Building a Capability-Driven IT Organization
The road to growth, flexibility and innovation
Many IT organizations are so busy fixing today's issues and keeping up with change that they have no time to build the capabilities needed for tomorrow—a critical shortcoming when the goal is adding value to the business. Further, they are often stuck in operational mode and thus poorly positioned for the innovation required in today's economy. To move beyond troubleshooting and actively plan for the future, IT has to close the gap between the need and ability to deliver.
No doubt many executives exploring the myriad technology investment paths that lie before them can empathize with the title character in Lewis Carroll's book, Alice's Adventures in Wonderland. A well-known passage describes this interaction between Alice and The Cheshire Cat:
"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don't much care where—" said Alice.
"Then it doesn't matter which way you go," said the Cat.
Today, much is expected from IT, new delivery models and innovative technologies. Employees assume IT will keep systems running with little to no downtime or interruptions. Business executives expect IT to help drive down costs while enabling business transformation initiatives and growth. Customers and partners want IT to adopt the latest and greatest technology to make the business of doing business easier, while simultaneously reducing the cost. And the stakes have never been higher. Given the increasingly critical role technology plays in the competitive positioning of an organization—from adaptive supply chains to innovative customer relationships—companies need to use their technology more effectively than ever if they are to stay ahead of competitors. Clearly, IT, if positioned and delivered appropriately, plays a vital role in the transformation and development of key capabilities as companies grow (see figure 1).
Yet in complex corporations where change is dynamic, where projects compete for funding, and where priorities are continually shifting, how do companies build IT capabilities that foster innovation and create long-term value for the business? How do executives determine which IT initiatives will create the most value and growth for the company?
Answers to these and other important questions hinge on moving IT to a higher, more strategic position on the CXO agenda, and into areas directly linked to driving business value and strategies. As such, it becomes increasingly important to define a clear path for creating a "capability-driven" IT organization—one that understands the skills and capabilities needed by the business to drive growth, flexibility and innovation while still running IT at an appropriate cost.
Taking the first step on the journey toward defining and building the needed capabilities is often the most difficult part. And, like Alice's Adventures in Wonderland, the clear path required for that journey can only be defined after the destination is known.
The Path to a Capability-Driven IT Organization
Identifying the destination is not always easy. Technology pervades almost all aspects of current business operations and is considered a critical innovation tool that can help support future growth. Delivering on that promise is the challenge for the IT organization (see sidebar: A.T. Kearney Research: The Six Mandates for IT Innovation). While business and IT executives agree on the need to support growth and develop key capabilities, they often disagree on delivery and execution.
As indicated previously, today's IT organizations have much to manage. Business models, IT delivery and technology architectures have changed dramatically in recent years (see figure 2). With offshoring and other delivery models now standard, it is often hard to determine how IT should really be structured to deliver best value. When one of our clients in the fashion apparel industry wanted to position its IT organization as an "innovator" rather than as a team that merely "keeps the lights on," we knew it would be a challenge. The company would have to undo years of pushing IT away from the strategy table. Company executives wanted IT to play a larger part in helping drive business improvements, but were not always willing to provide the necessary support. In fact, the company had not invested in IT for years, so the existing systems were old and inflexible. The IT team had gone through many rounds of layoffs and was constantly firefighting and developing one-off solutions to enable new business initiatives.
With this in mind, we began with a four-part approach to building a capability-driven IT organization that would deliver the key skills to its business counterparts (see figure 3). The method can be applied generally to companies with similar challenges:
1. The "What": Define the required IT capabilities. This step determines what capabilities are required. The main objective is to define an IT vision and prioritize the IT capabilities needed to achieve the vision. Questions to answer are:
- What business goals are needed to drive competitive advantage?
- What is the strategic vision for IT, and how is it positioned to deliver against these business priorities?
- What gaps need to be plugged in the current IT organization in order to deliver this vision?
- What specific IT capabilities are needed to deliver the future-state?
2. The "How": Design the end-state IT organization. This step determines how IT capabilities will be delivered, as it ensures end-state IT capabilities are supported by the right IT organization. Questions to answer are:
- How should IT organize to support the delivery of the IT capabilities?
