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it Strategy:
Issues and Practices M
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it Strategy Issues and Practices tHiRd edition
James D. McKeen • Heather A. Smith
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IT STraTegy: ISSueS and PracTIceS
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IT STraTegy: ISSueS and PracTIceS
T h i r d E d i t i o n
G l o b a l E d i t i o n
James D. McKeen Queen’s University
Heather A. Smith Queen’s University
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Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
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The rights of James D. McKeen and Heather A. Smith to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
Authorized adaptation from the United States edition, entitled IT Strategy: Issues and Practices, 3rd edition, ISBN 978-0-13-354424-4, by James D. McKeen and Heather A. Smith, published by Pearson Education © 2015.
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ISBN 10: 1-292-08026-4 ISBN 13: 978-1-292-08026-0
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ConTEnTS
Preface 13
About the Authors 21
Acknowledgments 22
Section I Delivering Value with IT 23
Chapter 1 The IT Value ProPoSITIon 24 Peeling the Onion: Understanding IT Value 25
What Is IT Value? 25
Where Is IT Value? 26
Who Delivers IT Value? 27
When Is IT Value Realized? 27
The Three Components of the IT Value Proposition 28 Identification of Potential Value 29 Effective Conversion 30 Realizing Value 31
Five Principles for Delivering Value 32 Principle 1. Have a Clearly Defined Portfolio Value Management
Process 33
Principle 2. Aim for Chunks of Value 33
Principle 3. Adopt a Holistic Orientation to Technology Value 33
Principle 4. Aim for Joint Ownership of Technology Initiatives 34
Principle 5. Experiment More Often 34 Conclusion 34 • References 35
Chapter 2 DelIVerIng BuSIneSS Value Through IT STraTegy 37 Business and IT Strategies: Past, Present, and Future 38
Four Critical Success Factors 40
The Many Dimensions of IT Strategy 42
Toward an IT Strategy-Development Process 44
Challenges for CIOs 45 Conclusion 47 • References 47
Chapter 3 MakIng IT CounT 49 Business Measurement: An Overview 50
Key Business Metrics for IT 52
5
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6 Contents
Designing Business Metrics for IT 53
Advice to Managers 57 Conclusion 58 • References 58
Chapter 4 effeCTIVe BuSIneSS–IT relaTIonShIPS 60 The Nature of the Business–IT Relationship 61
The Foundation of a Strong Business–IT Relationship 63
Building Block #1: Competence 64
Building Block #2: Credibility 65
Building Block #3: Interpersonal Interaction 66
Building Block #4: Trust 68 Conclusion 70 • References 70
Appendix A The Five IT Value Profiles 72
Appendix B Guidelines for Building a Strong Business–IT Relationship 73
Chapter 5 BuSIneSS–IT CoMMunICaTIon 74 Communication in the Business–IT Relationship 75
What Is “Good” Communication? 76
Obstacles to Effective Communication 78
“T-Level” Communication Skills for IT Staff 80
Improving Business–IT Communication 82 Conclusion 83 • References 83
Appendix A IT Communication Competencies 85
Chapter 6 effeCTIVe IT leaDerShIP 86 The Changing Role of the IT Leader 87
What Makes a Good IT Leader? 89
How to Build Better IT Leaders 92
Investing in Leadership Development: Articulating the Value Proposition 95
Conclusion 96 • References 97
MInI CaSeS Delivering Business Value with IT at Hefty Hardware 98
Investing in TUFS 102
IT Planning at ModMeters 104
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Contents 7
Section II IT governance 109
Chapter 7 effeCTIVe IT ShareD SerVICeS 110 IT Shared Services: An Overview 111
IT Shared Services: Pros and Cons 114
IT Shared Services: Key Organizational Success Factors 115
Identifying Candidate Services 116
An Integrated Model of IT Shared Services 117
Recommmendations for Creating Effective IT Shared Services 118
Conclusion 121 • References 121
Chapter 8 SuCCeSSful IT SourCIng: MaTurITy MoDel, SourCIng oPTIonS, anD DeCISIon CrITerIa 122 A Maturity Model for IT Functions 123
IT Sourcing Options: Theory Versus Practice 127
The “Real” Decision Criteria 131
Decision Criterion #1: Flexibility 131
Decision Criterion #2: Control 131
Decision Criterion #3: Knowledge Enhancement 132
Decision Criterion #4: Business Exigency 132
A Decision Framework for Sourcing IT Functions 133
Identify Your Core IT Functions 133
Create a “Function Sourcing” Profile 133
Evolve Full-Time IT Personnel 135
Encourage Exploration of the Whole Range of Sourcing Options 136
Combine Sourcing Options Strategically 136
A Management Framework for Successful Sourcing 137
Develop a Sourcing Strategy 137
Develop a Risk Mitigation Strategy 137
Develop a Governance Strategy 138
Understand the Cost Structures 138 Conclusion 139 • References 139
Chapter 9 BuDgeTIng: PlannIng’S eVIl TwIn 140 Key Concepts in IT Budgeting 141
The Importance of Budgets 143
The IT Planning and Budget Process 145
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8 Contents
Corporate Processes 145
IT Processes 147
Assess Actual IT Spending 148
IT Budgeting Practices That Deliver Value 149 Conclusion 150 • References 151
Chapter 10 rISk ManageMenT In IT 152 A Holistic View of IT-Based Risk 153
Holistic Risk Management: A Portrait 156
Developing a Risk Management Framework 157
Improving Risk Management Capabilities 160
Conclusion 161 • References 162
Appendix A A Selection of Risk Classification Schemes 163
Chapter 11 InforMaTIon ManageMenT: STageS anD ISSueS 164 Information Management: How Does IT Fit? 165
A Framework For IM 167
Stage One: Develop an IM Policy 167
Stage Two: Articulate the Operational Components 167
Stage Three: Establish Information Stewardship 168
Stage Four: Build Information Standards 169
Issues In IM 170
Culture and Behavior 170
Information Risk Management 171
Information Value 172
Privacy 172
Knowledge Management 173
The Knowing–Doing Gap 173
Getting Started in IM 173 Conclusion 175 • References 176
Appendix A Elements of IM Operations 177
MInI CaSeS Building Shared Services at RR Communications 178
Enterprise Architecture at Nationstate Insurance 182
IT Investment at North American Financial 187
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Contents 9
Section III IT-enabled Innovation 191
Chapter 12 TeChnology-DrIVen InnoVaTIon 192 The Need for Innovation: An Historical
Perspective 193
The Need for Innovation Now 193
Understanding Innovation 194
The Value of Innovation 196
Innovation Essentials: Motivation, Support, and Direction 197
Challenges for IT leaders 199
Facilitating Innovation 201 Conclusion 202 • References 203
Chapter 13 when BIg DaTa anD SoCIal CoMPuTIng MeeT 204 The Social Media/Big Data Opportunity 205
Delivering Business Value with Big Data 207
Innovating with Big Data 211
Pulling in Two Different Directions: The Challenge for IT Managers 212
First Steps for IT Leaders 214 Conclusion 215 • References 216
Chapter 14 effeCTIVe CuSToMer exPerIenCe 217 Customer Experience and Business value 218
Many Dimensions of Customer Experience 219
The Role of Technology in Customer Experience 221
Customer Experience Essentials for IT 222
First Steps to Improving Customer Experience 225 Conclusion 226 • References 226
Chapter 15 BuSIneSS InTellIgenCe: an oVerVIew 228 Understanding Business Intelligence 229
The Need for Business Intelligence 230
The Challenge of Business Intelligence 231
The Role of IT in Business Intelligence 233
Improving Business Intelligence 235 Conclusion 238 • References 238
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10 Contents
Chapter 16 TeChnology-enaBleD CollaBoraTIon 240 Why Collaborate? 241
Characteristics of Collaboration 244
Components of Successful Collaboration 247
The Role of IT in Collaboration 249
First Steps for Facilitating Effective Collaboration 251 Conclusion 253 • References 254
MInI CaSeS Innovation at International Foods 256
Consumerization of Technology at IFG 261
CRM at Minitrex 265
Customer Service at Datatronics 268
Section IV IT Portfolio Development and Management 273
Chapter 17 ManagIng The aPPlICaTIon PorTfolIo 274 The Applications Quagmire 275
The Benefits of a Portfolio Perspective 276
Making APM Happen 278
Capability 1: Strategy and Governance 280
Capability 2: Inventory Management 284
Capability 3: Reporting and Rationalization 285
Key Lessons Learned 286 Conclusion 287 • References 287
Appendix A Application Information 288
Chapter 18 IT DeManD ManageMenT: SuPPly ManageMenT IS noT enough 292 Understanding IT Demand 293
The Economics of Demand Management 295
Three Tools for Demand management 295
Key Organizational Enablers for Effective Demand Management 296
Strategic Initiative Management 297
Application Portfolio Management 298
Enterprise Architecture 298
Business–IT Partnership 299
Governance and Transparency 301 Conclusion 303 • References 303
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Contents 11
Chapter 19 TeChnology roaDMaP: BenefITS, eleMenTS, anD PraCTICal STePS 305 What is a Technology Roadmap? 306
The Benefits of a Technology Roadmap 307
External Benefits (Effectiveness) 307
Internal Benefits (Efficiency) 308
Elements of the Technology Roadmap 308
Activity #1: Guiding Principles 309
Activity #2: Assess Current Technology 310
Activity #3: Analyze Gaps 311
Activity #4: Evaluate Technology Landscape 312
Activity #5: Describe Future Technology 313
Activity #6: Outline Migration Strategy 314
Activity #7: Establish Governance 314
Practical Steps for Developing a Technology Roadmap 316
Conclusion 317 • References 317
Appendix A Principles to Guide a Migration Strategy 318
Chapter 20 eMergIng DeVeloPMenT PraCTICeS 319 The Problem with System Development 320
Trends in System Development 321
Obstacles to Improving System Development Productivity 324
Improving System Development Productivity: What we know that Works 326
Next Steps to Improving System Development Productivity 328
Conclusion 330 • References 330
Chapter 21 InforMaTIon DelIVery: PaST, PreSenT, anD fuTure 332 Information and IT: Why Now? 333
Delivering Value Through Information 334
Effective Information Delivery 338
New Information Skills 338 New Information Roles 339
New Information Practices 339
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12 Contents
New Information Strategies 340
The Future of Information Delivery 341 Conclusion 343 • References 344
MInI CaSeS Project Management at MM 346
Working Smarter at Continental Furniture International 350
Managing Technology at Genex Fuels 355 Index 358
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PrEFACE
Today, with information technology (IT) driving constant business transformation, overwhelming organizations with information, enabling 24/7 global operations, and undermining traditional business models, the challenge for business leaders is not simply to manage IT, it is to use IT to deliver business value. Whereas until fairly recently, decisions about IT could be safely delegated to technology specialists after a business strategy had been developed, IT is now so closely integrated with business that, as one CIO explained to us, “We can no longer deliver business solutions in our company without using technology so IT and business strategy must constantly interact with each other.”
