Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: Iss. 3 :: February 1999
Joseph A. Camillus
Nothing can be so baffling to senior managers as the information technology revolution. Top executives in global corporations are often the ones who grew up in the days when computers filled up an entire floor and word processing was done by the secretary instead of a Microsoft application.
For these managers, IT is often something to be feared. Those who invest in IT heavily risk having their investments outdated in a matter of months. On the other hand, those who don't leap ahead into this brave new world risk being put out of business by crafty competitors.
And even if the decision is made to invest in information technology, the most important question is: Where exactly? What is truly astounding and challenging about IT is that organisations have the capability to use it in so many ways.
New Product Development
Engineers at Chrysler are now able to assemble new cars piece-by-piece through a "cyber-synthesis" process called Digital Model Assembly (DMA), which allows the designers to handle space availability and safety issues prior to the construction of a physical prototype. DMA is also used to simulate the assembly process for new cars, reducing time-to-market while improving quality at the same time.
Chase Manhattan Corporation, the second largest bank and fourth largest issuer of credit cards in the US, is using data mining to analyse the buying patterns of its 25 million customers. By determining where and how its customers are buying products, the company has used IT to improve its own marketing capabilities while creating a new product to sell to others: information on customer buying patterns.
Buckman Laboratories, a maker of specialty chemicals located in Memphis, Tennessee, has reaped numerous benefits from the implementation of K'Netix, a knowledge sharing system on the company's corporate intranet. K'Netix allows the company's global sales force to share and create new customer solutions regardless of time or place. The results speak for themselves: In the four years before K'Netix, Buckman achieved 22.2 percent of its sales from new products. In the four years since, this figure has risen to 32.9 percent.
Business Process Improvement
Barnes & Noble is the #1 bookseller in the US, and operates more than 1,000 stores across the country. In the last decade, the company has revolutionised bookselling in America by introducing huge stores and deep discounts. But despite its meteoric rise to success, Barnes & Noble is continually looking over its shoulder to Amazon.com, which relies solely on the internet to sell 1.5 million in-print titles and another million of the most popular out-of-print books. Because Amazon orders books directly from distributors or publishers after a customer makes a selection, the company carries no inventory and has no comparable facilities costs. Amazon has used IT to cut out the middleman, much to the chagrin of its competition.
For all of these organisations, the road to competitive advantage has been clearly mapped out. Yet there should be many more examples than the ones listed above. Across the globe, IT spending continues to rise at exponential rates. Unfortunately for many, there is no accompanying rise in results. The simple reason for this type of failure is a lack of alignment between the business and the IT function. What many companies do not realise today is that while the nature of the IT function has changed from an administrative support function to a driver of corporate strategy, all too often the processes and people in the both the business and the IT department have not evolved to meet that challenge. In order for IT alignment to become a reality, business and IT have to collaborate both on a strategic as well as tactical level. This is trickier than it may sound. On the one hand, IT personnel must understand the organisation's business processes and models. On the other hand, business managers need to realise the importance of IT within the company's structure to increase growth and productivity. When this occurs, IT becomes an enabler of change in business processes, and learning and knowledge sharing increase throughout the organisation.
How are best-in-class organisations handling the details of this change? Top companies are taking a two-pronged approach. First, they are involving IT more closely in the strategic planning process. Second, they are turning over more and more responsibility for IT to their own line managers, and in doing so, are creating a more fluid, and customer-focused function. Without either of these two requirements, IT alignment remains a vague dream and IT investment becomes no more than blindly throwing money into an organisational black hole.
IT and the Strategic Planning Process
Many senior executives have no idea what IT can and cannot do. Only with senior-level IT representation in corporate strategy meetings can organisations accurately identify where information technology can best help the business. IT representation in corporate strategy meetings also has the added benefit of linking the IT function with the business. In most organisations, strategy guides major investment decisions. Yet, few companies ensure that their business priorities guide IT decisions. Only when business and IT professionals sit in a room together can a proper road map for investment be created.
