Whose Business is IT?
29 August 2006 Lisa Hammond
CEOs of large companies often delegate IT investment responsibilities, despite it being an important aspect of business. Lisa Hammond reviews the results of the Centrix survey and the roles that executives should take when it comes to IT.
Since the early 20th century, the fields of manufacturing, finance, sales and distribution, marketing and engineering have evolved into a set of commonly understood practices. All have well understood vocabularies and investment principles recognised by every member of the senior executive team. In contrast, the field of IT, created only a few decades ago, is rather young and is seen as a separate discipline that is not fully understood. This generation gap means senior executives too often shrug their shoulders on IT decision-making.
According to IT analyst Gartner, the average company wastes 20% of its corporate IT budget on purchases that fail to achieve their objectives. The IT budget of top FTSE 100 companies runs into tens of billions of pounds each year. Such waste is a direct result of the fact that IT has so far operated without the proper involvement of the CEOs and their senior management teams, despite the best endeavours of CIOs.
IT is the fourth major resource available to CEOs to shape and operate organisations. They have managed the other three major resources – people, finance and machines – for years. Today IT often accounts for more than 30% of CAPEX. It is time to see IT for what it is – a major investment that can radically affect the way companies perform, serve customers, communicate and build their brand. Understanding the importance of IT and building it into operating imperatives of the business, as well as into strategies and business plans, is essential for the CEO.
The success of IT investments requires common understanding among the CEOs and senior executives responsible for running their companies. Senior executives know how to talk about finance, because they all understand the language and can agree on a common set of metrics. They can do the same with the most elements of operations, marketing and sales. So, why not with IT?
There is no longer any valid reason why senior executives should be IT illiterate. The traditional view that CEOs are for running business and do not have time or interest to take responsibility for IT rarely stands up in today’s modern business world. IT risks are increasingly entangled with business risks and it is the CEO’s responsibility to distinguish between them. The CEO’s own vision and understanding of IT is the key. The question is no longer whether the CEO should be directly involved in IT decision, but how.
CEOS AND IT?
The degree of a CEO’s IT responsibility is dependent on the nature and operating mode of the company. There is no 'one-size-fits-all' list of IT responsibilities for CEOs, as there are number of factors that determine how IT is already used in a company. These factors include a company's history of using IT, the industry in which it operates, its financial position, the competitive landscape, the company's strategic ambitions and priorities, and its quality of IT management talent.
Having examined many companies over the last 20 years, Centrix has identified four different modes in which IT is used by businesses. These modes are described as:
- IT is the cost of doing business
- IT is for bringing efficiency to business
- IT is for bringing agility to business
- IT is for growing business
It is common for companies to migrate between the above four modes, but Centrix puts companies from different industries under each mode based on how they intend to use IT the majority of the time within their business.
'IT IS THE COST OF DOING BUSINESS'
Many companies operate in this mode, yet they may not fully realise it and understand the implications. Companies operating in this mode take a reactive approach to using IT to deliver on business demands. This approach can still be effective, but typically, IT is not seen as a strategic element in the business. The IT director or CIO of companies in this mode is often responsible to the finance director or Chief Financial Officer. Companies in this category balance the cost of IT against an acceptable level of operational reliability.
'IT BRINGS EFFICIENCY TO THE BUSINESS'
Almost every company needs to strive for efficiency and improve productivity. This is a vital source of cost-based competitive advantage. Organisations that operate in this mode include energy, utilities and pharmaceutical companies, among others, particularly those that have grown through merger and acquisition. These merged organisations have installed one IT system after another and the interconnections between them have become complex and often inefficient. Enabling efficiency by rationalising IT systems can be a valuable source of competitive advantage against other companies in a similar situation.
'IT BRINGS AGILITY TO THE BUSINESS'
Companies in this mode use IT to streamline their processes and invest in new IT systems for service improvements, cost reductions and to gain a competitive edge. In this mode, IT investment often accounts for 50% of CAPEX. Many companies enter this mode with one or more IT projects that require substantial re-engineering effort. This is often accompanied by the decision to move some business functions offshore, with the intention of bringing agility to their businesses.
Most of these companies are multinationals operating in different countries in a siloed manner. Centrix found that IT directors and country-based CIOs of companies in this category report to the business unit heads, rather than the group CEO.
'IT GROWS THE BUSINESS'
Companies in this category use existing IT systems and harness new technology to pave the way they approach the market and conduct their daily operations. In this mode, companies aggressively pursue process improvements and new service opportunities. These enable the business to move, reactively and proactively, more quickly to market changes. IT investments for these companies are over 50% of CAPEX.