What’s New in This Third Edition?
• Six new chapters focusing on current critical issues in IT management, including IT shared services; big data and social computing; business intelligence; manag- ing IT demand; improving the customer experience; and enhancing development productivity.
• Two significantly revised chapters: on delivering IT functions through different resourcing options; and innovating with IT.
• Two new mini cases based on real companies and real IT management situations: Working Smarter at Continental Furniture and Enterprise Architecture at Nationstate Insurance.
• A revised structure based on reader feedback with six chapters and two mini cases from the second edition being moved to the Web site.
All too often, in our efforts to prepare future executives to deal effectively with the issues of IT strategy and management, we lead them into a foreign country where they encounter a different language, different culture, and different customs. Acronyms (e.g., SOA, FTP/IP, SDLC, ITIL, ERP), buzzwords (e.g., asymmetric encryption, proxy servers, agile, enterprise service bus), and the widely adopted practice of abstraction (e.g., Is a software monitor a person, place, or thing?) present formidable “barriers to entry” to the technologically uninitiated, but more important, they obscure the impor- tance of teaching students how to make business decisions about a key organizational resource. By taking a critical issues perspective, IT Strategy: Issues and Practices treats IT as a tool to be leveraged to save and/or make money or transform an organization—not as a study by itself.
As in the first two editions of this book, this third edition combines the experi- ences and insights of many senior IT managers from leading-edge organizations with thorough academic research to bring important issues in IT management to life and demonstrate how IT strategy is put into action in contemporary businesses. This new edition has been designed around an enhanced set of critical real-world issues in IT management today, such as innovating with IT, working with big data and social media,
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14 Preface
enhancing customer experience, and designing for business intelligence and introduces students to the challenges of making IT decisions that will have significant impacts on how businesses function and deliver value to stakeholders.
IT Strategy: Issues and Practices focuses on how IT is changing and will continue to change organizations as we now know them. However, rather than learning concepts “free of context,” students are introduced to the complex decisions facing real organi- zations by means of a number of mini cases. These provide an opportunity to apply the models/theories/frameworks presented and help students integrate and assimilate this material. By the end of the book, students will have the confidence and ability to tackle the tough issues regarding IT management and strategy and a clear understand- ing of their importance in delivering business value.
Key Features of This Book
• A focus on IT management issues as opposed to technology issues • Critical IT issues explored within their organizational contexts • Readily applicable models and frameworks for implementing IT strategies • Mini cases to animate issues and focus classroom discussions on real-world deci-
sions, enabling problem-based learning • Proven strategies and best practices from leading-edge organizations • Useful and practical advice and guidelines for delivering value with IT • Extensive teaching notes for all mini cases
A Different ApproAch to teAching it StrAtegy
The real world of IT is one of issues—critical issues—such as the following:
• How do we know if we are getting value from our IT investment? • How can we innovate with IT? • What specific IT functions should we seek from external providers? • How do we build an IT leadership team that is a trusted partner with the business? • How do we enhance IT capabilities? • What is IT’s role in creating an intelligent business? • How can we best take advantage of new technologies, such as big data and social
media, in our business? • How can we manage IT risk?
However, the majority of management information systems (MIS) textbooks are orga- nized by system category (e.g., supply chain, customer relationship management, enterprise resource planning), by system component (e.g., hardware, software, networks), by system function (e.g., marketing, financial, human resources), by system type (e.g., transactional, decisional, strategic), or by a combination of these. Unfortunately, such an organization does not promote an understanding of IT management in practice.
IT Strategy: Issues and Practices tackles the real-world challenges of IT manage- ment. First, it explores a set of the most important issues facing IT managers today, and second, it provides a series of mini cases that present these critical IT issues within the context of real organizations. By focusing the text as well as the mini cases on today’s critical issues, the book naturally reinforces problem-based learning.
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Preface 15
IT Strategy: Issues and Practices includes thirteen mini cases—each based on a real company presented anonymously.1 Mini cases are not simply abbreviated versions of standard, full-length business cases. They differ in two significant ways:
1. A horizontal perspective. Unlike standard cases that develop a single issue within an organizational setting (i.e., a “vertical” slice of organizational life), mini cases take a “horizontal” slice through a number of coexistent issues. Rather than looking for a solution to a specific problem, as in a standard case, students analyzing a mini case must first identify and prioritize the issues embedded within the case. This mim- ics real life in organizations where the challenge lies in “knowing where to start” as opposed to “solving a predefined problem.”
2. Highly relevant information. Mini cases are densely written. Unlike standard cases, which intermix irrelevant information, in a mini case, each sentence exists for a reason and reflects relevant information. As a result, students must analyze each case very carefully so as not to miss critical aspects of the situation.
Teaching with mini cases is, thus, very different than teaching with standard cases. With mini cases, students must determine what is really going on within the organiza- tion. What first appears as a straightforward “technology” problem may in fact be a political problem or one of five other “technology” problems. Detective work is, there- fore, required. The problem identification and prioritization skills needed are essential skills for future managers to learn for the simple reason that it is not possible for organi- zations to tackle all of their problems concurrently. Mini cases help teach these skills to students and can balance the problem-solving skills learned in other classes. Best of all, detective work is fun and promotes lively classroom discussion.
To assist instructors, extensive teaching notes are available for all mini cases. Developed by the authors and based on “tried and true” in-class experience, these notes include case summaries, identify the key issues within each case, present ancillary information about the company/industry represented in the case, and offer guidelines for organizing the class- room discussion. Because of the structure of these mini cases and their embedded issues, it is common for teaching notes to exceed the length of the actual mini case!
This book is most appropriate for MIS courses where the goal is to understand how IT delivers organizational value. These courses are frequently labeled “IT Strategy” or “IT Management” and are offered within undergraduate as well as MBA programs. For undergraduate juniors and seniors in business and commerce programs, this is usually the “capstone” MIS course. For MBA students, this course may be the compulsory core course in MIS, or it may be an elective course.
