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IT 2020: Preparing for the Future

IT 2020: Preparing for the Future

IT 2020: Preparing for the Future

Digitization has transformed the business world. Digital tools are now ubiquitous in all aspects of commerce, from business processes to services and transactions, and one engine is driving the change: information technology.

Today's companies not only rely on information technology, they can't compete without it. IT is integrated into products, it pulls priceless information from customer data, and it is the force behind online shopping. As digital becomes even more prevalent, the demand for IT will continue to rise, which in turn will place a heavier burden on IT organizations. Driven by the further digitization of business and increasing market competition, IT is becoming even more indispensable.

What will IT 2020 look like? A new A.T. Kearney study reveals that over the next seven years, two-thirds of companies expect to invest more in IT in all areas along the value chain, but especially in sales and customer interactions. The moral of this story is that as IT gets a bigger slice of the corporate budget, expectations will rise, and even the smallest miscalculation about IT priorities will put the whole company at risk.

To cope with this pressure, top-notch IT organizations will focus more on business interactions—no easy task, given the shortage of business-savvy IT experts and the scarcity of other resources.

So tomorrow's IT challenges are basically a question of supply and demand. To meet these challenges, forward-thinking companies will capture long-term growth by striking a balance between the costs of IT and its value.

Let's look at IT's future from both a demand and a supply perspective.

Demand: IT's Evolving Business Role

Our study, which surveyed more than 150 chief information officers (CIOs) of large global enterprises and leading midsized companies, shows that IT requirements will grow rapidly until 2020: Nearly 85 percent of respondents say they foresee a significant increase over the next few years. Almost 75 percent say time pressure for implementing IT projects is also increasing, with the always complex time-to-market function becoming the key performance indicator.

Sales- and customer-driven applications are becoming the main focus of IT investments, according to 61 percent of CIOs (see figure 1). Improving processes and automating production, once IT's main focus, are giving way to fostering customer relations via personalized marketing campaigns, data analytics, and online ordering systems as key IT functions.

Sales and customers will be the focus of most IT investments by 2020

Consider, for example, an international automaker that was feeling a revenue squeeze and wanted to mine untapped resources by tailoring interactions with potential customers. In particular, the firm wanted to capitalize on the waves of customer data coming from in-car information systems. IT was the obvious way for the business to reach its goals. An end-to-end social marketing suite was built to connect internal customer relationship management (CRM) data to external social network data so that sales and marketing can be tailored to the customer. This new marketing tool helps the automaker identify customer groups and then access them via ads on the most appropriate channels. The effects of the new IT approach are clear: more attention on the customer side and significantly higher response rates.

Such a scenario would work well for utilities, telecommunications firms, and financial institutions, where regulation and security are major IT areas.

We asked our study participants whether the CIO should be on the board of directors now that IT plays such a key corporate role. Nearly 45 percent said they expect to have a CIO as a board member by 2020 (see figure 2). But a seat at the table doesn't make sense unless IT plays a central role in the business model. According to our study, CIOs will more often (51 percent) be on the boards of telecommunication, media, and high-tech companies and financial institutions, where IT is a core business asset. In fact, Citigroup recently named former General Electric CIO Gary Reiner as an independent director and member of its board of directors. A smaller proportion of consumer and retail, process, and utility companies—where IT is mainly a support function—will have CIOs on their boards.

Almost half of companies expect to have a chief information officer on the board in 2020

Though IT budgets are under constant pressure, our study indicates that all industries are funding IT, albeit at varying levels (see figure 3). Automakers and retailers will invest significantly more in IT in the next few years as they add product-related IT, such as embedded systems and smart metering. In companies where IT is a core asset—financial institutions, utilities, telecommunications, and high-tech—IT investments have been constant over the past few years. In banking, for example, IT is a core asset driven by constant innovation and increasing requirements. Outdated and complex application architectures with an array of interfaces can hinder the release of new products and services, and maintaining these obsolete systems absorbs large portions of the IT budget.

