Convergence: The Wave of Future Success
Silicon Valley is littered with the carcasses of high-tech ventures that started out with pomp and circumstance but amounted to little more than a pile of broken dreams and a roadside sale of used Herman Miller office furniture. NetApp was not born to be one of those companies.
In just 16 years, NetApp—formerly known as Network Appliance—has grown from a small venture in the nascent enterprise data storage market to become one of the most vibrant, fast-growing and consistent performers in the high-technology arena. It achieved what every small Silicon Valley newcomer aspires to: a gleaming campus along Highway 101, an army of salespeople and developers, and a loyal and expanding customer base. With more than $3 billion in revenue, NetApp challenges the market leaders, such as EMC and Hewlett-Packard, in the highly competitive storage market.
The secret to NetApp’s success is having a plan and a process for leveraging technology to meet its business objectives, and building an IT infrastructure that is flexible and extensible to meet changing market conditions. As you will read in our NetApp profile (see “Young Company, Mature IT,” page 36), NetApp’s early successes forced it to adopt technology and business practices normally reserved for much larger companies. It learned to treat technology as another resource, rather than becoming a slave to its capabilities. NetApp achieved its success, in part, through business-technology management convergence.
Business-technology convergence and business-technology management are terms that may be new to you. The idea is simple: Technology is a means for achieving business objectives, so why segregate the management of business and technology into separate silos. By converging business and technology management, enterprises are able to nimbly respond to changing marketplace dynamics, technology evolutions and competitive pressures.
In research conducted by Baseline and BTM Corporation, NetApp is among an elite group of U.S. corporations that is driving toward optimization of their technology management, placing their business interests and objectives first and then using technology—everything ranging from IT hardware, software and services to hybrid car engines, satellites and cellular transmitters—as a critical resource for opening new business lines, markets and revenues.
The result of this research is the Baseline/BTM 500, a sampling of Fortune 500 companies that highlights enterprises with the most efficient and optimized technology management organizations and explains how that convergence contributes to growth and profitability. This report is based on the detailed examination of dozens of leading companies, including Oracle, Verizon Communications, New York Life Insurance and Del Monte Foods.
Determining the maturity level of an enterprise’s business-technology management is no easy task. The Baseline/BTM 500 is based on BTM Corporation’s BTM Framework and BTM Convergence Index, a continuing study developed over the last five years for measuring companies’ convergence level. (See “Baseline/BTM 500 Methodology” at the end of this article)
The study validates the link between business-technology convergence and the maturity of that convergence in an enterprise’s efficient operations and financial performance. It also shows that converged enterprises are more able to adapt to dynamic market conditions, push through innovations faster and maintain resiliency in the face of competitive challenges. Ultimately, business-technology convergence may be just the thing that ensures the sustainability and viability of companies such as NetApp.
March Toward Convergence
Another company that clearly understands the importance of business-technology convergence is Oracle. The world’s second largest software company was built on a highly focused pursuit of business excellence that’s measured in revenue, profitability and performance relative to competition.
Founder Larry Ellison imposed his business vision and applications on the marketplace, even though the market wasn’t always ready for what he peddled. Oracle’s success came because the business drove the use of technology, instead of technology trying to fill an ill-defined void with no strategic direction.
Oracle is one of three companies, along with GM and Verizon, on the Baseline/BTM 500 to achieve a perfect business-technology management score. The database company’s numbers over the last five years speak for themselves. Between 2003 and 2007, Oracle delivered, on average, a 14 percent return on assets each year, 21 percent ROI (return on investment), 22 percent gross revenue growth and 40 percent EBITD (earnings before interest, taxes and depreciation).
Most amazing is Oracle’s five-year earnings-per-share increase of 21 percent—more than 8 percent higher than its competitive set. And it posted these numbers during a period when it spent billions acquiring major rivals: PeopleSoft ($10 billion), Siebel ($5.8 billion), Hyperion ($3.3 billion) and JD Edwards ($1.8 billion).
Oracle achieved this impressive performance through the convergence of its business-technology governance and by solving one of the most perplexing challenges facing enterprises: responding to change and being the instigator of change. Convergence, in our opinion, is the means to achieve these goals.