Each chapter and mini case in this book has been thoroughly tested in a variety of undergraduate, graduate, and executive programs at Queen’s School of Business.2
1 We are unable to identify these leading-edge companies by agreements established as part of our overall research program (described later). 2 Queen’s School of Business is one of the world’s premier business schools, with a faculty team renowned for its business experience and academic credentials. The School has earned international recognition for its innovative approaches to team-based and experiential learning. In addition to its highly acclaimed MBA programs, Queen’s School of Business is also home to Canada’s most prestigious undergraduate business program and several outstanding graduate programs. As well, the School is one of the world’s largest and most respected providers of executive education.
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16 Preface
These materials have proven highly successful within all programs because we adapt how the material is presented according to the level of the students. Whereas under- graduate students “learn” about critical business issues from the book and mini cases for the first time, graduate students are able to “relate” to these same critical issues based on their previous business experience. As a result, graduate students are able to introduce personal experiences into the discussion of these critical IT issues.
orgAnizAtion of thiS Book
One of the advantages of an issues-focused structure is that chapters can be approached in any order because they do not build on one another. Chapter order is immaterial; that is, one does not need to read the first three chapters to understand the fourth. This pro- vides an instructor with maximum flexibility to organize a course as he or she sees fit. Thus, within different courses/programs, the order of topics can be changed to focus on different IT concepts.
Furthermore, because each mini case includes multiple issues, they, too, can be used to serve different purposes. For example, the mini case “Building Shared Services at RR Communications” can be used to focus on issues of governance, organizational structure, and/or change management just as easily as shared services. The result is a rich set of instructional materials that lends itself well to a variety of pedagogical appli- cations, particularly problem-based learning, and that clearly illustrates the reality of IT strategy in action.
The book is organized into four sections, each emphasizing a key component of developing and delivering effective IT strategy:
• Section I: Delivering Value with IT is designed to examine the complex ways that IT and business value are related. Over the past twenty years, researchers and prac- titioners have come to understand that “business value” can mean many different things when applied to IT. Chapter 1 (The IT Value Proposition) explores these con- cepts in depth. Unlike the simplistic value propositions often used when imple- menting IT in organizations, this chapter presents “value” as a multilayered busi- ness construct that must be effectively managed at several levels if technology is to achieve the benefits expected. Chapter 2 (Delivering Business Value through IT Strategy) examines the dynamic interrelationship between business and IT strat- egy and looks at the processes and critical success factors used by organizations to ensure that both are well aligned. Chapter 3 (Making IT Count) discusses new ways of measuring IT’s effectiveness that promote closer business–IT alignment and help drive greater business value. Chapter 4 (Effective Business–IT Relationships) exam- ines the nature of the business–IT relationship and the characteristics of an effec- tive relationship that delivers real value to the enterprise. Chapter 5 (Business–IT Communication) explores the business and interpersonal competencies that IT staff will need in order to do their jobs effectively over the next five to seven years and what companies should be doing to develop them. Finally, Chapter 6 (Effective IT Leadership) tackles the increasing need for improved leadership skills in all IT staff and examines the expectations of the business for strategic and innovative guid- ance from IT.
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Preface 17
In the mini cases associated with this section, the concepts of delivering value with IT are explored in a number of different ways. We see business and IT executives at Hefty Hardware grappling with conflicting priorities and per- spectives and how best to work together to achieve the company’s strategy. In “Investing in TUFS,” CIO Martin Drysdale watches as all of the work his IT depart- ment has put into a major new system fails to deliver value. And the “IT Planning at ModMeters” mini case follows CIO Brian Smith’s efforts to create a strategic IT plan that will align with business strategy, keep IT running, and not increase IT’s budget.
• Section II: IT Governance explores key concepts in how the IT organization is structured and managed to effectively deliver IT products and services to the orga- nization. Chapter 7 (Effective IT Shared Services) discusses how IT shared services should be selected, organized, managed, and governed to achieve improved organi- zational performance. Chapter 8 (Successful IT Sourcing: Maturity Model, Sourcing Options, and Decision Criteria) examines how organizations are choosing to source and deliver different types of IT functions and presents a framework to guide sourc- ing decisions. Chapter 9 (Budgeting: Planning’s Evil Twin) describes the “evil twin” of IT strategy, discussing how budgeting mechanisms can significantly undermine effective business strategies and suggesting practices for addressing this problem while maintaining traditional fiscal accountability. Chapter 10 (Risk Management in IT) describes how many IT organizations have been given the responsibility of not only managing risk in their own activities (i.e., project development, operations, and delivering business strategy) but also of managing IT-based risk in all company activities (e.g., mobile computing, file sharing, and online access to information and software) and the need for a holistic framework to understand and deal with risk effectively. Chapter 11 (Information Management: Stages and Issues) describes how new organizational needs for more useful and integrated information are driving the development of business-oriented functions within IT that focus specifically on information and knowledge, as opposed to applications and data.
The mini cases in this section examine the difficulties of managing com- plex IT issues when they intersect substantially with important business issues. In “Building Shared Services at RR Communications,” we see an IT organiza- tion in transition from a traditional divisional structure and governance model to a more centralized enterprise model, and the long-term challenges experi- enced by CIO Vince Patton in changing both business and IT practices, includ- ing information management and delivery, to support this new approach. In “Enterprise Architecture at Nationstate Insurance,” CIO Jane Denton endeavors to make IT more flexible and agile, while incorporating new and emerging tech- nologies into its strategy. In “IT Investment at North American Financial,” we show the opportunities and challenges involved in prioritizing and resourcing enterprisewide IT projects and monitoring that anticipated benefits are being achieved.
• Section III: IT-Enabled Innovation discusses some of the ways technology is being used to transform organizations. Chapter 12 (Technology-Driven Innovation) examines the nature and importance of innovation with IT and describes a typi- cal innovation life cycle. Chapter 13 (When Big Data and Social Computing Meet) discusses how IT leaders are incorporating big data and social media concepts
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18 Preface
and technologies to successfully deliver business value in new ways. Chapter 14 (Effective Customer Experience) explores the IT function’s role in creating and improving an organization’s customer experiences and the role of technology in helping companies to understand and learn from their customers’ experiences. Chapter 15 (Business Intelligence: An Overview) looks at the nature of business intelligence and its relationship to data, information, and knowledge and how IT can be used to build a more intelligent organization. Chapter 16 (Technology- Enabled Collaboration) identifies the principal forms of collaboration used in orga- nizations, the primary business drivers involved in them, how their business value is measured, and the roles of IT and the business in enabling collaboration.
The mini cases in this section focus on the key challenges companies face in innovating with IT. “Innovation at International Foods” contrasts the need for pro- cess and control in corporate IT with the strong push to innovate with technology and the difficulties that ensue from the clash of style and culture. “Consumerization of Technology at IFG” looks at issues such as “bring your own device” (BYOD) to the workplace. In “CRM at Minitrex,” we see some of the internal technological and political conflicts that result from a strategic decision to become more customercen- tric. Finally, “Customer Service at Datatronics” explores the importance of present- ing unified, customer-facing IT to customers.
• Section IV: IT Portfolio Development and Management looks at how the IT func- tion must transform itself to be able to deliver business value effectively in the future. Chapter 17 (Managing the Application Portfolio) describes the ongoing management process of categorizing, assessing, and rationalizing the IT applica- tion portfolio. Chapter 18 (IT Demand Management: Supply Management is Not Enough) looks at the often neglected issue of demand management (as opposed to supply management), explores the root causes of the demand for IT services, and identifies a number of tools and enablers to facilitate more effective demand management. Chapter 19 (Technology Roadmap: Benefits, Elements, and Practical Steps) examines the challenges IT managers face in implementing new infrastruc- ture, technology standards, and types of technology in their real-world business and technical environments, which is composed of a huge variety of hardware, software, applications, and other technologies, some of which date back more than thirty years. Chapter 20 (Emerging Development Practices) explores how system develop- ment practices are changing and how managers can create an environment to pro- mote improved development productivity. And Chapter 21 (Information Delivery: Past, Present, and Future) examines the fresh challenges IT faces in managing the exponential growth of data and digital assets; privacy and accountability concerns; and new demands for access to information on an anywhere, anytime basis.
The mini cases associated with this section describe many of these themes embedded within real organizational contexts. “Project Management at MM” mini case shows how a top-priority, strategic project can take a wrong turn when proj- ect management skills are ineffective. “Working Smarter at Continental Furniture” mini case follows an initiative to improve the company’s analytics so it can reduce its environmental impact. And in the mini case “Managing Technology at Genex Fuels,” we see CIO Nick Devlin trying to implement enterprisewide technology for competitive advantage in an organization that has been limping along with obscure and outdated systems.
