Getting an Edge from IT

WSJ – Getting an Edge from IT

The interview of Dr. Peter Weill, Chairman of the MIT Sloan School of Management’s Center for Information Systems Research appeared in the Business Insight report of the WSJ on 30 Nov 2009 focuses on the characteristics of IT-Saavy organizations.

Dr. Weill said in the interview, “IT-savvy companies make information technology a strategic asset. They use their technology not only to reduce costs today by standardizing and digitizing their core processes, but the information they summarize from that gives them ideas about where to innovate in the future. A third element is that IT-savvy companies use their digital platform to collaborate with other companies in their ecosystem of customers and suppliers.”

Technology does not become a strategic asset by accident. The challenge becomes monetizing the sizable investment to create a strategic IT platform. IT-Saavy organizations are those that begin by investing in the development of comprehensive strategies so that top executives can confidently lend their support to complex and capital intensive initiatives.

Dr. Weill points out that senior executives have to make decisions about the scope of IT deployments and the business processes that should share the investment. He said, ”One of the most important decisions senior executives make is which business processes should be shared across the business and which shouldn’t. For example, UPS has decided it will have one process for picking up a package across the world. Whereas Procter & Gamble has decided it will leave the local marketing units to figure out how they will go to market, but the company will have shared standardized services for HR, finance and IT.

Those are two very different operating models—and both can work. Making the decision about what kind of operating model you want, and having the discipline to stick to it and the governance to enforce it, is what makes an IT-savvy company.”

Making strategic decisions in large organization requires top leadership to be the leaders of innovation. This wasn’t unusual 50 or more years ago, when corporations were more closely held and run top-down. Over the past 25-years increasing internet access and real-time financial data has compelled CEOs to focus the majority of their attention on the delivery of profits and quarterly reporting. Generally this has led to the devaluing of business strategy, pressuring the process into the depths of the operation even within departments. The result is that top business leaders are often shielded from the strategic planning effort.

Dr. Weill said in the interview, “It turns out the top-performing companies, the IT-savvy companies, do this instinctively. They don’t call it an operating model, but their executives make the decision about which business processes will be standardized and which ones will be integrated throughout the business.”

Most organizations bubble strategic plans from the bottom of the organization to the top. The closer to the bottom of the organization a strategy begins, the scope and scale of the potential plan becomes constrained by the operational breadth of the owner of the strategy. Without top leadership becoming personally involved in the innovation effort, it can become even politically dangerous to involve oneself with the innovation process as a corporate executive attempting to rise within a corporation. Often lower-level managers can be heard saying, “if the boss doesn’t think its important, then I’m not going to try to convince him.” The invisible hand of self-interest will not guide from the bottom of the organization, it can only guide from the top.

Whether executives are being naïve, or practical operatives, they have been beaten down into developing departmental, small scale, strategies often referred to as “efforts” as if to broadcast their smallness to more senior executives that may consider strategy and innovation a waste of time. Combining the pressure to ignore innovation while focusing on the relentless requirement for demonstrable quarterly improvements in profit, management teams are all to often beaten into short-term thinking. It is no wonder that quick-profit strategies like offshore labor arbitrage has become accepted and encouraged within large corporations.

Dr Weill commented, “The opposite of a strategic asset, of course, is a strategic liability. And there are many companies who feel their IT is a strategic liability. In those companies, the IT landscape is siloed, expensive and slow to change, and managers can’t get the data they want.”

The challenge is that a long-term focus is not easier to sell to business leadership; it is much harder, especially when innovation isn’t driven by top leadership. Innovative transformational strategies that have the potential to result in the development of strategic IT assets typically are holistic in scope and complex with many interrelated requirements. Additionally the benefits are less obvious and occur incrementally as a number of separate initiatives yield the total impact of the strategy. A transformative strategy typically has a larger upfront investment and therefore requires access to more capital. This normally pushes beyond the charter of unit and departmental leadership. These challenges require a top-down view of the business which requires rallying top leadership. The larger and more comprehensive the transformational scope becomes (i.e. the more strategic the resulting IT asset) the larger the costs basis must grow to monetize the large capital investment.

Arriving at a strategic IT asset begins with a comprehensive strategy,  that covers a broad cost basis, but goes beyond cost improvement to rely on increases in revenue. Most strategies fail to be approved because the net income improvement they create (e.g. As-Is Cost less To-Be Cost) is not substantial enough to warrant top leadership involvement. This is especially true when the To-Be cost is burdened by increased interest and depreciation resulting from the use of capital to fund the IT investment, plus any write-off to retire existing IT platforms.

In today’s world of IP-based technology platforms, complex database server environments, and broad CRM and ERP software solutions the cost to upgrade technology is far beyond the lower operating cost that might be seen from improved and more efficient technology or even decreased labor costs within the business process areas of the organization. Successful IT strategies are those that go beyond the obvious operational cost improvements and holistically improve the organization driving decreased cost as well as increased revenues and improved net income, improved customer loyalty and higher customer satisfaction and quality.

For these reasons it is important to start the strategy development process by determining how the IT platform will satisfy the objectives of top management. Only then is it worth the effort to create detailed analysis of IT cost improvement and business process cost improvement. Differentiating between strategic (important to top executives) and tactical (important to unit leadership) is where the rubber hits the road in strategy development.   Involving experts with substantial experience in operations and technology that can align revenue and cost improvements to the investment will give top leadership the confidence to invest in long-term strategies that require their support.

Ed Fullman, Partner, Adam Smith Consulting
www.adamsmithconsulting.com