Volkswagen of America: Managing IT Partners
Volkswagen of America: Managing IT Partners
Volkswagen of America (VWoA), made up of 10 business units, embarked upon the challenging task of reforming the process of prioritizing and selecting IT projects for the upcoming year. The business units were concerned about the rise in IT expenses and the trouble with schedule and cost overruns. The tally of IT projects funding requirements totaled $ 210 million for the year 2004. VWAG (parent company of VWoA) had approved a budget of only $60 million, making the task even more difficult. Dr. Uwe Matulovic, chief information officer (CIO) of VWoA, found himself in the middle of the controversy. He needed to pacify the disgruntled members of ELT team but at the same time had to ensure that he did not reverse the reformation underway.
The New Process:
The new IT priority management process was driven by the new IT budget constraint given to VWoA (VW of America) by the parent company (VWAG). The process involved mainly four teams formed by several organizational entities. The four teams mainly involved in the process were: ELT (Executive Leadership Team), ITSC (IT Steering Committee), PMO (Project Management Office) and DBC (Digital Business Council). The ELT was responsible for executing NRG (Next Round of Growth) strategy which includes IT governance. The ITSC consisted of business and IT managers and was responsible for guiding and approving the process of IT project selection and prioritization. The PMO administered the project proposal and approval process. The DBC was responsible for the filtering process, which decided which projects aligned with the company business strategy the most. IT at VW was never considered a strategic advantage, which led to IT budget stagnating at subsistence level. On the contrary sales & marketing areas were given relatively more importance while budget allocation process.
VWoA’s IT approval process, which requires four different teams before a project can be approved, makes the IT project funding complex and inefficient. The multiple layers of decision making with unclear roles and responsibilities, adds to the confusion. The excessively complicated organizational strategy does not align with the IT strategy to improve IT project prioritization. While each of these groups does have the goal ranking criteria to work with, it is expected that each group has their own opinion on exactly which project fits into Customer Loyalty, New Vehicle Value, Stable Business Infrastructure, Pre-Owned Vehicle Business and Optimize the Supply Flow. In other words, the teams may decide that an IT project fits in the customer loyalty category, but does that mean the project itself is more important than another project that fits into new vehicle value? Maybe, maybe not. The Digital Business Council has an important yet a difficult role, to make a final list of projects for which funding would be requested.
They also categorize projects, assess the business impact, discern alignment with goals, and make trade-off decisions-a tall order for the DBC which places a lot of power over other entities in their hands. Then there is still the steering committee followed by the BPTO. The positive aspect of the cross-functional decision making process, in spite of the confusion, is that the business unit managers are now forced to work together to make decisions, that affect their departments, to align the overall company strategy. The new process does provide an improvement over the former process of decentralized and less organized decision making. The entire process, with all its flaws, does seem to allow for in-depth discussions among teams and helps provide a comprehensive view of IT initiatives to the executive team.
The categorization of investment types (stay in business, return on investment, option-creating investment) and categorization of technological application (base-enterprise IT platform, enterprise applications, customized points solutions) are intelligent ways to classify each IT proposal and makes an honest attempt to align IT strategy with the overall business and organizational strategy of the company. However, multiple layers do provide opportunity to each entity to pick their favorites. In fact during Phase 3, it seemed that Matulovic was expecting business executives, who knew that several projects did not have sufficient enterprise value to make the funding cut, to choose to acknowledge that projects from other areas might be more important to achieving enterprise goals. Instead, they chose to challenge the merit of the new methodology for selecting and prioritizing projects. This obviously indicates that people simply were not happy with the process and that they were willing to challenge the importance of other projects to ensure that theirs could still have a chance.
The phone calls to Matulovic expressed frustration over “categorization mistakes that penalized their business units.” Although it is not clear from the case, it appears that the new process is to blame for improperly categorizing projects. Additionally, the case specifically mentions that some thought that IT infrastructure projects “had been treated separately, and not forced through the same process, which many considered unfair.” It is not surprising that anyone would find this unfair since all IT projects are coming from the same budget. Finally, some managers “assumed that, as in past years, they would at a minimum gain approval for their most highly prioritized projects.”
This has to be incredibly frustrating for a manager who cannot have funding for even his most important project anymore. It appears that the new process for managing IT project priorities is frustrating to those involved and has put Uwe Matulovic in a difficult position. He is in the awkward position of having to possibly make changes to the IT projects that were approved based on who can be the most persuasive on why their project needs money. This is undermining the integrity of the new process and it means that Volkswagen spent lot of resources to prioritize the projects but several of the ELT members are still dissatisfied.
The worst part may be that nobody whom Matulovic spoke to has conceded that his project is any less important than the ones which were approved. Ever since 1992, Volkswagen has consistently tried to minimize IT costs as much as possible, even keeping IT costs “at subsistence levels” so money could be put to other uses. Although Volkswagen was admittedly in survival mode for a while, they should be aware that there needs to be significant investment in IT to align IT with the rest of the business units, rather than let IT play catch up with a small budget. Of the $60 million, only about 25 percent ($14 million) is available for the highest priority business unit projects. Whether ELT members forgot about withholding investment in the past (or were not around), they should know at this point that they cannot let IT fall behind anymore. Volkswagen has placed its North American IT (and Matulovic) in a difficult position when deciding on which IT projects need funding. The case is not very specific on which IT projects affect Volkswagen globally; however, at least the supply flow project seemed very important to Volkswagen (globally) and it was left partially funded.
There does not appear to be any clear answer on whether Volkswagen’s IT projects can be funded outside of VWoA if the project needs global funding. All that we can gather from the case is that Volkswagen will not show a green light to a VWoA project if it does not fit within that budget even if the project has global implications for the company’s overall success. This will definitely lead to frustration for those needing the help of a project that helps Volkswagen outside of North America. It also begs the question why Volkswagen does not have the foresight to approve a project that is important to the company’s overall success. The textbook suggests that “Monetary costs and benefits are important but not the only considerations in making IT investments.