Many companies operating in this mode do it as a part of their strategic intent to grow their business and dominate their markets. Other companies are forced into operating in this mode by competitive pressure and changing customer preferences. IT directors or CIOs of companies in this category report to CEOs.
WHAT SHOULD CEOS DO?
CEOs cannot take on all responsibility for the IT sector. They need farsighted business unit heads and chief information officers (CIOs).
Four practices can distinguish the companies that are most successful from their IT investments. First, these successful companies target their IT investments at the productivity levers that are important for their industries and themselves. Second, they meticulously work out the sequence and timing of their IT investments. Third, they take a sceptical view of large scale technology and service providers who consistently behave in ways that reduces companies' financial benefits from IT. Fourth, these successful companies do not pursue IT investments in isolation, but instead develop business innovations in parallel with IT innovations.
ESTABLISH RESPONSIBILITY FRAMEWORK
It is essential for CEOs to make everyone accountable to get the most out of IT investments. For example, when a large supply-chain-management installation goes awry, fingers point in all directions. To avoid such recriminations, CEOs make their IT suppliers, IT organisations and business heads jointly accountable. Improved supply chain processes are closely linked to their budget cycles and compensation packages.
CEOs direct CIOs to ensure IT suppliers are rewarded or penalised according to how well the software or their solution does its job, not just how quickly it is installed. CIOs ensure that IT managers and supply chain executives are jointly responsible for delivering solutions on time. They are also responsible for performance improvements, such as meeting inventory or service-level goals. All participants are judged by the CIOs and business unit heads on whether they launch the project on time and within budget.
In this operating environment, senior executives establish shared metrics and tie the IT suppliers' compensation to the achievement of certain business goals, not just to technology delivery. Competitive pressure increasingly compels companies to make large IT investments. But the challenges of creating and capturing value from these investments are immense. Taking a rigorous approach to getting it right can make the difference between productivity improvements at every level and facing a major profit loss.
THE IT ROAD-MAP
It is common for CIOs of large companies to spend time developing the IT road-map and priorities independently. Most CIOs have passed through technical leadership roles which allowed them to be more comfortable with the IT than the business. It is rare to find organisations where CEOs, business unit heads and the CIOs set out the IT road-map together. This means the IT road-map and the business agenda are developed separately and often in a divergent way.
Functioning this way often produces poor results from IT investments and creates two camps with different cultures within an organisation. A camp of technologists will clash with a camp of business unit heads, the latter of whom are not entirely satisfied with regular requests from the technology camp to increase funding for their IT usage.
There is, however, a better way of operating. CEOs need to make business unit heads responsible for setting the IT road-map for their companies, while working with their CIOs. In this way, CEOs set the tone right from the beginning and make both business unit heads and CIOs responsible for IT.
ALIGN BUSINESS AND IT
Complexity is driven by misalignment between business needs and IT objectives. Management must understand that complexity is the result of both business drivers and IT drivers. The most crucial task for CEOs is to establish a business and IT partnership to bring the IT organisation more closely in line with the rest of their organisations. Centrix discovered that companies with better integrated governance have over 25% higher profits than companies with poor governance.
Just as corporate governance aims to ensure quality decisions about all corporate assets, IT governance links IT decisions with company objectives and monitors performance and accountability. If IT projects are to be completed on time and within budget, the organisational structure and reporting relationships of the IT function will have to change. Instead of the IT organisation operating in a silo and reporting only to the CIO, key individuals within IT will need to report to both the CIO and business unit heads.
OUTCOME FOR CEOS
CEOs need a more sophisticated approach to managing risks in their IT operations. Traditionally, most large companies procure their technology and related services from large IT vendors, believing them the safest bet. In today’s business environment, that isn’t necessarily true.
Many large vendors have become outsourcers and utility suppliers, whose primary aim is to carve out technology and back-office functions from companies, lock them into long-term contracts and subsequently make them pay over the odds when their business changes. Many companies have failed to recognise this new risk. Prudent CEOs need to steer their CIOs and supply chain organisations toward small and independent technology service providers. They are more likely to act in the true interests of their clients by helping them to deliver efficiency and operational excellence.
The rules of the IT game have changed. Given the speed of change in the business environment and impact of globalisation on almost every sector of the economy, together with the rapid changes in technology, there is no room for CEOs to abdicate responsibility for IT. Instead of delegating down the ladder, it is high time that CEOs take responsibilities for IT and make IT their business.