Funds will be earmarked for IT in all industries, but to varying degrees

Banks are redesigning their architectures to better align with the business, reduce complexity, and expedite the development of new products and services. Leading banks are focusing on improving the customer experience by integrating channels and making better use of customer data.

Supply: Three Areas of Change

In 2020, IT will look very different in three main areas. First, it will be far less complex, thanks to standard software packages and fewer custom solutions. Second, operations will be leaner as outsourcing, mega-suppliers, and offshoring become the norm. And third, the IT skills gap will be wider, and it will have to be closed with the help of seasoned IT experts. As the IT landscape shifts, forward-thinking companies will focus on these three areas. An example from the media industry shows how this shift can drive profits (see sidebar: The Benefits of Simplification).

Let's look at each of these three areas in detail:

Less complexity. IT complexity is a big concern because it hinders product launches and makes functional additions and regulatory changes costly and risky. As a result, combating complexity is at the top of most CIO agendas.

Our study shows that despite efforts to consolidate and simplify, the number of IT applications will increase until 2020 (see figure 4). The number of interfaces will also increase, with mobile interfaces expanding to keep up with the rising use of smartphones and tablets. Most CIOs say they expect more than three-quarters of applications to have a mobile interface.1

The number of IT applications is expected to increase until 2020

Thanks to standard solutions, however, all those applications and interfaces don't necessarily mean IT will get costlier and slower. Nearly 80 percent of CIOs expect standard software to cover more than half of the required functionality. And a quarter believe that most required features—as much as 80 percent—can be covered by standard software products. Thus, investing in labor-intensive custom software will no longer be necessary.

The benefits are clear: Standard software minimizes the effort required to introduce new products. Software providers can implement regulatory requirements and make them available through upgrades or new releases, shifting the programming risk mostly to the provider and freeing in-house IT to focus more on governance and integrating standardized software components into business processes.

Especially in mature software markets such as enterprise resource planning (ERP), companies can simplify with a complete switch to standard software. A standard system also offers more functionality and improves IT's business value. An example from the pharmaceutical industry illustrates this point: A company was wrestling with an outdated ERP system that did not support its corporate growth strategy. The system had inadequate end-to-end business process support, few automated controls, and little analytical functionality. The company is now replacing its ERP system and outsourcing the related infrastructure and support. A global template was defined to stay as close to standard functionality as possible, which consisted of 90 percent standard functionality. The main benefits of the new system are significantly reduced time-to-market and the ability to react quickly when regulations and business requirements change.

Many companies are struggling with complex business applications and seeking new ways to simplify. Rising IT development and operations costs and end-of-life business applications often threaten overall performance. A long history of customizations, systems, and customer solutions often constrain time-to-market and limit flexibility for further development. But consolidation projects are expensive, especially if they involve a lot of interfaces. If standard software is available, a greenfield approach can be used to replace the old application with new software and make the software provider responsible for development and maintenance.

We helped a telecom operator embark on a new business support systems (BSS) stack, with a plan to migrate the complete customer base, including consumers and large enterprises, to a modern off-the-shelf solution. Our sourcing approach was to establish the business requirements and identify differentiating factors across potential BSS systems. The deciding factors were standardization, speed of implementation and migration, and ability to configure—as opposed to develop—future functionality. The BSS transformation was identified as the key to unlocking cost and business performance efficiencies, not just for IT but throughout the organization.

Leaner operations. How can IT meet rising demand? Consolidating and leveraging scale are no longer the universal answers. In fact, nearly 60 percent of our study's CIOs are going the opposite way, building islands of specialization and independence (see figure 5). This can help meet demand faster and more effectively.

Applications will become more specialized

As an example, consider how digitization has transformed the media. For years, improving and stabilizing editorial and printing processes, with an eye on cost-effectiveness, was the focus of centralized IT departments. Now, as IT and content converge, new IT capabilities are needed to support the growing digital business. In short, agility, flexibility, and time-to-market are essential to compete in the digital media market.

