Tight nexus between information systems and business strategy is the grail for the global corporation. To date the grail has been chimerical for most chief executive officers, whose expectations of technology have rarely been matched by practice. Yet they remain optimistic. They have to.
When the world's leading chief executive officers gathered earlier this year at the World Economic Forum held in Davos, Switzerland, they were focused on the topic, "Responsible Globality". They met at the end of a tumultuous year, which served to demonstrate the emergence of a global economy. They met to discuss the rocky rides of Asia and Latin America, to ponder the wisdom of America's ebullience, to worry over Eastern-bloc basket cases, to wonder at Europe's big adventure with the euro. They met to discuss tactics, to network, to develop and share ideas. And everywhere, everyone was talking about global electronic commerce and the age of the Internet. Just as the steamship, the aeroplane, and the telephone have shrunk the globe for previous generations, the Internet delivers the next contraction. And just as each generation of business has been forced to embrace each quantum leap in technology, so this generation of chief executives must grapple with electronic and global business.
Accounting and consulting organisation PricewaterhouseCoopers (PWC) published at Davos the findings of its 1999 Global CEO survey, which determined that "CEO awareness of the critical importance of information technology and its power to transform the global economy, especially through electronic business, is acute and growing". For chief information officers the news is a mixed blessing. Yes, CEOs remain committed to information technology; but yes, they want it more closely meshed with business strategy and better able to deliver results.
Disturbingly, the PWC research also found that almost 70 per cent of CEOs still rate as fair or poor their technological sophistication. So although CEOs want their business to embrace change, they personally remain recalcitrant. Fewer than 50 per cent had used the Internet in the four weeks leading up to the survey. Alongside management of expectations, CIOs will also be faced with the continuing role of educating executives about technology.
Fear may be one of the drivers behind the surge in demand for better information systems. PricewaterhouseCoopers found that half of the CEOs foresaw threats to their business from non-traditional competitors entering their industries through electronic business. Meanwhile, a fifth expected their own e-business revenues to grow 20 per cent or more in the coming five years. As the report notes: "Communications technology first drew the world together; now e-business is altering the value propositions upon which business has been based." The NRMA is grappling with many of precisely the same issues. As one of the largest insurance companies in NSW, the NRMA has been exploring how it might better harness technology. Chief operating officer Dick Simpson (who recently announced his move to Telstra) explains the task as "pre-emptively using the technology -- moving from being a passive user, to seizing the active advantage. To get the competitive edge." Simpson, a former senior executive with both Unisys and Optus, is well aware of the supplier side of the equation, and the promises made. Now he is seeking delivery from the user side of the fence. "If you look at the threats to us, almost all are outside the insurance industry," Simpson says. It's a problem of technology's making. "A significant number can use technology to disaggregate what was an aggregated business. I could put together an insurance company tomorrow using wholesale products and insurance, get someone else to handle claims management, and then hire another company to conduct the selling and customer service. And it's the same for road service. Technology is providing the capacity to do that."New Value PropositionsAs the 1999 PWC Global Survey notes: "Half of our CEOs see non-traditional companies employing the disruptive technology of the Net. These competitors will attempt to establish new value propositions. They may represent competition of an entirely different order than the traditional sort, with negligible overhead, new distribution systems -- competitors perhaps capable of vaulting into triple digit growth brackets. "The challenge for these CEOs is that they are fully invested in legacy business infrastructure, which means that they confront three uncommonly difficult tasks. 1. They must invest in and grow current businesses that underpin shareholder value. 2. They must profitably manage the inevitable decline of certain legacy businesses. 3. They must quickly transform these businesses before competitors using disruptive technology do it for them." What Simpson now wants to do is harness technology for the NRMA, so that the service offerings are more tightly integrated, making customers less likely to want to shift to competitors because of the service package they win from the NRMA. "This is the concept behind HELP [the NRMA's branding campaign] -- and part of our strategic positioning. We want to be the company that people turn to [in order] to execute their lifestyles," Simpson says. That might mean developing hybrid financial products that effectively lock a customer into the NRMA.
"There are new players from outside the industry who are looking for opportunities in disintermediation. And we want to get into other industries.
We can't sit there being nibbled by a duck," Simpson says. "We will look at financial services, but we have no wish to be a bank." He believes the NRMA needs to make its move within two to three years. Simpson is keen for the information systems staff to be very much included in the business and not confined to a computing ghetto. At the NRMA the IT staff report to the business, which is the ultimate owner of technology.