- How should IT partner with the business?
- How should governance processes be changed to improve efficiency and encourage innovation?
3. The "How Much": Develop the "should-cost" financial model. This step primarily determines how much is required to deliver the capabilities. Questions to answer are:
- How much is the current baseline of IT spending?
- How much should be invested to deliver the required services at the best cost?
- How much will it cost to deliver and optimize the needed IT services?
4. Create the go-forward roadmap. This step lays out the implementation plan. Questions to answer are:
- What are the critical milestones that must be met to reach the end-state?
- What dependencies or considerations govern the timing of various actions?
- How should IT be "branded" to the organization?
- What change management priorities need to be addressed?
The following outlines the objectives, critical decisions and factors to consider in completing each step.
1. Define the required IT capabilities
Every organization's needs are different: Some need IT to focus on delivering the latest and greatest applications, while others need IT to create a robust infrastructure. Let's accept one fact: IT is a service provider and the firm and its employees are its customers. IT must enable the business and ensure that its customers are satisfied with the basic services (for example, keeping servers and email up and running, providing help-desk support) and that all IT operations are efficient and cost-effective.
Creating a strategic IT vision requires determining the IT organization's various customer segments and their business needs. Generally customers need a set of capabilities across a range of functions. Typically these capabilities fall into three main areas. Each of these areas must be optimized by the IT organization:
- IT operational excellence. Critical capabilities that allow IT assets to be managed to take information systems to higher levels of effectiveness and cost efficiency. The objective is to create low-cost, flexible support for the enterprise.
- Business enablement and process improvement. The ability to transform or improve core business processes within the organization. The goal of core-value and IT-enabling processes is to take value chains and business operations to world-class levels. The measure of success is not cost reduction, but improvements to key business processes.
- IT innovation. Solutions developed with the business to help achieve breakthrough innovation to improve competitiveness. Initiatives move beyond improving processes to helping create competitive strategies and transforming market dynamics, repositioning a company against its competitors or allowing it to enter markets where it did not previously compete.
For our fashion apparel client, several interesting findings came from the assessment of current IT services. We expected overall feedback from a customer survey to be negative, since user complaints and contentious discussions with the business were fresh in IT leaders' minds. The survey, however, revealed that in general, most users were happy with the basic IT services. Further examination of the data revealed that business leaders were more critical of IT than general users. Since business leaders are involved primarily in future-looking projects, some of which may be running behind for a variety of reasons (some beyond the control of IT), their view of IT was often framed as "what IT hasn't done for me yet." In the end, the need for IT to establish credibility before being viewed as an innovative partner was critical.
IT capabilities can be illustrated in a capability catalog, which is used to establish a common language and framework on services to be consumed and delivered to the business (see figure 4). Additionally, the capability catalog can be used as a basis to define which capabilities are core and which are non-core. Core capabilities are those for which in-house expertise must be developed, because they are often critical to the business and for gaining competitive advantage. Examples include business relationship management and IT strategy and innovation. Non-core capabilities are less crucial to be executed by in-house staff and are often outsourced to IT services providers. Potential examples often include end-user support, application development and infrastructure management (see figure 5).
Consider, for example, the additional competitive advantage a company might get by improving data-center operations beyond a base-service level. True, further improvements will reduce costs and increase the reliability of backup and recovery services—but will this be the strategic differentiator when competing in the market? This is not to say that non-core capabilities are not important. They all have a base level of service that must be maintained for IT to "keep the trains on the track." We want to compare the marginal return on investment (ROI) for investing in non-core activities to investing in areas such as IT innovation or data management. If IT can bring new applications to the table that drive product innovation, enable the next generation of marketing capabilities, or provide business intelligence that ultimately improves customer profitability, the returns are much larger. The core-versus-non-core framework and dialogue is a good way to communicate what drives competitive advantage and what an in-house IT team must get right.
Significant room for savings often exists if non-core activities are not provided efficiently. For example, one of our textile clients used AS400 servers in most of its in-house data centers, so the company considered its monitoring of AS400 as a core activity and kept it in-house. Following an analysis, we concluded that the company would be better served by outsourcing all of its data-center activities. The decision not only freed up the infrastructure director's time to focus on core activities, but also cut costs by 40 to 50 percent. The money saved in outsourcing these activities was re-invested into improving existing business applications.