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Preface 19
SupplementAry mAteriAlS
online instructor resource center The following supplements are available online to adopting instructors:
• PowerPoint Lecture Notes • Image Library (text art) • Extensive Teaching Notes for all Mini cases • Additional chapters including Developing IT Professionalism; IT Sourcing; Master
Data Management; Developing IT Capabilities; The Identity Management Challenge; Social Computing; Managing Perceptions of IT; IT in the New World of Corporate Governance Reforms; Enhancing Customer Experiences with Technology; Creating Digital Dashboards; and Managing Electronic Communications.
• Additional mini cases, including IT Leadership at MaxTrade; Creating a Process-Driven Organization at Ag-Credit; Information Management at Homestyle Hotels; Knowledge Management at Acme Consulting; Desktop Provisioning at CanCredit; and Leveraging IT Vendors at SleepSmart.
For detailed descriptions of all of the supplements just listed, please visit www.pearsongloableditions.com/McKeen.
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the geneSiS of thiS Book
Since 1990 we have been meeting quarterly with a group of senior IT managers from a number of leading-edge organizations (e.g., Eli Lilly, BMO, Honda, HP, CIBC, IBM, Sears, Bell Canada, MacDonalds, and Sun Life) to identify and discuss critical IT manage- ment issues. This focus group represents a wide variety of industry sectors (e.g., retail, manufacturing, pharmaceutical, banking, telecommunications, insurance, media, food processing, government, and automotive). Originally, it was established to meet the com- panies’ needs for well-balanced, thoughtful, yet practical information on emerging IT management topics, about which little or no research was available. However, we soon recognized the value of this premise for our own research in the rapidly evolving field of IT management. As a result, it quickly became a full-scale research program in which we were able to use the focus group as an “early warning system” to document new IT management issues, develop case studies around them, and explore more collaborative approaches to identifying trends, challenges, and effective practices in each topic area.3
3 This now includes best practice case studies, field research in organizations, multidisciplinary qualitative and quantitative research projects, and participation in numerous CIO research consortia.
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20 Preface
As we shared our materials with our business students, we realized that this issues-based approach resonated strongly with them, and we began to incorporate more of our research into the classroom. This book is the result of our many years’ work with senior IT manag- ers, in organizations, and with students in the classroom.
Each issue in this book has been selected collaboratively by the focus group after debate and discussion. As facilitators, our job has been to keep the group’s focus on IT management issues, not technology per se. In preparation for each meeting, focus group members researched the topic within their own organization, often involving a number of members of their senior IT management team as well as subject matter experts in the process. To guide them, we provided a series of questions about the issue, although members are always free to explore it as they see fit. This approach provided both struc- ture for the ensuing discussion and flexibility for those members whose organizations are approaching the issue in a different fashion.
The focus group then met in a full-day session, where the members discussed all aspects of the issue. Many also shared corporate documents with the group. We facilitated the discussion, in particular pushing the group to achieve a common understanding of the dimensions of the issue and seeking examples, best practices, and guidelines for deal- ing with the challenges involved. Following each session, we wrote a report based on the discussion, incorporating relevant academic and practitioner materials where these were available. (Because some topics are “bleeding edge,” there is often little traditional IT research available on them.)
Each report has three parts:
1. A description of the issue and the challenges it presents for both business and IT managers
2. Models and concepts derived from the literature to position the issue within a con- textual framework
3. Near-term strategies (i.e., those that can be implemented immediately) that have proven successful within organizations for dealing with the specific issue
Each chapter in this book focuses on one of these critical IT issues. We have learned over the years that the issues themselves vary little across industries and organizations, even in enterprises with unique IT strategies. However, each organization tackles the same issue somewhat differently. It is this diversity that provides the richness of insight in these chapters. Our collaborative research approach is based on our belief that when dealing with complex and leading-edge issues, “everyone has part of the solution.” Every focus group, therefore, provides us an opportunity to explore a topic from a variety of perspectives and to integrate different experiences (both successful and oth- erwise) so that collectively, a thorough understanding of each issue can be developed and strategies for how it can be managed most successfully can be identified.
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AbouT THE AuTHorS
James D. McKeen is Professor Emeritus at the Queen’s School of Business. He has been working in the IT field for many years as a practitioner, researcher, and consultant. In 2011, he was named the “IT Educator of the Year” by ComputerWorld Canada. Jim has taught at universities in the United Kingdom, France, Germany, and the United States. His research is widely published in a number of leading journals and he is the coau- thor (with Heather Smith) of five books on IT management. Their most recent book—IT Strategy: Issues and Practices (2nd ed.)—was the best-selling business book in Canada (Globe and Mail, April 2012).
Heather A. Smith has been named the most-published researcher on IT management issues in two successive studies (2006, 2009). A senior research associate with Queen’s University School of Business, she is the author of five books, the most recent being IT Strategy: Issues and Practices (Pearson Prentice Hall, 2012). She is also a senior research associate with the American Society for Information Management’s Advanced Practices Council. A former senior IT manager, she is codirector of the IT Management Forum and the CIO Brief, which facilitate interorganizational learning among senior IT executives. In addition, she consults and collaborates with organizations worldwide.
21
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ACKnowLEDGMEnTS
The work contained in this book is based on numerous meetings with many senior IT managers. We would like to acknowledge our indebtedness to the following individuals who willingly shared their insights based on their experiences “earned the hard way”:
Michael Balenzano, Sergei Beliaev, Matthias Benfey, Nastaran Bisheban, Peter Borden, Eduardo Cadena, Dale Castle, Marc Collins, Diane Cope, Dan Di Salvo, Ken Dschankilic, Michael East, Nada Farah, Mark Gillard, Gary Goldsmith, Ian Graham, Keiko Gutierrez, Maureen Hall, Bruce Harding, Theresa Harrington, Tom Hopson, Heather Hutchison, Jim Irich, Zeeshan Khan, Joanne Lafreniere, Konstantine Liris, Lisa MacKay, Mark O’Gorman, Amin Panjwani, Troy Pariag, Brian Patton, Marius Podaru, Helen Restivo, Pat Sadler, A. F. Salam, Ashish Saxena, Joanne Scher, Stewart Scott, Andy Secord, Marie Shafi, Helen Shih, Trudy Sykes, Bruce Thompson, Raju Uppalapati, Len Van Greuning, Laurie Schatzberg, Ted Vincent, and Bond Wetherbe.
We would also like to recognize the contribution of Queen’s School of Business to this work. The school has facilitated and supported our vision of better integrat- ing academic research and practice and has helped make our collaborative approach to the study of IT management and strategy an effective model for interorganizational learning.
James D. McKeen Kingston, Ontario
Heather A. Smith School of Business
June 2014
22
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S e c t i o n i
Delivering Value with IT
Chapter 1 The IT Value Proposition Chapter 2 Delivering Business Value through IT Strategy Chapter 3 Making IT Count Chapter 4 Effective Business–IT Relationships Chapter 5 Business–IT Communication Chapter 6 Effective IT Leadership
Mini Cases ■ Delivering Business Value with IT at Hefty Hardware ■ Investing in TUFS ■ IT Planning at ModMeters
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24
C h a p t e r
1 the it Value Proposition1
1 This chapter is based on the authors’ previously published article, Smith, H. A., and J. D. McKeen. “Developing and Delivering on the IT Value Proposition.” Communications of the Association for Information Systems 11 (April 2003): 438–50. Reproduced by permission of the Association for Information Systems.
It’s déjà vu all over again. For at least twenty years, business leaders have been trying to figure out exactly how and where IT can be of value in their organizations. And IT managers have been trying to learn how to deliver this value. When IT was used mainly as a productivity improvement tool in small areas of a business, this was a relatively straightforward process. Value was measured by reduced head counts— usually in clerical areas—and/or the ability to process more transactions per person. However, as systems grew in scope and complexity, unfortunately so did the risks. Very few companies escaped this period without making at least a few disastrous invest- ments in systems that didn’t work or didn’t deliver the bottom-line benefits executives thought they would. Naturally, fingers were pointed at IT.
With the advent of the strategic use of IT in business, it became even more difficult to isolate and deliver on the IT value proposition. It was often hard to tell if an invest- ment had paid off. Who could say how many competitors had been deterred or how many customers had been attracted by a particular IT initiative? Many companies can tell horror stories of how they have been left with a substantial investment in new forms of technology with little to show for it. Although over the years there have been many improvements in where and how IT investments are made and good controls have been established to limit time and cost overruns, we are still not able to accurately articulate and deliver on a value proposition for IT when it comes to anything other than simple productivity improvements or cost savings.
