The innovation phoenix is stirring. The challenge for CIOs is to catch hold of its tail feathers.

Trapped by budget thumbscrews CIOs have pruned spending, streamlined operations, outsourced the everyday. By some estimates they are so focused on optimizing current systems that less than 20 percent of IT budgets are now available for new stuff. Most IT spending goes towards keeping the lights on - admittedly the lights are on longer and cost less - but analysts worry this focus may have squeezed the innovation juice out of many CIOs. Continuous improvement is great but it is not innovation.

CEOs meanwhile are recognizing that peddling the status quo is not building new revenues, so when McKinsey & Company surveyed global business executives in 2005 they nominated technological innovation, emerging economics and offshore manufacturing as three most important global business trends.

The challenge that lies ahead for CIOs is to make room in their thinking, their culture and their processes for this renewed interest in IT innovation. Robert Austin, a former technology manager for Ford in the US and now an associate professor at Harvard Business School (HBS), believes that this will be tough for many CIOs.

"A lot of IT innovation is happening outside the IT department in areas like product development," he says. "The problem with innovating in IT departments is that they have spent so much effort on reduction and efficiency as an approach to value creation." While allowing that is a perfectly reasonable approach (especially when it's demanded by CEOs), it makes it hard for CIOs to "find time to think about innovation" that primarily impacts top-line revenue growth.

"In areas like product development people have permission to think about the top line. Because IT has focused so long on efficiency and cost reduction, IT managers have cost reduction reflexes and efficiency orientation coursing through their veins. It's hard to switch out of this mode and into innovation mode and I don't see that happening in most companies," Austin says.

Gartner adds to the gloom. When London-based research director Marcus Blosch surveyed global CIOs for the Gartner Growth and Innovation survey in 2005, he also found that while many CIOs claim to be interested in making a contribution to the business, very few were actually helping the business innovate. (A Forrester survey conducted around the same time actually went one step further and had business complaining that the systems that IT had put in place were actually barriers to innovation.)

According to Blosch, CIOs are very good at operational innovation but weak at innovating around the business. "There is no doubt that CIOs are good at innovating in the process [area] but around customers and markets their innovation skills are weak. One problem is a lack of engagement with the business," he says.

Even in enterprises where there has been significant innovation involving IT, Blosch maintains that the seed of the innovation more often comes from the business than IT. For example, express delivery service DHL is known for its innovation, and technological solutions such as track and trace and pre-9.00am delivery. Yet Blosch claims it was the business, not IT, that drove these innovations. "I don't think many CIOs understand their customers well."

He also says that there is a false belief that IT governance will in some way spur innovation. "IT governance is something that we are all talking about. But boil it down and it comes down to involving the business in IT decision making. That's not IT innovation."

In those companies that did have innovating CIOs, Blosch says that the CIO almost invariably had a seat at the board and hence first-hand knowledge of where the business was headed strategically and what might deliver a competitive advantage. It was this vision that allowed them to innovate. "These CIOs are part of the general executive team and have a wider remit," he says. "It is different for them than someone who reports to the CFO."

Innovation Culture

Insurance Australia Group (IAG) CIO David Issa does report to the CEO, and does challenge the status quo. He is not interested in fiddling about with incremental change. "My view is that because we have limited resources then it should be spent on the big things - making a strategic change to the organization." There is of course an associated risk, he says, and balancing that risk with the potential benefits of innovation is "one of the most difficult challenges" faced by CIOs. "I don't think it is a governance thing. But it does come down to how well we understand the business and how strong the communication and trust is with the business," Issa admits.

To demonstrate what he means, Issa explains his "barbecue test". Issa says that he wants his IT team, if asked what they do at a barbecue, to say they are in the insurance business rather than in IT. It is for him an acid test of his team's mind-set.

At Centrelink the communication and trust between the IT group and the broader user base is such that policy and IT innovation operate in lockstep, according to CIO John Wadeson.

"We tend to build capacity to solve today's solution and then once people recognize the capability of the system then they create policy to take advantage of that. If [IT innovation] is done well it builds policy innovation." He says this is a legacy of the 1980s and 1990s, when systems were created that, unusually for the period, put clients at the centre of the system. "It was innovative thinking for its time," Wadeson adds. Because of that heritage it has been possible to develop more and more complex innovations that hinge around the individual.

"What happened was we developed mainframe systems to make the service available in the suburbs. It was a question of access. We built that capacity and the government realized they could use that to handle more and more complexity, for example introducing the income and asset test to welfare," Wadeson says.

"We have a big influence on policy. If you looked at the policy development of the last five years it has been built around technology platforms and an understanding of what they can deliver. It is a very iterative process, but there is no way that policy is developed without the involvement of IT."