Soft benefits, such as the ability to make future decisions, are often part of the business case for IT investments, making it difficult to measure the payback of the investment.” The case is not explicitly clear on what soft benefits were considered; however, it seems that the focus at Volkswagen was to make IT do the most with the least (referring to the very limited budget that was provided to VWoA). In other words, Volkswagen appears to be looking for the best bang for their buck and does not seem willing to consider benefits outside of the bottom line.
Budgeting for IT projects:
The budget for IT projects was controlled through the new process which involved several organizational entities that established priorities. The IT Steering Committee or ITSC approved IT project selection and prioritization. Matulovic controlled $16 million set aside for ‘stay in business’ IT initiatives. He also had the capability to make special exceptions involving project approvals, to find additional funding, and to divert funding to some other projects. Whether IT should have its own budget is a good question; however, whether that budget should be based on VWoA or whether it should be globally-based is a more important question. We have already seen the effects of the process on the supply flow project.
Obviously that project would have had more financial support if it were funded through a globally-based budget for IT. That would still possibly leave Volkswagen with issues since IT projects with global significance could receive more attention than local IT projects. Perhaps Volkswagen should start thinking about including IT projects in budgets of other divisions within the company so that business strategy, organizational strategy, and information strategy are in better alignment. We recommend that Volkswagen should have a separate IT budget for VWoA and have a separate budget to fund IT projects that impact Volkswagen globally. If those outside of VWoA are depending on a project (that can only be funded by VWoA), they are setting themselves up for disappointment because the VWoA budget can only go so far. If a project leader knows that a project is important for Volkswagen globally, that leader should know that VWoA might not be the best source for seeking funds.
If funds are simply not available outside of VWoA, then there is an issue here because projects with global significance should be able to be funded globally. The textbook suggests that “IT strategy is business strategy; one cannot be created independent of the other.” It follows then, that in creating a process for deciding IT funding priority, the overall business strategy must be kept in mind along with the IT plans. In other words, classifying a project as “an IT project” could be shortsighted if the project is limited by an IT budget but could be very beneficial to the overall business strategy. The better option would be to allow IT projects to potentially flow outside of funding requests when IT strategy and business strategy are both considered.
Supply Flow Project and Requests for Special Treatment:
There is no easy answer for Matulovic on how to respond to his fellow executives who are asking for special treatment. It is unfortunate that the ELT team let things get to this point. Matulovic heard from the ELT members that “supposed categorization mistakes” had penalized their business units. We propose Matulovic to accept the feedback from the organization on the entire process, in form of either complaints or suggestions. Although, it is too late to change the process for the current year, people’s concerns and suggestions to improve can be addressed by updating the process in future years. This is especially crucial as the support for the process is diminishing. Several people across the departments are upset for not securing funding for their projects and are likely to resist the process during next year. Letting people voice their frustration will relieve the employees of the negativity and will help everyone move forward.
At this point, Matulovic should stick to the decisions made and follow the results of the approval process. It would be a terrifically bad idea to bend the rules to approve a project that was already denied funding. He would not only alienate those that made a last ditch effort for the other projects, but he might not pick the “right” project to receive funding and would undermine the integrity of the approval process. Furthermore, if Matulovic backtracks now, it would only diminish the importance of the process and thereby deplete employees support in the future. Also, it will send out a wrong signal to the organization that the decisions of the process are subject to manipulation by the squeaky wheels. Matulovic must reiterate the importance of the process and make it clear that the decisions of the committee are final and binding upon all. Matulovic should bring the issue of supply flow project to the attention of senior management as an example of ineffective project prioritization and disruption of enterprise goals.
The supply flow project demonstrates that a business-critical project can go unfunded due to budget issues at the business-unit (VWoA) level. The process does not address how to deal with a project with global importance. The other option is for Matulovic to seek funding from outside of the IT budget (i.e., the budget of another division). Just because the supply flow is an IT project does not necessarily mean that the project should be shut down because there is no IT budget for it. If Volkswagen thinks the project is really important then, they (and Matulovic) need to find a way to make it happen.
As we discuss the process of IT funding at VW, it is imperative that we elicit the characteristics of a good process for deciding IT funding priorities. IT projects are not just limited to the IT department but they impact multiple function areas with a company. Hence, funding decisions for IT projects should involve the stakeholders in all the departments and function areas within the company. Doing so, all the departments’ needs and concerns can be addressed in the process. This facilitates high degree of transparency. VW should develop enterprise wide system using predetermined goals and measures. The process should be led by the CIO with the support of the IT department. The decision-making process should involve discussion of cost-benefit analysis, feasibility and duration of each project. IT projects should be evaluated and prioritized based on companywide goals like customer loyalty, new vehicle rollout value etc.
Each project must be justified i.e. ‘stay in business’ initiative or ‘business’ initiative to improve operational efficiency or reduce costs. A list of IT project requests made by the cross-functional team can be presented to upper-management for IT funding prioritization. Projects can then be grouped under goal oriented portfolios and the goals that tie in with the company’s goal should be funded. The enterprise goals which consist of different projects should be ranked based on the specific goal significant to the enterprise .The upper-management team including the CIO should prioritize the projects based on the costs involved, benefits derived and alignment with overall company strategy and goals. In case of an ERP system the IT projects should be prioritized based on the stages of implementation. The IT systems should be categorized in terms of cost, their implementations and ease of application. Such a system would provide a base consisting of system that provides decision making and transaction processing system on which further more complicated systems like CRM and ERP can be built upon.