Involving the IT function in the strategic planning process is only the first step in alignment and a difficult one at that. Why? Because the nature of the planning process has changed. Ten years ago, a one-year strategic plan would have been considered an oxymoron; today, it may be looked at as too lengthy. As best-practice organisations have realised, it does not make much sense for corporate planners and IT leaders to sit in a room together and create a five- or ten-year road map for IT investment because the plan will soon be outdated, if not by the competition, then by new developments in the IT arena.
IT in the Trenches
At the typical corporation, the IT budget is often decided as a percentage of revenue. A central steering committee then facilitates a process to allocate the scarce IT resources among the business units. In the end, no line of business gets the amount of money that it wanted and starts the year off with a negative attitude toward IT. The IT function, facing a deteriorating situation, tries to deliver a project (for instance, an e-commerce site) without proper guidance from the already disgruntled line managers. This project is inevitably not what the business wanted and complaints about how IT has wasted precious time and money becomes even more frequent. IT feels overly chastised and delivers an even poorer project the next time around, creating a downward spiral of results.
Best-in-class organisations avoid this disaster by allowing the lines of business to decide how much they want to spend on information technology. Since the business-unit managers are now allocating funds, the perception of corporate under-funding, and the concern about lack of control are substantially addressed. Consequently, no one feels slighted, and, in fact, the business feels even more involved with the work that IT is doing (because after all, it's their money now). Greater business involvement increases the chances of an IT project's success. This is the key to IT alignment - once line managers feel ownership of the process, there is no limit to what the IT department can deliver.
The Client-funded Approach
Because of the flexibility required in today's strategic planning process and the fluidity of developments in the IT arena, the most important conversations in IT alignment usually occur in the trenches. At top companies today, more and more strategic planning responsibility is being turned over to line managers in business units, who are often the most informed and able to make these decisions. Not surprisingly, the parallel trend among leading-edge organisations is to turn over the responsibility for decisions regarding investments in information technology to these very same line managers. This is being done through what we will call the "client-funded model," a process whereby lines of business, not the corporate executives on high, get to set the IT budget.
The insightfulness and elegance of the client-funded model is that while it puts the purse strings into the hands of line managers in business units, the IT function still maintains autonomy over its own personnel and processes. The problem with having dedicated IT resources for line managers is that it results in an IT function that is not coordinated. By keeping the decisions about staffing and standards in the hands of the CIO while letting go of the centralised budgeting process, best-in-class companies are able to have their cake and eat it too.
Across the globe, more and more companies such as AMOCO and Mead are waking up to the benefits of the client-funded model. It is being applied to a variety of areas including corporate-level R&D and process reengineering. There are, however, some important caveats to consider when taking IT funding out of the hands of corporate executives and placing it in the hands of line managers. Most importantly, in order for the client funded-model to work, the IT function absolutely must deliver what the business asks it to do. Otherwise, the lines of business will end up treating information technology just like senior executives used to - as a cost centre. For organisations that have not developed beyond the IT-as-a-support-function paradigm, building a customer-centred IT function can be a revolutionary change. Best-in-class organisations are driving home this change in a number of ways. USAA, an insurance company headquartered in San Antonio, Texas, has gone so far as to spin off the entire IT organisation. This new entity, entitled IT Company or ITCO, is now the preferred provider of information technology services to USAA. The spin-off has greatly aided the company's attempts to reinforce customer satisfaction and has turned the IT function into a real profit centre.
A critically important intangible that must be explicitly recognised is the issue of trust. For IT to truly become a strategic weapon in an organisation's arsenal, the business has to believe that IT will deliver. Building trust is not easy; it will take time especially in companies where information technology has been treated as nothing more than a cost of doing business for the last twenty years. Companies are continuing to find new ways to build a good level of trust. Two approaches to building trust that are consistent with the client-funded model are customer training for IT personnel and co-location of line and IT managers. In fact, if the client-funded model is to work well, these two approaches are probably necessary.
In the end, for trust to build, the IT function has to step up to the plate and deliver what it has been vigorously claiming it can do for quite some time now. The client-funded approach provides the IT function with both the opportunity and the incentive to deliver on its promise.
Joseph A. Camillus is a Benchmarking Specialist with the American Productivity and Quality Centre. He can be reached at firstname.lastname@example.org.