Problems in delivering IT value can lie with how a value proposition is conceived or in what is done to actually implement an idea—that is, selecting the right project and doing the project right (Cooper et al. 2000; McKeen and Smith 2003; Peslak 2012). In addition, although most firms attempt to calculate the expected payback of an IT invest- ment before making it, few actually follow up to ensure that value has been achieved or to question what needs to be done to make sure that value will be delivered.
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Chapter 1 • The IT Value Proposition 25
This chapter first looks at the nature of IT value and “peels the onion” into its different layers. Then it examines the three components of delivering IT value: value identification, conversion, and value realization. Finally, it identifies five general principles for ensuring IT value will be achieved.
Peeling the OniOn: Understanding it ValUe
Thirty years ago the IT value proposition was seen as a simple equation: Deliver the right technology to the organization, and financial benefits will follow (Cronk and Fitzgerald 1999; Marchand et al. 2000). In the early days of IT, when computers were most often used as direct substitutes for people, this equation was understandable, even if it rarely worked this simply. It was easy to compute a bottom-line benefit where “technology” dollars replaced “salary” dollars.
Problems with this simplistic view quickly arose when technology came to be used as a productivity support tool and as a strategic tool. Under these conditions, managers had to decide if an IT investment was worth making if it saved people time, helped them make better decisions, or improved service. Thus, other factors, such as how well technology was used by people or how IT and business processes worked together, became important considerations in how much value was realized from an IT investment. These issues have long confounded our understanding of the IT value prop- osition, leading to a plethora of opinions (many negative) about how and where technol- ogy has actually contributed to business value. Stephen Roach (1989) made headlines with his macroeconomic analysis showing that IT had had absolutely no impact on pro- ductivity in the services sector. More recently, research shows that companies still have a mixed record in linking IT to organizational performance, user satisfaction, productivity, customer experience, and agility (Peslak 2012).
These perceptions, plus ever-increasing IT expenditures, have meant business managers are taking a closer look at how and where IT delivers value to an organization (Ginzberg 2001; Luftman and Zadeh 2011). As they do this, they are beginning to change their understanding of the IT value proposition. Although, unfortunately, “silver bullet thinking” (i.e., plug in technology and deliver bottom-line impact) still predomi- nates, IT value is increasingly seen as a multilayered concept, far more complex than it first appeared. This suggests that before an IT value proposition can be identified and delivered, it is essential that managers first “peel the onion” and understand more about the nature of IT value itself (see Figure 1.1).
What is it Value?
Value is defined as the worth or desirability of a thing (Cronk and Fitzgerald 1999). It is a subjective assessment. Although many believe this is not so, the value of IT depends very much on how a business and its individual managers choose to view it. Different companies and even different executives will define it quite differently. Strategic posi- tioning, increased productivity, improved decision making, cost savings, or improved service are all ways value could be defined. Today most businesses define value broadly and loosely, not simply as a financial concept (Chakravarty et al. 2013). Ideally, it is tied to the organization’s business model because adding value with IT should enable a firm to do its business better. In the focus group (see the Preface), one company sees value
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26 Section I • Delivering Value with IT
resulting from all parts of the organization having the same processes; another defines value by return on investment (ROI); still another measures it by a composite of key performance indicators. In short, there is no single agreed-on measure of IT value. As a result, misunderstandings about the definition of value either between IT and the busi- ness or among business managers themselves can lead to feelings that value has not been delivered. Therefore, a prerequisite of any IT value proposition is that everyone involved in an IT initiative agree on what value they are trying to deliver and how they will recognize it.
Where is it Value?
Value may also vary according to where one looks for it (Davern and Kauffman 2000; Oliveira and Martins 2011). For example, value to an enterprise may not be perceived as value in a work group or by an individual. In fact, delivering value at one level in an orga- nization may actually conflict with optimizing value at another level. Decisions about IT value are often made to optimize firm or business process value, even if they cause difficulties for business units or individuals. As one manager explained, “At the senior levels, our bottom-line drivers of value are cost savings, cash flow, customer satisfaction, and revenue. These are not always visible at the lower levels of the organization.” Failure to consider value implications at all levels can lead to a value proposition that is coun- terproductive and may not deliver the value that is anticipated. Many executives take a hard line with these value conflicts. However, it is far more desirable to aim for a value
What Value will be Delivered?
Where will Value be Delivered?
Who will Deliver Value?
When will Value be Delivered?
How will Value be Delivered?
FigUre 1.1 IT Value Is a Many-Layered Concept
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Chapter 1 • The IT Value Proposition 27
that is not a win–lose proposition but is a win–win at all levels. This can leverage overall value many times over (Chan 2000; Grant and Royle 2011).
Who delivers it Value?
Increasingly, managers are realizing that it is the interaction of people, information, and technology that delivers value, not IT alone.2 Studies have confirmed that strong IT practices alone do not deliver superior performance. It is only the combination of these IT practices with an organization’s skills at managing information and people’s behav- iors and beliefs that leads to real value (Birdsall 2011; Ginzberg 2001; Marchand et al. 2000). In the past, IT has borne most of the responsibility for delivering IT value. Today, however, business managers exhibit a growing willingness to share responsibility with IT to ensure value is realized from the organization’s investments in technology. Most companies now expect to have an executive sponsor for any IT initiative and some busi- ness participation in the development team. However, many IT projects still do not have the degree of support or commitment from the business that IT managers feel is necessary to deliver fully on a value proposition (Peslak 2012).
When is it Value realized?
Value also has a time dimension. It has long been known that the benefits of technol- ogy take time to be realized (Chan 2000; Segars and Chatterjee 2010). People must be trained, organizations and processes must adapt to new ways of working, information must be compiled, and customers must realize what new products and services are being offered. Companies are often unprepared for the time it takes an investment to pay off. Typically, full payback can take between three and five years and can have at least two spikes as a business adapts to the deployment of technology. Figure 1.2 shows this “W” effect, named for the way the chart looks, for a single IT project.
Initially, companies spend a considerable amount in deploying a new technology. During this twelve-to-sixteen-month period, no benefits occur. Following implementa- tion, some value is realized as companies achieve initial efficiencies. This period lasts for about six months. However, as use increases, complexities also grow. Information overload can occur and costs increase. At this stage, many can lose faith in the initia- tive. This is a dangerous period. The final set of benefits can occur only by making the business simpler and applying technology, information, and people more effectively. If a business can manage to do this, it can achieve sustainable, long-term value from its IT investment (Segars and Chatterjee 2010). If it can’t, value from technology can be offset by increased complexity.
Time also changes perceptions of value. Many IT managers can tell stories of how an initiative is vilified as having little or no value when first implemented, only to have people say they couldn’t imagine running the business without it a few years later. Similarly, most managers can identify projects where time has led to a clearer
2 These interactions in a structured form are known as processes. Processes are often the focus of much orga- nizational effort in the belief that streamlining and reengineering them will deliver value. In fact, research shows that without attention to information and people, very little value is delivered (Segars and Chatterjee 2010). In addition, attention to processes in organizations often ignores the informal processes that contribute to value.
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28 Section I • Delivering Value with IT
understanding of the potential value of a project. Unfortunately, in cases where antici- pated value declines or disappears, projects don’t always get killed (Cooper et al. 2000).
Clarifying and agreeing on these different layers of IT value is the first step involved in developing and delivering on the IT value proposition. All too often, this work is for- gotten or given short shrift in the organization’s haste to answer this question: How will IT value be delivered? (See next section.) As a result, misunderstandings arise and tech- nology projects do not fulfill their expected promises. It will be next to impossible to do a good job developing and delivering IT value unless and until the concepts involved in IT value are clearly understood and agreed on by both business and IT managers.
the three COmPOnents OF the it ValUe PrOPOsitiOn
Developing and delivering an IT value proposition involves addressing three compo- nents. First, potential opportunities for adding value must be identified. Second, these opportunities must be converted into effective applications of technology. Finally, value
12–16 Months
EVA
Time
Get the House in Order
Harvest Low- Hanging Fruit
Make the Business Complex
Make Business Simpler
16–22 Months 22–38 Months 3–5 Years
FigUre 1.2 The ‘W’ Effect in Delivering IT Value (Segars & Chatterjee, 2010)
Best Practices in Understanding IT Value
• Link IT value directly to your business model. • Recognize value is subjective, and manage perceptions accordingly. • Aim for a value “win–win” across processes, work units, and individuals. • Seek business commitment to all IT projects. • Manage value over time.