A New Concept
A converged business-technology management model is a relatively new concept. The Baseline/BTM 500 assessment model is based on the BTM Framework and Maturity Model (see “Business-Technology Maturity Model,” below), which rates an enterprise’s convergence maturity on five levels (from low to high):
- Defined (at this point, discernible alignment first occurs)
- Managed (the threshold of synchronization)
- Optimizing (convergence)
Of the Fortune 500 companies Baseline and BTM evaluated:
29 percent are synchronized and approaching full convergence (Level 4 and above—Quartile 1)
29 percent are fully in alignment, approaching synchronization (Level 3.5 to 4—Quartile 2)
24 percent are increasing alignment (Level 3 to 3.5—Quartile 3)
17 percent are in pre-alignment (less than Level 3—Quartile 4).
As mentioned previously, less than 1 percent of the companies have achieved full convergence (Level 5).
Conventional wisdom presumes that technology will lead to greater operational efficiency, lower costs and higher returns on investment. It doesn’t understand how consistently—and to what extent—converging business and technology delivers rewards. The Baseline/BTM 500 study found that companies in the top quartile experienced more than a 5 percent higher rate of revenue growth than nonconverged industry peers (20.5 percent compared to 15.3 percent) and an ROI rate that’s nearly a full point higher (7.5 percent compared to 6.8 percent) between 2003 and 2007.
Baseline and BTM assessed the survey sample in six financial measures relative to business-technology convergence: five-year averages for return on assets, equity, investments, EBITD, annual growth in revenues and annual growth in earnings per share (EPS). Nearly 60 percent of the companies in the first quartile exhibited superior or average performance. In the third quartile, only 50 percent of the companies had similar performance, while only one-quarter to one-third of the companies in the lower two quartiles had superior or average performance.
The past five years have proved the value of resilience: the ability of an enterprise to leverage technology for agility in order to respond to changing market conditions and capitalize on new revenue opportunities. Leaders outperform their own industry groups in four of the six financial measures tracked (return on equity, ROI, revenue growth and EPS growth), and they are in line with their own industry groups in the remaining two (return on assets and EBITD).
Perhaps the strongest evidence in the value of convergence is the return on stock value to investors. Companies in the top quartile of the Baseline/BTM 500 had an average stock value return of 236 percent, compared to an average of 111 percent for companies in the lower three quartiles.
The Baseline/BTM 500 falls in line with the findings of the BTM Institute, which established that converged enterprises—those achieving Level 5 maturity—are good enough to know when to change the rules to maintain strategic advantages over their competitors. While less mature enterprises enjoy increasing benefits as their maturity increases, none of them equal the performance of converged enterprises.
At Level 1 (the least mature), enterprises typically execute some strategic capabilities in a disaggregated, task-like manner. A Level 2 organization exhibits limited capabilities, attempts to assemble information for major decisions and consults the technology function on decisions with obvious business-technology implications. Enterprises at Level 3 are “functional” with respect to the capabilities, and those at Level 4 have the capabilities fully implemented.
Our study shows that enterprises at lower levels of maturity will score lower for business-technology productivity, responsiveness and project success than enterprises at higher levels. As maturity extends above Level 3, the resulting synchronicity of business strategy and technology delivery makes the enterprise more agile and adaptable. For such companies, changes in the business landscape compel appropriate adjustments to strategy and corresponding action without major disruptions. They sense and address emerging opportunities more quickly.
Most of the companies assessed in the Baseline/BTM 500 have achieved at least a foundation for business-technology convergence (Level 3 rating and above), but only one-third have scored a position in the upper echelon of the maturity scale.
What makes for a mature, converged enterprise? The leaders in the Baseline/BTM 500 exhibited strong capabilities and competencies across the board of our assessment survey, but all enterprises that were close to convergence or on the path to convergence shared some characteristics: They are:
Governance & Organization determines the role of technology in the enterprise and manages technology to meet business goals; structures and manages the business-technology organization; manages enterprise technology risk and compliance; and ensures that there is regular communication of the activities and accomplishments of technology throughout the enterprise.
Strategic Investment Management approves and prioritizes technology investments; develops and manages enterprise project and asset portfolios and provides appropriate reporting; establishes and manages business-technology demand and resource requirements; and applies business technology to project execution through the implementation lifecycle.
Strategy and Planning articulates required business capabilities and the technology plans to enable them; provides a disciplined means of ensuring that budgets reflect and support strategy; supports the creation and management of relationships with those partners best suited to an organization’s strategy; and integrates accumulated or acquired technology assets to ensure consistency with the enterprise’s strategy.
