CIOs are on notice: contestability is on the rise and IT organisations that can't cut it will be the first against the wall. In fact IT organisations that don't adapt may find themselves on a slippery slope to irrelevance and loss of influence as business units increasingly turn to outsider providers to fill the gaps IT just can't fill. There's only one proven way to bridge the credibility gap and avoid losing influence to third parties: position the IT organisation as a services company with a strong and credible vision of the company's future.
"Today's IT organisations cannot meet users' needs around the Web and e-commerce - creating opportunity for outside service providers. To compete, CIOs must position the IT organisation as a services company - which markets and sells business and technology solutions to internal customers and potentially the open market," according to Forrester Research.
As the boundaries between the IT organisation and business units further blur, some analysts believe CIOs will have to fight to stay relevant under threat of being replaced by a virtual CIO group and on-call IT consultants. CIOs that can't continually prove their value to internal business partners, even external partners and customers, could be a vanishing species. Marty Hartman, US-based research manager with IDC's IT Advisor program, says changes in the way people work and the pace of technology are transforming the nature and role of the IT organisation in every industry and forcing change. "Every IT organisation must evolve from a service-based function to one that provides strategic technology direction throughout the extended enterprise, including the customer," Hartman says.
Lack of Vision
When Forrester talked recently to business executives who sponsor technology projects - everything from e-commerce to product development initiatives - it found widespread concern about IT's lack of business knowledge and agility.
Levels of satisfaction varied, but dissatisfied executives voiced their opinions clearly. "We were forced to look outside our IT group for a decision support project, because IT lacked the technical experts and the vision to execute. The service provider completed the project in the three-month time frame - a feat that IT with its shortage of talent could not accomplish," said one chemical company executive.
"Some companies structure to be proactive and innovative, but not us. Our IT department resents any technology change. But we are undergoing the same changes the microprocessor industry experienced in the 1980s. If we don't innovate, we'll end up like Digital," said another executive from a financial services company.
These are the sorts of comments that ought to send a shiver down the spine of any CIO wanting to keep his organisation relevant in the new millennium.
Forrester found IT organisations were seen to be making strides in their attempts to proactively deliver business solutions. Yet most were failing because they were too slow, too cost-focused and too tactical. As a result - and herein lies the threat - business executives were increasingly turning to third-party providers for their depth of technical skill and ability to execute. Forrester posits that if they are to stop vendors like Sapient and IBM Global Services winning strategic work in areas like e-commerce strategy and integration, CIOs must position their IT organisations as highly competitive services companies.
Bridging the Gap
In Australia some IT organisations are already well on the way to meeting this reality. Peter Hind, who runs IDC's InTep forums, cites the example of two Melbourne-based companies consciously striving to bridge the credibility gap between the IT department and business. Both have recognised that without the effort they'll eventually end up simply supervising the contracts of third-party service suppliers. "These companies realise that if they don't bridge that credibility gap, business will just get rid of them; and part of the issue that they have is a feeling that they have to show that the services they have are cost-effective," Hind says.
One of those companies is Mobil Oil Australia (MOA), which is making heavy use of balanced scorecards on its way to achieving business alignment and becoming a sustainable best-in-market supplier of IT (see CIO, October 1999). MOA finds the balanced scorecard approach helps it get a handle on IT value, provides easy measures of the cost of doing business, and gives IT credibility as a supplier of both core business systems and value-adding IT services for new business developments.
The other is chemical company Orica, formerly ICI Australia, which has spent the last 10 months studying the structure of its corporate functional service providers - engineering, finance, HR, as well as IT. According to general manager, IT shared services Keith Revell, Orica used to have a centralised IT group, which was seen as technically competent, capable and process-oriented, but somewhat bureaucratic and divorced from the businesses. Then there were the independent IT groups in the businesses which were more flexible and responsive, but didn't have the critical mass to be able to implement solutions as effectively as the central IT group. The set-up was neither flexible nor responsive enough to business needs.