With our fashion apparel client, IT generally delivered well; however, there were several improvement opportunities that emerged as a result of the capability catalog analysis:
- Although the business relationship management function existed, there was a need to drive more innovation and be more proactive in the role
- Data management was a capability that needed to be developed to support the enterprise and important transformations
- Training was a key gap and needed more centralized planning and execution
- IT service management and planning needed a more holistic approach
2. Design the end-state IT organization
How should an IT leader structure the organization to deliver the needed IT capabilities? Over the past decade this question has become more difficult to answer and, in fact, has no right answer, as the appropriate structure will vary from company to company. Strategic initiatives, corporate acquisitions, internal capabilities and internal politics often influence a company's IT structure. In our fashion apparel example, the priorities led to several key changes:
- A renewed business relationship management team, dedicated to partnering with the business (and regions) to delivering innovative solutions rather than focusing on tactical project management, which was broken out as a separate team
- Creation of regional IT leads to help support the growth strategy and leverage the enterprise architecture across all non-headquarter locations
- A centralized data management team to ensure clean and usable data to support business decisions
- An IT planning team to drive service management processes and internal IT initiatives
Regardless of specific changes, we have found, however, that good IT organizations often have several common characteristics:
Executives exploring the myriad technology investment paths can empathize with Alice's Adventures in Wonderland.
A structure that drives good business-IT partnerships. The business-IT interplay is critical for fostering business transformation and innovation. Leaders who manage this structure understand the partnership requirement from both the business and IT side, and occupy a role often defined as business relationship manager (BRM). Such leaders act as internal account managers and a single point of contact for specific business teams, proposing IT solutions for business problems, prioritizing business projects based on their value to the company, and identifying creative ways for IT to support business innovation. Creating a BRM role produces a shift in the IT organization, from a focus on applications to a focus on business. One key trade-off for this role that must be analyzed is the amount of responsibility assumed across the IT delivery lifecycle. Understanding the career path for this role and whether the role is responsible for project delivery and deployment often leads to other important considerations for IT leaders.
Take, for example, the CIO at the fashion apparel company who revitalized the business relationship management team, whose members provided a single point of contact for each business area, with business analysts, project managers and applications developers providing support to the team. The company prioritized IT projects according to the company's strategic roadmap, and the CIO appointed leads for business units in Europe and Asia so they could collaborate more closely with the central IT organization.
Because each company is different, roles such as that of a BRM must be thoroughly reviewed for applicability. Additionally, roles should be designed in the context of the strategy and information that will be used to get the job done. Having a clear IT strategy that is aligned with the business and drives a portfolio plan for each function is typically critical and necessary for success in this role.
We have seen some negative repercussions from outsourcing the BRM role. For example, the IT leaders at a global retailer outsourced IT aggressively, because they wanted to focus their resources on their core competencies. While this is a common strategy, the company outsourced all of its IT functions—from application development and help desk to enterprise architecture—and reduced the BRM function to a single-sourced vendor. Although the retailer initially cut costs, it soon found IT spending rising at a much faster rate than revenues. The critical issue was a misalignment of incentives: By outsourcing the BRM function, the company effectively gave the vendor a blank check to start new IT projects. We helped the client bring several functions back in-house, including the BRM role and enterprise architecture. We also helped the company create the appropriate governance structure so IT would respond to the business in a cost-efficient manner. When our textile client considered outsourcing its entire IT organization, we took what we learned from this study and recommended it keep the BRMs and vendor managers in-house.
A holistic approach to IT strategy, planning and execution. High-performance IT organizations form centralized IT planning teams to improve service and drive IT internal initiatives. Here, "shadow" IT organizations (teams that perform IT functions but don't report to the central IT organization) integrate into central IT to deliver significant benefits.