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Chapter 1 • The IT Value Proposition 29
must be realized by the organization. Together, these components comprise the funda- mentals of any value proposition (see Figure 1.3).
identification of Potential Value
Identifying opportunities for making IT investments has typically been a fairly informal activity in most organizations. Very few companies have a well-organized means of doing research into new technologies or strategizing about where these tech- nologies can be used (McKeen and Smith 2010). More companies have mechanisms for identifying opportunities within business units. Sometimes a senior IT manager will be designated as a “relationship manager” for a particular unit with responsi- bility for working with business management to identify opportunities where IT could add value (Agarwal and Sambamurthy 2002; Peslak 2012). Many other com- panies, however, still leave it up to business managers to identify where they want to use IT. There is growing evidence that relegating the IT organization to a passive role in developing systems according to business instructions is unlikely to lead to high IT value. Research shows that involving IT in business planning can have a direct and positive influence on the development of successful business strategies using IT (Ginzberg 2001; Marchand et al. 2000). This suggests that organizations should estab- lish joint business–IT mechanisms to identify and evaluate both business and technical opportunities where IT can add value.
Once opportunities have been identified, companies must then make decisions about where they want to focus their dollars to achieve optimal value. Selecting the right projects for an organization always involves balancing three fundamental factors: cash, timing, and risk (Luehrman 1997). In principle, every company wants to under- take only high-return projects. In reality, project selection is based on many different factors. For example, pet or political projects or those mandated by the government or competitors are often part of a company’s IT portfolio (Carte et al. 2001). Disagreement at senior levels about which projects to undertake can arise because of a lack of a coher- ent and consistent mechanism for assessing project value. All organizations need some formal mechanism for prioritizing projects. Without one, it is very likely that project selection will become highly politicized and, hence, ineffective at delivering value. There are a variety of means to do this, ranging from using strictly bottom-line metrics, to comparing balanced scorecards, to adopting a formal value-assessment methodology. However, although these methods help to weed out higher cost–lower return projects, they do not constitute a foolproof means of selecting the right projects for an organiza- tion. Using strict financial selection criteria, for example, can exclude potentially high- value strategic projects that have less well-defined returns, longer payback periods, and more risk (Cooper et al. 2000; DeSouza 2011). Similarly, it can be difficult getting
Identification Conversion Realization IT
Value
FigUre 1.3 The Three Components of the IT Value Proposition
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30 Section I • Delivering Value with IT
important infrastructure initiatives funded even though these may be fundamental to improving organizational capabilities (Byrd 2001).
Therefore, organizations are increasingly taking a portfolio approach to project selection. This approach allocates resources and funding to different types of projects, enabling each type of opportunity to be evaluated according to different criteria (McKeen and Smith 2003; Smith and McKeen 2010). One company has identified three different classes of IT—infrastructure, common systems, and business unit applications—and funds them in different proportions. In other companies, funding for strategic initia- tives is allocated in stages so their potential value can be reassessed as more information about them becomes known. Almost all companies have found it necessary to justify infrastructure initiatives differently than more business-oriented projects. In fact, some remove these types of projects from the selection process altogether and fund them with a “tax” on all other development (McKeen and Smith 2003). Other companies allocate a fixed percentage of their IT budgets to a technology renewal fund.
Organizations have come a long way in formalizing where and how they choose to invest their IT dollars. Nevertheless, there is still considerable room for judgment based on solid business and technical knowledge. It is, therefore, essential that all executives involved have the ability to think strategically and systematically as well as financially about project identification and selection.
effective Conversion
“Conversion” from idea/opportunity to reality has been what IT organizations have been all about since their inception. A huge amount of effort has gone into this central component of the IT value proposition. As a result, many IT organizations have become very good at developing and delivering projects on time and on budget. Excellent project management, effective execution, and reliable operations are a critical part of IT value. However, they are not, in and of themselves, sufficient to convert a good idea into value or to deliver value to an organization.
Today managers and researchers are both recognizing that more is involved in effective conversion than good IT practices. Organizations can set themselves up for failure by not providing adequate and qualified resources. Many companies start more projects than they can effectively deliver with the resources they have available. Not having enough time or resources to do the job means that people are spread too thin and end up taking shortcuts that are potentially damaging to value (Cooper et al. 2000). Resource limitations on the business side of a project team can be as damaging to con- version as a lack of technical resources. “[Value is about] far more than just sophisticated managerial visions. . . . Training and other efforts . . . to obtain value from IT investments
Best Practices in Identifying Potential Value
• Joint business–IT structures to recognize and evaluate opportunities • A means of comparing value across projects • A portfolio approach to project selection • A funding mechanism for infrastructure
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Chapter 1 • The IT Value Proposition 31
are often hamstrung by insufficient resources” (Chircu and Kauffman 2000). Inadequate business resources can lead to poor communication and ineffective problem solving on a project (Ginzberg 2001). Companies are beginning to recognize that the number and quality of the staff assigned to an IT project can make a difference to its eventual out- come. They are insisting that the organization’s best IT and businesspeople be assigned to critical projects.
Other significant barriers to conversion that are becoming more apparent now that IT has improved its own internal practices include the following:
• Organizational barriers. The effective implementation of IT frequently requires the extensive redesign of current business processes (Chircu and Kauffman 2000). However, organizations are often reluctant to make the difficult complementary business changes and investments that are required (Carte et al. 2001). “When new IT is implemented, everyone expects to see costs come down,” explained one manager. “However, most projects involve both business and IT deliverables. We, therefore, need to take a multifunctional approach to driving business value.” In recognition of this fact, some companies are beginning to put formal change man- agement programs in place to help businesses prepare for the changes involved with IT projects and to adapt and simplify as they learn how to take advantage of new technology.
• Knowledge barriers. Most often new technology and processes require employ- ees to work differently, learn new skills, and have new understanding of how and where information, people, and technologies fit together (Chircu and Kauffman 2000; Perez-Lopez and Alegre 2012). Although training has long been part of new IT implementations, more recently businesses are recognizing that delivering value from technology requires a broader and more coordinated learning effort (Smith and McKeen 2002). Lasting value comes from people and technology working together as a system rather than as discrete entities. Research confirms that high- performing organizations not only have strong IT practices but also have people who have good information management practices and who are able to effectively use the information they receive (Beath et al. 2012; Marchand et al. 2000).
realizing Value
The final component of the IT value proposition has been the most frequently ignored. This is the work involved in actually realizing value after technology has been imple- mented. Value realization is a proactive and long-term process for any major initiative. All too often, after an intense implementation period, a development team is disbanded to work on other projects, and the business areas affected by new technology are left to
Best Practices in Conversion
• Availability of adequate and qualified IT and business resources • Training in business goals and processes • Multifunctional change management • Emphasis on higher-level learning and knowledge management
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32 Section I • Delivering Value with IT
sink or swim. As a result, a project’s benefits can be imperfectly realized. Technology must be used extensively if it is to deliver value. Poorly designed technology can lead to high levels of frustration, resistance to change, and low levels of use (Chircu and Kauffman 2000; Sun et al., 2012).
Resistance to change can have its root cause in an assumption or an action that doesn’t make sense in the everyday work people do. Sometimes this means challeng- ing workers’ understanding of work expectations or information flows. At other times it means doing better analysis of where and how a new process is causing bottlenecks, overwork, or overload. As one manager put it, “If value is not being delivered, we need to understand the root causes and do something about it.” His company takes the unusual position that it is important to keep a team working on a project until the expected benefits have been realized. This approach is ideal but can also be very costly and, therefore, must be carefully managed. Some companies try to short-circuit the value management process by simply taking anticipated cost savings out of a business unit’s budget once technology has been implemented, thereby forcing it to do more with less whether or not the technology has been as beneficial as anticipated. However, most often organizations do little or no follow-up to determine whether or not benefits have been achieved.
Measurement is a key component of value realization (Thorp 1999). After imple- mentation, it is essential that all stakeholders systematically compare outcomes against expected value and take appropriate actions to achieve benefits. In addition to monitor- ing metrics, a thorough and ongoing assessment of value and information flows must also be undertaken at all levels of analysis: individual, team, work unit, and enterprise. Efforts must be taken to understand and improve aspects of process, information, and technology that are acting as barriers to achieving value.
A significant problem with not paying attention to value recognition is that areas of unexpected value or opportunity are also ignored. This is unfortunate because it is only after technology has been installed that many businesspeople can see how it could be leveraged in other parts of their work. Realizing value should, therefore, also include provisions to evaluate new opportunities arising through serendipity.