CIO Reporting Line Counts
Such close links are important, as evidenced by a survey released in March by Compass Analysis. The company sponsored an investigation, conducted in the final quarter of 1999 by the London School of Economics' Professor Kit Grindley. One of the overwhelming findings of that report was that in companies where senior IT executives report at the highest level, preferably to the board, technology is perceived to be most effective. Rawdon Simon, managing director of Compass' Australian operation, says that the survey of 659 CEOs (39 of them Australian) found that in the main, although CEOs had high hopes for IT, information technology was not delivering against that expectation.
However, in companies where IT management was more highly placed, that mismatch in expectation versus delivery was reduced. But for most CEOs questioned in the survey "the vision of IT fails in its execution. The business objectives are lost as a result of the solution imposed by the suppliers," Simon says.
James Schiro, CEO of PricewaterhouseCoopers, acknowledges the paradox.
"[PricewaterhouseCoopers'] survey demonstrates that CEOs expect to face challenges in coming years as e-business offers market entry to non-traditional competitors. In response CEOs are calling upon technological tools that speed information flow and product development: the Internet, ERP implementations, knowledge management systems. Yet the survey and my conversations at Davos make it clear that technology alone does not create long-term value. "Leveraging the immense potential of human capital is more critical than ever," Schiro says.
Dick Simpson is well aware of the need for the close meshing of information systems and the human element of the organisation. "The customer relationship is important. People talk about using intelligence in the networks," Simpson says. But that, he argues, does not mean speedier networks It does mean smarter application of the networks -- so that information systems can be used to trap more information about the customer, and then used to offer better decision-making advice to the NRMA employee dealing with the customer.
The Davos group recognises the importance of knowledge. Knowledge management was "absolutely critical" to their companies said 97 per cent of respondents, and 84 per cent claimed to be confident that their employees were able to access the appropriate knowledge. PricewaterhouseCoopers expressed some scepticism about this level of confidence, obliquely suggesting that the CEOs might be, in fact, confusing access to information with access to the considerably more powerful asset, knowledge.
One company which is aware of the need both for information and knowledge is global distribution company DHL. General manger Gary Edstein claims that one of the key drivers for the business is "information excellence". In March the company unveiled a revamped Web presence, which permits a much wider range of customer services. For example, service alerts can be e-mailed to clients each morning should unforeseen social or political events take place that might delay a shipment; advanced tracking facilities mean that e-mail updates are available every time a shipment clears a DHL network checkpoint. Edstein believes that although a company may think it is buying a delivery service, it is also paying for a data service about that delivery. "When we were a courier company, we based the business on a proof of delivery," he says. "As we progressed to a global distribution company, they want information all the way.
We can provide a service differential using IT." Edstein echoes the Compass findings, as he believes that one of the keys to achieving objectives is that CEOs need a strong CIO and a "very clear view of what is required, then an IT group that understands what you want to achieve".
For global companies that means having a global vision and a global information technology division to deliver the vision. Not to say that local information groups are emasculated. On the contrary, Edstein says that if a local group comes up with a great idea, and believes it can deliver, then it can bid for budget to complete a project which might have global ramifications. That, though, is unlikely to stray far from supporting the business in its core global distribution business. DHL is in the unusual position of expecting its core business to grow rather than be cannibalised as a result of the rise of e-commerce. Although bits can be shipped over networks, atoms can't, as famously explained by MIT's Nicholas Negroponte. DHL, though, is in the business of shifting atoms around the world. Therefore the more international online sales transactions are concerned, the more atoms DHL might expect to deliver. Edstein, however, isn't blind to the potential arrival of new players.
"I think one of our core competencies is our global network developed over many years, which UPS and FedEx now want to match," he says. "But who's to say that a Oneworld and their information systems don't try to mirror it. They would still need a ground capability -- but it's not beyond the realms."Edstein also sees the potential rise of traditional post offices into more global distribution. Dutch Post, for example, now owns TNT, and DHL itself has Deutsche Post as a quarter shareholder. "Then there are the telecommunications companies with a global reach. There are always companies asking how they might diversify and use their global reach." But with a market now growing at 18 per cent a year for global distribution, Edstein believes for the present "sticking to the knitting" will be the best approach for DHL. That will mean a continued investment in, and refinement of, the technology implemented at the company.