Internal politics can sometimes influence decisions to centralize shadow IT teams. Many companies, particularly large companies with a history of acquisitions, have teams performing IT functions throughout the organization. IT functions cannot all be run remotely from headquarters. Certain regions may need to follow regulations that mandate localizing customer data and managing it with teams that satisfy certain local requirements. In other companies, regional units may have strong clout through better business performance and control. They consequently command their own local CIO or IT decision making. These regional business units may have IT teams managing the company's e-commerce site or its local customer data. While regulations such as the local data privacy laws may necessitate this, complete local autonomy is not a good idea. The best way to harvest potential benefits in critical markets is through robust governance and effective spending management. We believe a company would lose out on potential synergies (for example, from central procurement) and innovation ideas if its regional units were autonomous.
In the case of global corporations, for example, it does not surprise us to observe the same IT vendor quoting different rates to different business units of the same company. Much of this is driven by internal communication gaps, which result in one unit receiving better volume pricing than another for identical services. Pricing rationalization has yielded significant savings and better vendor attention to the overall enterprise. Strong vendor-management capabilities also provide better governance and higher savings. We believe that as more services are outsourced, companies should look at vendor management as a required capability. In most IT organizations, vendor management is an administrative role; however, with increased outsourcing, it often becomes a service and a core capability. We created this new capability—and the role to serve it—for both our textile and fashion apparel clients.
Additionally, the planning team should often own the enterprise architecture and application portfolio to ensure alignment of business needs, overall strategy and IT investment. The decision to centralize enterprise architecture, planning and IT spending in one group is not motivated by internal politics. Rather, it is driven by the need to coordinate services at a global level to prevent an unnecessary proliferation of applications and redundant functionality.
A flexible and agile structure. The best IT organizations can adapt as needed to support new business priorities. For example, to capitalize on a company merger, the IT organizations of the two companies can be combined to provide common services while maintaining business unit-specific services such as analytics. Some components of the structure may be temporary, but having a short-term and long-term transition plan is vital. The company may decide, for example, that data management is a strategic IT priority for supporting business analytics and, as a result, create a central data-management organization within IT that reports to the CIO. Once the goal is met, the central data management team can be moved down in the organizational structure. If appropriate, this unit may even be outsourced. While any further incremental investments in data management will begin yielding diminishing returns, outsourcing this function will provide a one-time value that can be used to improve analytics.
While being nimble is invaluable to business, it comes at a price for the IT organization. To maintain the necessary agility, IT needs to update its capability catalog constantly and continually stay abreast of ways to provide new services important to the business. Good IT organizations have policies that encourage continuing education so that employees keep up with the latest technology and obtain industry certifications.
3. Develop the "should-cost" financial model
Developing the end-state "should-cost" financial model will provide a "case for change" and the tool needed to undertake the journey to transform IT. This step can help translate the strategy into actual cost targets and benefits.
Establish a baseline. Establishing a baseline of current spending and comparing it with the should-cost models will help identify necessary investments and future run-rate. At first glance, establishing a baseline may seem unnecessary, as CIOs know how much is being spent. Our experience, however, is that most CIOs do not know where the money is being spent and whether the amount given to certain areas is appropriate or excessive given their needed capabilities. A baseline can also help determine if the budget is used appropriately on non-core capabilities and, if not, show how these capabilities could be delivered more cost-effectively through other means such as outsourcing. This is possible if the financial model separates the baseline IT functions into standard buckets where it is easier to find comparables.
Cost benchmarking is a useful tool, but when benchmarking, it is important to use like-with-like industry comparisons, while understanding that no benchmark can filter out all the company-specific intricacies to create a true "apples-to-apples" comparison. It would not be appropriate, for example, to assume a small specialty fashion apparel company will have IT spending ratios similar to a global giant such as NIKE or Procter & Gamble.
At a recent textile client, direct labor costs were a much bigger portion of IT spending than what the benchmarks suggested. The company's complex legacy systems needed internal knowledge and expertise, which limited its ability to take advantage of cheaper outsourcing services. In this case, the larger labor expense didn't mean the company was overpaying or overstaffing its people; rather, its complex legacy systems appeared to be the underlying problem.