With this in mind, we helped a European publisher start a subsidiary to support business units by creating and publishing digital content with a short time-to-market. The new entity was established as part of the existing IT department to create innovative digital media and accelerate the company's transformation into a digital-media enterprise. This allowed the publisher to fulfill the specific needs of both print and digital business: stability and cost efficiency of standard packages in print in addition to time-to-market and value-add of individual software in digital. The setup also enabled the company to consolidate and scale down its traditional IT capacities without affecting the digital units.

Outsourcing and offshoring will continue to thrive in all industries, albeit with some differences (see figure 6). Rising costs in Asian locations, better language capabilities, and closer communication in Eastern Europe are driving delivery models toward nearer locations in Europe, the Middle East, and Africa (EMEA), while relocating Asian outsourcing operations to Eastern Europe is a mini-trend that deserves watching.

IT outsourcing and offshoring is expected to grow by 2020

North American and UK companies are more advanced in outsourcing, especially offshoring, thanks to the fact that English is spoken in most offshoring countries. Language barriers are major challenges to offshoring for EMEA companies, but they pursue it nonetheless to capture efficiency gains. Meanwhile, companies in the Asia Pacific region see outsourcing as a way to improve service quality. They tend to seek assistance from large IT service providers to manage complex projects and accelerate time-to-market.

Facing a multitude of challenges to fulfill business requirements, IT is seeking to minimize the risks of IT operations. Outsourcing responsibility to so-called mega-suppliers is a very likely scenario for many CIOs. In fact, 64 percent expect a significant part of the IT budget to go to mega-suppliers such as SAP and Accenture. Service-level agreements (SLAs) can then define the needed services and set penalty charges for non-compliance.

Closing the IT skills gap. There is always a need for experts who understand both IT and business, and that need is only going to grow. There is a startling deficit of such specialists, and the gap is getting wider.

If the skills shortage is not addressed, business development will stall, and time-to-market requirements will go unmet. EMEA countries appear to have the most serious skills gap. Germany and France have a huge qualification deficit in the IT sector. In Germany alone, about 60,000 IT positions will remain unfilled until 2020 unless new efforts are made to attract and train business-minded IT personnel. The United States, Canada, and the United Kingdom are in a better position, thanks to their access to qualified workers, including those from India who speak the local language.

Golden Rules for Reaching Goals

Our studies of IT's evolution over the past decade show that successful IT leaders adapt their operating models as business requirements change. Driven by the rise of digitization and stiffer competition, more companies will realize the true value of IT. However, IT has to deliver soon: Supporting the business, especially sales and time-to-market, is becoming a key IT performance measure.

We've developed three strategic goals encompassing 10 golden rules to help CIOs find the balance between increasing IT's value while also lowering costs:

Drive digitization of the business

  1. Act as a company manager, not a technology guru
  2. Build the skills necessary for meshing business needs with IT requirements
  3. Find a balance between highly sophisticated solutions for core processes and standardized packages for commodities

Simplify business and optimize IT architecture

  1. Focus first on IT-driven business simplification
  2. Reduce the number of applications, but increase the share of value-driving functions
  3. Consider a greenfield approach to start from scratch instead of doctoring the old model
  4. Provide innovative front ends, but use highly standardized back-end technology on the server, storage, and network sides

Build agile, cost-efficient IT delivery

  1. Focus on a balance between agility and costs instead of on costs alone
  2. Build agile teams in parallel with old-fashioned IT if required
  3. Decentralize value-driving IT functions if necessary, but centralize or outsource major parts of the delivery

As IT's role continues to evolve, success will hinge on adapting to changing business conditions. These 10 golden rules can guide CIOs in the quest to find the balance between lowering IT costs and increasing its value. What that balance looks like will differ from company to company, but those that find the equilibrium to guide their IT strategies will emerge as winners.

 

1 See "A Blueprint to Fix IT Complexity" at www.atkearney.com.

July 2013
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