increase the return of expected future projects.

Beyond the measurement of value, Xcel Energy leadership believed that how the purse strings were controlled could play the decisive role in how successful the PMO would be. It was decided that Business Systems (the IT organization) would control funding for IT projects, even those requested by business units. The business units themselves would have to put some "skin in the game" up front to demonstrate their support of proposed projects and risk charge-backs for "unapproved" projects.

Part II: From the idea and business case stage to project valuation, end-to-end processes ensure that Xcel’s PMO and business units collaborate closely in selecting the highest value proposals for implementation.

Bryan Maizlish is chief technology officer/IT program director, Integrated Systems and Solutions for Lockheed Martin. Robert Handler is vice president, EnterprisePlanning & Architecture Strategies for Gartner. This article is excerpted from IT Portfolio Management Step-by-Step: Unlocking the Business Value of Technology (April 2005) with permission from John Wiley & Sons.