FiVe PrinCiPles FOr deliVering ValUe
In addition to clearly understanding what value means in a particular organization and ensuring that the three components of the IT value proposition are addressed by every project, five principles have been identified that are central to developing and deliver- ing value in every organization.
Best Practices in Realizing Value
• Plan a value-realization phase for all IT projects. • Measure outcomes against expected results. • Look for and eliminate root causes of problems. • Assess value realization at all levels in the organization. • Have provisions for acting on new opportunities to leverage value.
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Chapter 1 • The IT Value Proposition 33
Principle 1. have a Clearly defined Portfolio Value management Process
Every organization should have a common process for managing the overall value being delivered to the organization from its IT portfolio. This would begin as a means of identifying and prioritizing IT opportunities by potential value relative to each other. It would also include mechanisms to optimize enterprise value (e.g., through tactical, stra- tegic, and infrastructure projects) according to a rubric of how the organization wants to allocate its resources.
A portfolio value management process should continue to track projects as they are being developed. It should ensure not only that projects are meeting schedule and budget milestones but also that other elements of conversion effectiveness are being addressed (e.g., business process redesign, training, change management, informa- tion management, and usability). A key barrier to achieving value can be an organiza- tion’s unwillingness to revisit the decisions made about its portfolio (Carte et al. 2001). Yet this is critically important for strategic and infrastructure initiatives in particular. Companies may have to approve investments in these types of projects based on imper- fect information in an uncertain environment. As they develop, improved information can lead to better decision making about an investment. In some cases this might lead to a decision to kill a project; in others, to speed it up or to reshape it as a value proposition becomes clearer.
Finally, a portfolio value management process should include an ongoing means of ensuring that value is realized from an investment. Management must monitor expected outcomes at appropriate times following implementation and hold someone in the organization accountable for delivering benefits (Smith and McKeen 2010).
Principle 2. aim for Chunks of Value
Much value can be frittered away by dissipating IT investments on too many projects (Cho et al. 2013; Marchand et al. 2000). Focusing on a few key areas and designing a set of complementary projects that will really make a difference is one way companies are trying to address this concern. Many companies are undertaking larger and larger tech- nology initiatives that will have a significant transformational and/or strategic impact on the organization. However, unlike earlier efforts, which often took years to complete and ended up having questionable value, these initiatives are aiming to deliver major value through a series of small, focused projects that, linked together, will result in both immediate short-term impact and long-term strategic value. For example, one company has about three hundred to four hundred projects underway linked to one of a dozen major initiatives.
Principle 3. adopt a holistic Orientation to technology Value
Because value comes from the effective interaction of people, information, and tech- nology, it is critical that organizations aim to optimize their ability to manage and use them together (Marchand et al. 2000). Adopting a systemic approach to value, where technology is not viewed in isolation and interactions and impacts are anticipated and planned, has been demonstrated to contribute to perceived business value (Ginzberg 2001). Managers should aim to incorporate technology as an integral part of an overall
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34 Section I • Delivering Value with IT
program of business change rather than dealing with people and information manage- ment as afterthoughts to technology (Beath et al. 2012). One company has done this by taking a single business objective (e.g., “increase market penetration by 15 percent over five years”) and designing a program around it that includes a number of bundled tech- nology projects.
Principle 4. aim for Joint Ownership of technology initiatives
This principle covers a lot of territory. It includes the necessity for strong executive sponsorship of all IT projects. “Without an executive sponsor for a project, we simply won’t start it,” explained one manager. It also emphasizes that all people involved in a project must feel they are responsible for the results. Said another manager, “These days it is very hard to isolate the impact of technology, therefore there must be a ‘we’ mentality.” This perspective is reinforced by research that has found that the quality of the IT–business relationship is central to the delivery of IT value. Mutual trust, visible business support for IT and its staff, and IT staff who consider themselves to be part of a business problem-solving team all make a significant difference in how much value technology is perceived to deliver (Ginzberg 2001).
Principle 5. experiment more Often
The growing complexity of technology, the range of options available, and the uncertainty of the business environment have each made it considerably more difficult to determine where and how technology investments can most effectively be made. Executives naturally object to the risks involved in investing heavily in possible business scenarios or technical gambles that may or may not realize value. As a result, many companies are looking for ways to firm up their understanding of the value proposition for a particular opportunity without incurring too much risk. Undertaking pilot studies is one way of doing this (DeSouza 2011). Such experiments can prove the value of an idea, uncover new opportunities, and identify more about what will be needed to make an idea successful. They provide senior managers with a greater number of options in managing a project and an overall technology portfolio. They also enable poten- tial value to be reassessed and investments in a particular project to be reevaluated and rebalanced against other opportunities more frequently. In short, experimentation enables technology investments to be made in chunks and makes “go/no go” decisions at key milestones much easier to make.
This chapter has explored the concepts and activities involved in developing and delivering IT value to an organization. In their efforts to use technology to deliver business value, IT managers should keep clearly in mind the maxim “Value is in the eye of the beholder.” Because there is no
single agreed-on notion of business value, it is important to make sure that both business and IT managers are working to a common goal. This could be traditional cost reduction, process efficiencies, new business capabili- ties, improved communication, or a host of other objectives. Although each organization
Conclusion
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Chapter 1 • The IT Value Proposition 35
References
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DeSouza, K. Intrapreneurship: Managing Ideas in Your Organization. Toronto: University of Toronto Press, 2011.
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Marchand, D., W. Kettinger, and J. Rollins. “Information Orientation: People, Technology and the Bottom Line.” Sloan Management Review (Summer 2000): 69–80.
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37
C h a p t e r
2 Delivering Business Value through IT Strategy1
1 This chapter is based on the authors’ previously published article, Smith, H. A., J. D. McKeen, and S. Singh. “Developing IT Strategy for Business Value.” Journal of Information Technology Management XVIII, no. 1 (June 2007): 49–58. Reproduced by permission of the Association of Management.
Suddenly, it seems, executives are “getting” the strategic potential of IT. Instead of being relegated to the back rooms of the enterprise, IT is now being invited to the boardrooms and is being expected to play a leading role in delivering top- line value and business transformation (Korsten 2011; Luftman and Zadeh 2011; Peslak 2012). Thus, it can no longer be assumed that business strategy will naturally drive IT strategy, as has traditionally been the case. Instead, different approaches to strategy development are now possible and sometimes desirable. For example, the capabilities of new technologies could shape the strategic direction of a firm (e.g., mobile, social media, big data). IT could enable new competencies that would then make new busi- ness strategies possible (e.g., location-based advertising). New options for governance using IT could also change how a company works with other firms (think Wal-Mart or Netflix). Today new technologies coevolve with new business strategies and new behaviors and structures (see Figure 2.1). However, whichever way it is developed, if IT is to deliver business value, IT strategy must always be closely linked with sound business strategy.
Ideally, therefore, business and IT strategies should complement and support each other relative to the business environment. Strategy development should be a two-way process between the business and IT. Yet unfortunately, poor alignment between them remains a perennial problem (Frohman 1982; Luftman and Zadeh 2011; McKeen and Smith 1996; Rivard et al. 2004). Research has already identified many organizational challenges to effective strategic alignment. For example, if their strategy-development processes are not compatible (e.g., if they take place at different times or involve differ- ent levels of the business), it is unlikely that the business and IT will be working toward the same goals at the same time (Frohman 1982). Aligning with individual business units can lead to initiatives that suboptimize the effectiveness of corporate strategies (McKeen and Smith 1996). Strategy implementation must also be carefully aligned to
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38 Section I • Delivering Value with IT
ensure the integration of business and IT efforts (Smith and McKeen 2010). Finally, com- panies often try to address too many priorities, leading to an inadequate focus on key strategic goals (Weiss and Thorogood 2011).
However, strategic alignment is only one problem facing IT managers when they develop IT strategy. With IT becoming so much more central to the development and delivery of business strategy, much more attention is now being paid to strategy devel- opment than in the past. What businesses want to accomplish with their IT and how IT shapes its own delivery strategy are increasingly vital to the success of an enterprise. This chapter explores how organizations are working to improve IT strategy develop- ment and its relationship with business strategy. It looks first at how our understanding of business and IT strategies has changed over time and at the forces that will drive even further changes in the future. Then it discusses some critical success factors for IT strategy development about which there is general consensus. Next it looks at the dif- ferent dimensions of the strategic use of IT that IT management must address. Finally, it examines how some organizations are beginning to evolve a more formal IT strategy- development process and some of the challenges they are facing in doing so.