Strategic Enterprise Architecture describes the enterprise’s business strategies, operating models, capabilities and processes in terms actionable for business technology; defines the applications and technical infrastructure required to meet enterprise goals and objectives; establishes a set of standard business-technology applications, tools and vendors; and identifies, organizes and manages existing business applications, technology assets and projects.
In other words, these leaders focus on the strategic, business-oriented management of technology. Taken together, these characteristics describe enterprises in which there are consistent processes with integration across the organization. The “enterprise view” is fully developed, and the enterprise has the means to address a broad array of issues.
Leading enterprises in the Baseline/BTM 500 study have demonstrated that data has become information. And, in large measure, this information is available through—and managed in—an integrated, enterprisewide fashion that facilitates better and faster decision-making. Leaders look at technology as an enabler of enterprise strategy. They consider the technology implications of business decisions and look for innovative ways to embed technology into their ways of doing business. “Technology” for them is more than “information technology” or “operational technology.” It is, instead, “business technology.”
Aligned and synchronized—and, over time, converged—business-technology management occurs in leader enterprises as a fundamental element of best management practices. That these business-technology convergence leaders do well financially should not be surprising: Well-managed business-technology leader enterprises are well-managed enterprises.
Creating a Benchmark
Originally, the goal of the Baseline/BTM 500 was to create a ranking of the top publicly traded U.S. companies by their technology-management maturity. Early trends in the process prompted us to shift gears and focus on the maturity of the top enterprises as a set, based on the sample, and establish a baseline for technology-management maturity and convergence.
The numbers speak for themselves. Companies such as U.S. Steel, Wyeth, Marriott International, Fidelity National Information Services, Avnet and NetApp demonstrate that the principles of business-technology convergence are not exclusive to any vertical market, technology specialty or organizational size. The results of convergence—or the march toward convergence—pay real dividends in terms of real dollars.
Convergence does equal dollars. The companies that Baseline and BTM evaluated saved billions of dollars through the convergence of their business and technology management structures. But that shouldn’t be the only measure of success. The various business-technology management stages—alignment, synchronization and convergence—will almost certainly result in efficiencies that reduce costs. The greater value of convergence is in making an enterprise more agile, adaptive and able to nimbly respond to change and in improving its total performance as an enterprise.
The conclusions of the Baseline/BTM 500 go beyond stating that the majority of the Fortune 500—based on our sample—have begun the journey toward a converged management model. The conclusions encompass a convergence model that provides the optimal governance over business initiatives and the implementation of technology that drives business.
While not all organizations have the same scale requirements, resources and capabilities of the Fortune 500, businesses of all sizes can adopt these principles to maximize technology’s value and ensure that technology serves the organization’s strategic goals and operational needs with efficiency and effectiveness.
Baseline/BTM 500 Methodology
The BTM Institute created an index that highlights the connection between corporate financial performance and business-technology convergence. This research also shows that enterprises at lower levels of maturity consequently score lower for business-technology productivity, responsiveness and project success than those enterprises at higher levels. As the enterprise’s maturity improves, the increasing synchronicity of business strategy and technology delivery makes the organization more agile and adaptable.
To understand what these successful companies do differently in terms of their management behaviors, BTM Assessment tools, based on the BTM Framework, are used to evaluate those organizations against a set of essential management capabilities for effective business-technology convergence. These capabilities are grouped in four functional areas: Governance & Organization, Strategy & Planning, Strategic Investment Management and Strategic Enterprise Architecture. Each capability represents a specific management competency defined by four critical dimensions: Each is ordered by repeatable processes, executed through appropriate organizational structures, and enabled by the right information and technology.
BTM research shows that at Level 1, enterprises typically execute some strategic capabilities in a disaggregated, task-like manner. At Level 2, an organization exhibits limited capabilities, attempts to assemble information for major decisions, and consults the technology function on decisions with obvious business-technology implications. Enterprises at Level 3 are “functional” with respect to the capabilities, and those at Level 4 have the capabilities fully implemented. Organizations achieving Level 5 maturity are good enough to know when to change the rules to maintain strategic advantages over competitors.
Publicly available financial data is then compared to the unweighted average figures for the industry groups of the leaders for a direct head-to-head comparison. The comparison serves both to normalize the comparison and to reduce the number of factors that could otherwise account for performance differences. Depending on their technology investment and the role of technology in their type of business, different industries may experience different results.