Model future costs. A should-cost model is a tool to define future cost targets and quantify the impact of potential IT strategy scenarios by modeling future cost targets. A good should-cost model can be a valuable decision-making tool for senior executives and should include the following capabilities:
- Support "what-if" scenario analysis to identify the impact of changes in critical variables on the overall costs and benefits for example, the impact of outsourcing of non-core IT function or investments needed to build capabilities Include a forecast of IT capacity needed (for example, headcount, servers and so on) to support business growth
- Base cost assumptions on historical costs, but predict any future cost changes and delivery model assumptions (for example, application development services can be delivered by using firm resources, onshore resources, landed resources or offshore resources, each with a different cost)
- Include and model any currently planned initiatives (for example, a large supply chain transformation)
A good should-cost model can be very useful not only in IT initiative decision making, but also in providing intelligence when creating IT annual budgets (see figure 6). Although it is possible to create a single financial model with budgetary constraints built in, we recommend creating an unconstrained should-cost view first, then comparing the projected costs against budgetary constraints and updating input assumptions in the should-cost model as appropriate.
We used this approach at our fashion apparel client to show IT expenditures for the subsequent five years. Based on anticipated demand and priorities, peaks occurred in certain years because of the initial investments required to build specific capabilities. The model provided a view of how much budget the CIO would need—and in certain instances it was clear that the budget would not be approved. In those cases, we identified trade-offs to defer investments, such as spreading out new hires over time rather than hiring all at once.
4. Create the go-forward roadmap
Finally, we chart a roadmap to reach the end goal—doing so within the budget and on a timeline aligned with business priorities. A roadmap takes into account different ways in which the end-state can be reached and determines the major milestones needed to realize the final end-state and reach the defined should-cost model for the organization. The chosen roadmap resolves the issue of projects competing for limited budget and talent. So, if the business strategy favors more cross-channel marketing to increase sales, then data management, integration and governance should be deemed high priorities. For example, one element of a telecommunications provider's business strategy was to focus on revenue-enhancing capabilities—therefore, in its roadmap, all IT initiatives either had to help the company capture new customers or improve services to existing customers.
Never has more been expected of IT: reducing costs, enabling business transformation and driving innovation
All resources to perform these functions should be identified in the roadmap. The options are often fairly obvious—develop in-house resources through internal training, or external resources through focused hiring, and eventually outsource some functions. Our telecommunications provider redeployed its resources to revenue-generating initiatives, which meant outsourcing some service functions, such as its call centers.
We use a prioritization framework to identify the appropriate timeline to launch initiatives. For example, if we target outsourcing in the second fiscal quarter, tasks such as vendor selection, vendor management and IT processes will be required prior to this quarter and will be a major milestone. It is best to group outsourcing services into a few phases—repeating the process every quarter for a few years will demoralize remaining IT staff, as they will naturally fear what's coming next.
The roadmap must be consistently reviewed by senior leaders and must be flexible enough to adapt to changing business dynamics yet rigid enough to maintain momentum. While change is a fact of business, many companies struggle to manage change in transforming IT capabilities. They often overlook informal efforts to share data and cooperate on initiatives to help establish the foundation for collaboration, including addressing stakeholders' curiosity and explaining the reasons why centralized decision making is critical. This oversight often leads to resistance to change and eventual hurdles on the roadmap. Of course, change management is essential to any transformation.1
IT as a Strategic Leader
Never has more been expected of IT: reducing costs, enabling business transformation and driving innovation. As the pace of innovation intensifies, businesses are becoming increasingly dependent on their IT organizations. Those that cannot keep pace with changing demands are at risk of falling behind their more agile rivals. IT leaders must participate actively in strategic planning and look past day-to-day execution. This will require significant changes in strategy, culture, organization and process. Success will depend on developing a capability-driven IT organization—one that positions IT to deliver for the business and gain a much-needed seat at the strategy table. IT organizations that make this shift—a shift in all likelihood as difficult as it is necessary—will move IT upstream and position the company for long-term success.
Authors
Christian Hagen is a partner in the strategic information technology practice. He is based in the Chicago office.
Eric Stettler is a principal in the strategic information technology practice. He is based in the Dallas office.
Rajeev Duggirala is a consultant in the Chicago office.
Kevin Cheung is a consultant in the Washington, D.C. office.
Surendra Agrawal is a consultant in the Dallas office
1 For more information, see "A Lean Approach to Change Management" at www.atkearney.com.
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