Transform IT to Transform the Business

By Fred Matteson Print this article Print

A fundamental approach to making IT a major driver of innovation.

Corporations operate based on the assumption of continuity, developing processes to drive efficiency over the long haul, but often ignoring the vital need for constant transformation. As a result, most cannot change or create value at the pace and scale of the markets.

CEOs, who are largely compensated for building value, know they must drive a mandate for change, and look to the CIO to implement the technology that enables transformation.

In most cases, though, IT is the keeper of continuity because current systems support the status quo. Typically, technology funding favors incremental changes to existing processes, rather than bold new bets, and IT skills are focused on maintaining existing business processes. For the CIO and IT to succeed in transformation, they must make changes to funding, governance and specific skills. In short, to become a major driver of innovation, the following four changes are necessary:

1. Business Engagement Model

Developed in the days when the primary purpose of IT systems was to automate operational functions, business engagement models were designed by business analysts with carefully crafted requirements that were later translated into software by engineers. Changing the software was difficult, but since the status quo for business rarely changed, this model worked well.

Today, business cycles are compressed, customer needs are constantly changing and companies look to technology to drive core value creation. So IT leaders should invest in architecture that defines business actions and outcomes, and in new development methodologies that emphasize collaboration between business and IT. These integrated teams spend more time on solution design than code development. Solutions are delivered on technology architecture that mirrors business architecture.

2. Architecture and Design

No one really owns the life cycle of a system. Instead, it is created, maintained, enhanced and, eventually, retired by different groups. A more effective model mirrors software companies, in which software is the product and its entire life cycle is owned by product managers. By adapting this model to internal IT organizations, systems can become more effective at meeting business needs, and retirement costs become predictable.

3. Manufacturing (Systems Development)

Typically, funding for new systems is made available when business cycles are positive. Conversely, funding dries up when cycles turn negative. CIOs must juggle between increasing staff to respond to new requests and reducing overcapacity when the cycle turns negative. Contingent labor is often used to accommodate these cycles. However, IT should use sourcing as a strategic weapon to manage variable demand, rather than just as cost reduction. Invest in architecture and systems design skills to deliver requirements that a strategic partner (the manufacturer) can then turn into code. Invest in documentation and project management tools, and in resources skilled at managing complex vendor relationships.

4. Funding and Governance

Successful companies do a good job of allocating resources to their most strategic objectives. Marketing dollars, inventory, sales capacity and manufacturing capacity are all distributed to maximize return. IT, however, is usually treated as overhead.

If a business unit has money, it is presumed that it can “buy” technology services. This ignores the fact that IT has a number of constraints, including the availability of skilled resources. By not clearly allocating those resources to the most strategic projects, IT ultimately delivers less value at higher cost than promised.

In response to cost overruns and underdelivery, the finance unit distributes technology funding to strategic business units and requires ROI analysis at the project level. Funding is available only to projects with a short payback. While this may provide some prioritization, it does not consider those game-changing bets on IT that typically do not have a fully understood return and are too big for any one business unit to fund.

Keeping the Lights on

Companies should develop an enterprise view of how much to invest in technology, and IT leaders should develop a “keep  the lights on” number, with the rest being used as an investment pool for IT. Management must then determine what percentage of this investment pool to assign to strategic objectives.

Once the pool and investment areas are set, line managers select projects that best support their strategic targets. Money can be reallocated as needed when costs become better known, but the overall pool can be modified only by top-level management. In this way, companies can ensure that scarce IT resources are aligned with the most important business opportunities.

Senior management often believes that IT must be part of the “creative destruction” needed to compete successfully, but does not necessarily believe that the current technology structure can deliver. CEOs must play a much more strategic role in allocating technology funds, and CIOs must boldly change the way IT services are delivered. 

Fred Matteson is managing director of Alvarez & Marsal, which specializes in turnaround and interim management, performance improvement and business advisory services.  

This article was originally published on 2012-01-19
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