Vanguard spends 40 percent of their total operating budget on IT, so its CEO and CIO take the time to talk technology.
John J. Brennan, Chairman and CEO of The Vanguard Group, was an IT evangelist long before that term became a hip job title. He's put his money where his mouth is too, investing an incredible 42 percent of revenues on technology this year alone. But it's been worth it.
In 1985, Vanguard was the ninth-largest mutual fund company in the United States, with US$16.4 billion under management. Brennan took the corner office in 1989, at age 34, and Vanguard hasn't looked back. By the middle of 2000, the company had US$555 billion under management and was the second biggest kid on the block, trailing only FMR Corp., better known as Fidelity Investments. While the mutual funds business as a whole has exploded these past 15 years, Vanguard's growth has outstripped that of nearly all its competitors, including Fidelity.
Jack Brennan has an unusually tight relationship with Robert DiStefano, Vanguard's managing director of the IT division. (DiStefano "has people scattered all over," Brennan says, "but he sits here, right near me.") That's not really surprising considering that eye-popping technology budget, but the pair go further than the usual "align business and IT" sloganeering. DiStefano cites a recent Sloan Management Review piece ("How To Be a CEO for the Information Age," by Michael Earl and David Feeny,) that explains the seven types of CEOs and their attitudes toward technology. The article found that only one type - the believer - is suited to run an information age business.
Brennan and DiStefano recently spoke with Darwin Contributing Writer Steve Ulfelder from their offices in Valley Forge.
DARWIN: You've both touted the importance of the CEO and CIO relationship, and now this Sloan report seems to support your views. Is this still so unusual?
DiStefano: I know a lot of CIOs who have been fired. And many of them point to this report for vindication saying, "[CEOs] gave IT lip service," "They didn't really believe in strategic importance," "They never got involved." This report does a great job of describing what attitude a CEO must have to really make this successful and talks about the five things that the CEO does in actual behaviour that makes him a believer. Basically, the CEO has to put the application of technology in the right context for his company, set priorities, which we think is really critical, send continuous positive signals to the organisation that technology is critical, spend quality time on IT and work closely with the CIO.
What makes me lucky, I guess, is that Jack really is a believer.
DARWIN: OK, now Bob has earned his year-end bonus, but this stuff is easier said than done. What is it that's made you this supportive of the IT function, Jack?
Brennan: Some of it is probably generational. I'm only 46 years old, and I think that's probably an advantage [over older CEOs]. But we also noticed back in 1995 that there would be humongous opportunities to capitalise on the technology revolution. Maybe between the two of us, we had a little view that the whole online thing would happen.
So how are you going to make that online thing happen? Well, you've got to think it's technology that will drive it, which is no great deep insight. I think a lot of it is pretty obvious. But then you've got to get a team in place to make it happen, because most of all believing in IT is a sales job.
DARWIN: An internal sales job on your part?
Brennan: Absolutely. I go to all our technical training graduations for employees and always discuss the concept of technology as a key way we compete.
And other members of our senior team here are believers too. We commit time to it. We're interested in it. We are challenging about it. We've tried to ensure that people who get the senior roles are good buyers of technology and therefore not snowable, if you will, by a fast-talking guy who wants to buy a toy.
Then everybody has to deliver. In a high-growth environment and increasingly competitive business, the only way you can continuously improve is by applying your resources as effectively and efficiently as possible. For us, doing the technology side of the business well means that technology makes our people and our financial resources better utilised. If I get people to understand this, I'm doing my sales job.
DAWIN: And one way you can send this signal is by incorporating technology into your work life.
Brennan: Precisely. It's the little things that count. I haven't sent a piece of paper around Vanguard in years, since the day we went online. I'll probably have carpal tunnel syndrome, but I don't send memos.
DARWIN: An early convert to e-mail.
Brennan: Had to do it. You have to send those signals that this is visible, serious stuff.
DARWIN: You've been head of Vanguard's IT steering committee for a long time.
Brennan: Yes. You come back to the premise that number one, this is a huge part of what we do, so I'm going to be deeply involved in it; and number two, the human element of success in this area is as important as anything.
Bob and I spend a lot of time together because for us, there are no IT issues - there are only business strategy issues, and IT is a core part of how we get at them. There aren't many days that go by that we're not shooting the breeze about something or other. Then we meet every two weeks with the steering group on IT-related issues. So it's a pretty intensive relationship, but it only works if you have a CIO who understands the business and is credible.
DARWIN: The two of you do a presentation in which you talk about IT success as the three Cs: context, competence and commitment. What's that all about?