"We've got some dynamic customers internally, who are trying to respond to their own markets. And if we put impediments in the way of their ability to respond, then they are going to lose market capability and market share, so we have got to be responsive to that," Revell says. To answer that need, Orica set out to find ways to amalgamate the IT groups while establishing some new business principals. These included getting closer to customers in order to understand the business drivers, being more responsive, thinking globally, and avoiding being fixated on standards or technology.
The outcome, Revell says, is a newly implemented shared services organisation embracing IT, engineering, finance and HR. The new organisation brings together five fairly autonomous IT units and four major business units that previously expected to be able to set their own agenda for IT. Above it sits a business governance group called the IT Buyer's Committee where business representatives negotiate services and agree funding mechanisms.
Revell says the key driver for the shared service organisation is to ensure the IT group is competitive and fit for service. "At [some] time in the future we will be measured against external providers and if we don't meet the market then our internal customers can choose to buy services elsewhere," he says.
The ever-present challenge for IT is to demonstrate that the investment in IT produces value.
"Our IT shop is a service provider and we have internal customers," says Optus CIO Chris Bird. "If we don't remain service-focused, and worried about our provision of services - the cost at which they are provided, the quality which is provided - then I think the IT group has lost the plot.
"I'm working to keep that focus in terms of a whole bunch of measures. The key thing is the IT group exists as a service provider to deliver outcomes: mainly new products and projects, but also a seamless infrastructure which runs 24 hours a day, seven days a week and doesn't cause any problems to the business."
There must also be a two-way dialogue between business and IT, Hind says. And it's not enough just to be responsive to business needs - you also have to be a "visionary", projecting what the business should be doing next. "The evolution is from being a servant, where you do as you're told; to being a service provider or a partner, where you're in there, helping give a service and fine-tuning the service. Then you have to evolve that to a strategic role," he says, "like in an e-commerce environment, where the business doesn't quite know how far it will go, and it needs that dialogue from IT to help business to think about the distribution channels it could use."
Keeping up means many IT organisations are having to reinvent themselves, as Orica has done, while developing entirely new models and structures for working with the business.
Proof of Value
One reason why the IT organisation, once a mandated overhead function, is having to demonstrate its value to internal and external partners is that companies can no longer afford to wait to leverage technology. "Customers are demanding more technology-enabled services and value from their vendors," IDC's Hartman says. "Ultimately, technology options that leverage knowledge, rather than those that use information or data, will create the greatest competitive advantage."
Under those conditions it's no longer good enough for internal IT professionals to have technology skills; they increasingly need to have business savvy and interpersonal flair as they sell themselves to the organisation. Along the way the IT organisation has to find ways to demonstrate its value to internal and external partners.
Forrester says an IT services company markets and sells technology solutions relevant to business unit executives - such as customer relationship management and streamlining the call centre and the Web for better service. It operates in profit and loss mode, building the actual costs of delivering a new technology solution into the business case, regardless of budget, rather than charging back itemised services to business units. And it maintains a flexible portfolio of skills, with staffing levels adjusted according to demand to ensure IT can respond to the needs of business units.
At Pacific Dunlop the IT organisation spends a fair part of its time these days selling itself to its customers. Account manager, group head office Nina Robinson, for instance, is employed by the IT group, but spends her time working with three internal customers as well as one external one: the Cables Group, an independent business since being recently sold off. "So I work for the IT area, but out with the customer, to make sure that service levels are being met and that type of thing. We have to make sure that we're commercially competitive and seen to be just as good as a third party," she says.
In the past Pacific Dunlop allocated a proportion of its total budget to IT, causing many of the true costs of IT to be hidden. These days, customers are charged directly for services to ensure they all pay for what they use. While this is only fair and reasonable, Robinson says it has led to a perception by some customers that they are now paying more for services. Under those circumstances there is considerable pressure on IT not only to prove its value but also deliver efficiently and effectively.