The same holds true for the Commonwealth Bank. Chief executive David Murray explored the issue at some length recently in the Australian Financial Review.
"The technology really comes back to the simple fact that we are only an information processing business. And it's information processing that's been at the forefront of all the change," Murray says. "There are a lot of people who now have the financial capacity and the know-how to do our business in a new way for our existing clients. So most existing operations like ours face a dilemma of how quickly you switch to the new and try and preserve value rather than just harvest the old operation. While appearing to add value in the short term, you lose value in the long term. "Now, to deal with that I think our job firstly is to ensure that in a low-inflation, low-asset growth environment that we are cost-competitive in Australia on an international benchmark basis. That means our old operations, our old system will have minimal drag going forward.
"The next is to take in the new technology more aggressively than anybody else, and get those offerings to our customers before somebody else does it. They're the two approaches that would drive our strategy more than anything else." Clearly, Murray has the grail in his sights. But then he is operating in perhaps the most competitive information-intense sector. Of the chief executives interviewed in the Compass survey, those in the finance sector were most bullish regarding IT's contribution, Simon says. Yet the finance sector as a whole did not believe that information technology was delivering much in the way of cost savings. Banks, however, do have a complex entanglement with technology. On one hand, technology allows them to shed expensive bricks and mortar branches, replacing them with electronic services, while technology also exposes them to greater demands for service from clients, and increased levels of competition from new and emerging players.
Responding to Change
The new players in this sector are likely to have an impact on the thinking of the Australian Payments Clearing Authority. APCA is a service organisation for its members -- the nation's financial institutions. As chief executive officer Dr Peter Smith explains: "We provide services in payments systems and how they are delivered, and, of course, technology plays a large part in shaping the direction of the payments system." Evidence of that emerged in March when APCA announced that it was progressing its framework to support members' participation in electronic commerce, based around the issuance of digital certificates from APCA to its members. It selected Baltimore as the vendor to produce such certificates, and although APCA is not yet ready to issue working certificates, it describes the step as an important milestone. "Our innovative work is shaped by technology," Smith says. "Look to the future and there is much in emerging technology which will shape the payments systems, and in turn that influences our thinking. APCA needs to position itself to respond to those changes and reflect that back in our recommendations to the membership."That membership, though, might well change. "When we look at the payments systems we see different organisations playing a larger part -- particularly the software and telecommunications companies," Smith says. "If you look at payments now, it has been possible to fragment [the payments system] to its component parts. Some years back that opportunity was not there. It affects everyone involved in the payments process." Smith must factor into his strategic thinking the possibility that "telecommunications companies see themselves as playing a role to offer add-on services -- in competition with the finance sector", and that in turn might affect the overall composition of APCA.
PricewaterhouseCoopers nominated the Internet as a disruptive technology, which will reshape the composition of industry sectors. "In this world there are but a few primary sustainable advantages: one is the power of a brand, the other is an organisation's capacity for rapid and relentless innovation in close harmony with market needs," notes the Global Survey report. CBA's David Murray is aware of the arrival of new players and technologies. "All of the bargaining power shifts. That's why brand is critical," he says. "You must have a brand that people will come to on a third-party site if necessary. So you might have to ally with someone in the communications business to have a more secure position in that communications channel." Just as it is for Murray, the challenge for the modern CEO is to prepare for the onslaught of new competition unleashed by technology, while harnessing the technology to allow growth and expansion. And decisions need to be made on the run. PWC's survey identified 35 per cent of CEOs who said that today their companies earned no revenues from e-business.
Within five years only 8 per cent believed that would still be the case. Asked to identify their highest priorities -- overwhelmingly the respondents said "setting a corporate strategy and vision", followed by "reshaping corporate culture and employee behaviour".
As one Brazilian interviewee responded: "The challenges will not change drastically. What must change is the way CEOs address those challenges. CEOs will need to be personally adept at using technology to maximise their decision-making agility." An admired university professor once warned that through life the questions asked were always the same; what separated the wise from the not so wise was that their answers changed with experience. Technology demands better answers sooner.
This story is the first of a continuing series, "Inside the Mind of the CEO".
Over the next few months Beverley Head will speak with some of Australia's most senior executives and report in CIO.
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