DiStefano: Just being a good IT department doesn't mean that IT will be successful in the company. Again, the big point is that IT must serve the business. Frankly, technology for its own sake doesn't matter to our clients. There are two other dimensions that are important: the context of the problem set you're trying to solve and the clarity of what it is that we want to do with technology. For us, Jack really sets the context. My peers here [other Vanguard managing directors] in charge of the business areas really have to provide clarity as to what it is that we're trying to accomplish, and IT has to get it done.
DARWIN: Clarity? You sneaked another C in there?
Brennan: The clarity is very important. Otherwise you risk spending money for entertainment value, rather than productive use to meet your clients' needs. At least from my perch, one of the places people go wrong is not getting the clarity part right. The technology part of this is a lot easier than figuring out what to do with it. So clarity of purpose - in the context that is set for the corporation - is really where we put most of our effort as a management team.
DARWIN: Is that the area where some organisations don't do as well? They've got all the technology and they don't have clarity on what to do with it?
Brennan: I'd say that's certainly true. We look at business problems, and we have various arrows in our quiver that deal with those business problems or capitalise on opportunities. One of our arrows is the people in our company; financial resources is another. But the third arrow for us is technology. When we confront a business challenge, we find a technological solution to make us most effective. You see companies that just get it in reverse. They throw big money at technologies and end up with an exquisite solution to a problem that didn't exist.
DiStefano: Those fired CIOs I know always say, "Those idiots I worked for just don't get it. They don't know what they want. I gave them a great system and we used the latest technology, but they didn't like it. They don't know how to specify requirements. They don't know how to do this." Some of that is true, but the implication is that it's not the CIO's problem to make that happen - and it really is.
DARWIN: Why didn't those CIOs know it was their problem?
DiStefano: Mostly, they came from the technology side from day one and didn't get the exposure or the knowledge [that the demands on them] were changing. Or some didn't get the support from the business side that we [in IT] get here at Vanguard. They got the message, "You do the IT, we'll do the business [decisions]."
DARWIN: Bob, do you have a business background? Or does your business knowledge come via on-the-job training?
DiStefano: I started as a programmer, but my degree is in management and psychology. Actually, we [recently] looked at my senior staff, and there is only one person with a computer science degree. You really have to know what goes on from a technology perspective, what things will work together and what things won't. But that alone isn't enough. You have to also be great at relationship-building, communicating, conceptual and analytical thinking. These are things that help you relate to a business area.
Jack and I were talking about that, and he said, "We ought to try to hire poets in IT." So now we hire a lot of college grads every year with computer science degrees, but we look for two or three a year that are more liberal arts types. We just hired a dance major. We put them into an IT role that doesn't require technology but lets them see what we do. They love it. They really want to get into it, and the three we've trained so far have started to take technology courses on their own. We think they can be real future stars for us.
DARWIN: That's an exceptional idea.
Brennan: You can teach the programming, but it's harder to teach breadth of vision and creativity, and the ability to assimilate new ideas. If it's easier for a poet to assimilate the creative aspects of what it is we're trying to accomplish, and we can teach them to be effective and efficient as a coder, why not? We've found that a mix of technicians and nontechnicians is very important.
DiStefano: In 1995, I was looking for someone to run [Vanguard's] systems development group. I said to Jack, "There's this guy [elsewhere in the company], who's not an IT guy but he really knows how to make technology work successfully, and he'd be great." Jack kind of said, "Yeah, OK." I didn't think he took me seriously. A couple of weeks later, he said, "It's done. You've got him."
I think the rationale was that if this guy is going to be a future leader in the company, he'll be better for having spent time in IT. And he was just the best thing that ever happened to us. He didn't know technology, so he didn't deal with that. He dealt with issues like how you make big change initiatives successful. He left us with a lot of great techniques that we still use.
DARWIN: Let me confirm this, because it's a pretty astonishing number. Forty-two percent of your total corporate revenue goes to IT?
Brennan: Yes. IT is integral to everything we do. A core part of our technology strategy is leveraging the people and letting the machines do the doing. We'll swap US $ 2 of payroll for US $ 1 of IT any day of the week. Then the people on the payroll are doing value-added work instead of low-end work.
DARWIN: Even in this day and age, that's an amazing percentage.
DiStefano: Uh huh.
Brennan: And if Bob had his way, it would be bigger.
Are you a CEO with an unusually close relationship with your CIO? Let us know at firstname.lastname@example.org. You can contact Contributing Writer Steve Ulfelder at email@example.com.
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