"Customers are a lot more critical of the service you provide, because they can see direct costs relating to it," Robinson says. "You have to prove you're just as good as a third party, because one of our main themes in IT is to be a provider of choice: that they don't just have to use us now, they can go somewhere else for the same service. So we have to make sure we justify everything we do."
Robinson says proving the IT organisation is cost-competitive has been a long process, easier to achieve in some areas than others. It's involved benchmarking against other companies, then communicating the results throughout the organisation. It's also meant maintaining far more contact with customers and moves by IT to increasingly market its services.
Even where services are already outsourced the internal IT organisation must be able to continually market its value to the business. At Optus the IT group keeps service provision up to scratch with the help of a customer satisfaction survey regime providing regular input from customers about their level of satisfaction with the services provided. The surveys are designed around "towers of service".
"There's desktop services, help desk services, applications delivery, operations-type stuff. We get a good measure on each of those services so we can align them back to our outsource providers to ask them to improve their capabilities in those areas," Bird says. "And our contracts encourage outsourcers to continually improve with incentives for positive improvement and disincentives if they don't improve." Until recently Optus conducted the surveys every six months. In recent times they have proved so valuable the company is introducing separate surveys for every project.
Meanwhile, within Orica Revell is engaging senior business customers as representatives of the buying community to reach agreement on service levels. "That involves exactly what the services are that the customer wants to buy and how much it costs, and complete transparency of where those costs are spent. So our customers can sit down and say: 'Well, why are we spending so much money on a particular aspect of the technology?' and we can respond to that."
Revell accepts that the internal IT organisation will never be able to meet every business need, but says he is confident Orica will achieve a mix of internal and external sourcing of service delivery, such that the IT group will remain competitive for internal customers. In support of that ambition his group maintains a strong focus on its capability to deliver core systems while locating alternative suppliers for items that are non-core or add little value. "We will be doing selective reviews of components of our architecture and systems to determine who can best supply them - our internal people or some external suppliers," he says.
If the revamp is successfully repositioning IT as a competitive service organisation, it is also proving highly educational for all parties involved. IT staff have had to learn more about the business issues and the business drivers, while customers have learned more about the drivers within IT that they can control.
Altogether it has been an ideal opportunity to really engage customers and the businesses on the drivers for IT while opening up communications, Revell says. "I came from one of the subsidiary autonomous IT groups and for quite a while it was a very strong defender of its autonomy and refused to be part of the greater corporate IT environment. But now I can really see an opportunity here that is fairly [significant] for us as an organisation, to set the IT environment up as a core competency of this organisation able to really add value to the businesses."
But there are other ways to enhance the responsiveness of IS. At Mobil balanced scorecards are achieving that end in many areas, says MOA GIS infrastructure manager Raymond Bowring.
For instance, since business development analysts are closely involved in the growth of business units, MOA's scorecard metrics for these analysts reflect their value-adding contribution to the effectiveness of IS in partnering with business development and change. "The IS manager takes part in various business forums, and the metrics from year-to-year reflect the high-level changes in business strategy through this involvement," Bowring says.
One of the strategic objectives of Mobil's IS is to be better than any alternative supplier. To help it achieve this goal IS is partnering with a prominent IT consultancy. The firm has significant experience in brokering IT outsourcing arrangements in Australia, having acted for organisations on either side of IT outsourcing arrangements.
"MOA purchases and uses the industry market data that is revealed in these arrangements, so that we understand the prevailing market value of IT services," Bowring says. "This is different from benchmarking with other IT organisations. In the benchmarking approach to learning the value of IT services, one only learns about common practices, not necessarily best practices, or the actual values and costs that an alternative supplier would bring to the table."
All up the balanced scorecard has removed most of the uncertainty about how to implement "accountability" and "empowerment" and ensured IS product managers are aligned with the IS objectives of business alignment and best-in-market performance. "The IS group is now a credible supplier of core business systems and is achieving credibility as a supplier of value-adding IT services for new business developments," Bowring says.
It is a success many IT groups will be looking to emulate as they fight to stay relevant into the next century.
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