Business and iT sTraTegies: PasT, PresenT, and FuTure
At the highest level, a strategy is an approach to doing business (Gebauer 1997). Traditionally, a competitive business strategy has involved performing different activi- ties from competitors or performing similar activities in different ways (Porter 1996). Ideally, these activities were difficult or expensive for others to copy and, therefore, resulted in a long-term competitive advantage (Gebauer 1997). They enabled firms to charge a premium for their products and services.
Until recently, the job of an IT function was to understand the business’s strategy and figure out a plan to support it. However, all too often IT’s strategic contribution was inhibited by IT managers’ limited understanding of business strategy and by busi- ness managers’ poor understanding of IT’s potential. Therefore, most formal IT plans were focused on the more tactical and tangible line of business needs or opportunities
New Capabilities
New Behaviors & Structures
N ew
T ec
hn ol
og
y
New Strate gie
s
Figure 2.1 Business and IT Strategies Co-evolve to Create New Capabilities
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Chapter 2 • Delivering Business Value through IT Strategy 39
for operational integration rather than on supporting enterprise strategy (Burgelman and Doz 2001). And projects were selected largely on their abilities to affect the short- term bottom line rather than on delivering top-line business value. “In the past IT had to be a strategic incubator because businesspeople simply didn’t recognize the potential of technology,” said a member of the focus group.
As a result, instead of looking for ways to be different, in the past much business strategy became a relentless race to compete on efficiencies with IT as the primary means of doing so (Hitt et al. 1998; Porter 1996). In many industries, companies’ improved information-processing capabilities have been used to drive down transaction costs to near zero, threatening traditional value propositions and shaving profit margins. This is leading to considerable disruption as business models (i.e., the way companies add value) are under attack by new, technology-enabled approaches to delivering products and services (e.g., the music industry, bookselling). Therefore:
Strategists [have to] honestly face the many weaknesses inherent in [the] industrial-age ways of doing things. They [must] redesign, build upon and reconfig- ure their components to radically transform the value proposition. (Tapscott 1996)
Such new business strategies are inconceivable without the use of IT. Other factors, also facilitated by IT, are further influencing the relationship between the business and IT strategy. Increasingly, globalization is altering the economic playing field. As countries and companies become more deeply interrelated, instability is amplified. Instead of being generals plotting out a structured campaign, business leaders are now more likely to be participating in guerilla warfare (Eisenhardt 2002; Friedman 2005). Flexibility, speed, and innovation are, therefore, becoming the watchwords of competi- tion and must be incorporated into any business or IT strategy–development process.
These conditions have dramatically elevated the business’s attention to the value of IT strategy (Korsten 2011; Weiss and Thorogood 2011). As a result, business executives recognize that it was a mistake to consider technology projects to be solely the responsibility of IT. There is, thus, a much greater understanding that business executives have to take leadership in making technology investments in ways that will shape and/or complement business strategy. There is also recognition at the top of most organizations that problems with IT strategy implementation are largely the fault of leaders who “failed to realize that adopting … systems posed a business—not just a technological—challenge” and didn’t take responsibility for the organizational and process changes that would deliver business value (Ross and Beath 2002).
Changing value models and the development of integrated, cross-functional systems have elevated the importance of both a corporate strategy and a technology strategy that crosses traditional lines of business. Many participants remarked that their executive teams at last understand the potential of IT to affect the top line. “IT recently added some new distribution channels, and our business has just exploded,” stated one manager. Others are finding that there is a much greater emphasis on IT’s ability to grow revenues, and this is being reflected in how IT budgets are allocated and projects prioritized. “Our executives have finally recognized that business strategy is not only enabled by IT, but that it can provide new business opportunities as well,” said another manager. This is reflected in the changing position of the CIO in many organizations over the past decade. “Today our CIO sits on the executive team and takes part in all
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40 Section I • Delivering Value with IT
business strategy discussions because IT has credibility,” said a group member. “Our executives now want to work closely with IT and understand the implications of tech- nology decisions,” said another. “It’s not the same as it was even five years ago.” Now CIOs are valued for their insight into business opportunities, their perspective across the entire organization, and their ability to take the long view (Korsten 2011).
However, this does not mean that organizations have become good at developing strategy or at effectively integrating business and IT strategies. “There are many incon- sistencies and problems with strategy development,” said a participant. Organizations have to develop new strategy-making capabilities to cope in the future competitive environment. This will mean changing their current top–down method of developing and implementing strategy. If there’s one thing leading academics agree on, it’s that future strategy development will have to become a more dynamic and continuous pro- cess (Casadesus and Ricart 2011; Eisenhardt 2002; Kanter 2002; Prahalad and Krishnan 2002; Quinn 2002; Weill et al. 2002). Instead of business strategy being a well-crafted plan of action for the next three to five years, from which IT can devise an appropri- ate and supportive technology strategy, business strategy must become more and more evolutionary and interactive with IT. IT strategy development must, therefore, become more dynamic itself and focused on developing strategic capabilities that will support a variety of changing business objectives. In the future, managers will not align business strategy and IT at particular points in time but will participate in an organic process that will address the need to continually evolve IT and business plans in concert with each other (Casadesus and Ricart 2011).
Four CriTiCal suCCess FaCTors
Each focus group member had a different approach to developing IT strategy, but there was general agreement that four factors had to be in place for strategy development to be effective.
1. Revisit your business model. The worlds of business and IT have traditionally been isolated from each other, leading to misaligned and sometimes conflicting strategies. Although there is now a greater willingness among business manag- ers to understand the implications of technology in their world, it is still IT that must translate their ideas and concepts into business language. “IT must absolutely understand and focus on the business,” said a participant.
Similarly, it is essential that all managers thoroughly understand how their business as a whole works. Although this sounds like a truism, almost any IT man- ager can tell “war stories” of business managers who have very different visions of what they think their enterprise should look like. Business models and strate- gies are often confused with each other (Osterwalder and Pigneur 2010). A business model explains how the different pieces of a business fit together. It ensures that everyone in an organization is focused on the kind of value a company wants to create. Only when the business model is clear can strategies be developed to articu- late how a company will deliver that value in a unique way that others cannot easily duplicate (Osterwalder and Pigneur 2010).
2. Have strategic themes. IT strategy used to be about individual projects. Now it is about carefully crafted programs that focus on developing specific business
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Chapter 2 • Delivering Business Value through IT Strategy 41
capabilities. Each program consists of many smaller, interrelated business and IT initiatives cutting across several functional areas. These are designed to be adapted, reconfigured, accelerated, or canceled as the strategic program evolves. Themes give both business and IT leaders a broad yet focused topic of interest that chal- lenges them to move beyond current operations (Kanter 2002). For example, one retail company decided it wanted to be “a great place to work.” A bank selected mobile banking as a critical differentiator. Both firms used a theme to engage the imaginations of their employees and mobilize a variety of ideas and actions around a broad strategic direction. By grouping IT and business programs around a few key themes, managers find it easier to track and direct important strategic threads in an organization’s development and to visualize the synergies and interdepen- dencies involved across a variety of projects spread out across the organization and over time.
3. Get the right people involved. One of the most important distinguishing factors between companies that get high business value from their IT investment and those that don’t is that senior managers in high-performing companies take a leadership role in IT decision making. Abdication of this responsibility is a recipe for disas- ter (Ross and Beath 2002). “In the past it was very hard to get the right people involved,” said a focus group member. “Now it’s easier.” Another noted, “You don’t send a minion to an IT strategy meeting anymore; it’s just not done.” In this type of organization, the CIO typically meets regularly with the president and senior busi- ness leaders to discuss both business and IT strategies.
Getting the right people involved also means getting business managers and other key stakeholders involved in strategy as well. To do this, many com- panies have established “relationship manager” positions in IT to work with and learn about the business and bring opportunities for using technology to the table. Research shows that the best strategies often stem from grassroots innovations, and it is, therefore, critical that organizations take steps to ensure that good ideas are nurtured and not filtered out by different layers of management (DeSouza 2011). “We have two levels of strategy development in our organization,” said a focus group participant. “Our relationship managers work with functional managers and our CIO with our business unit presidents on the IT steering committee.” This com- pany also looks for cross-functional synergies and strategic dependencies by hold- ing regular meetings of IT account managers and between account managers and infrastructure managers.
4. Work in partnership with the business. Successful strategy demands a true partnership between IT and the business, not just use of the term. Strategy decisions are best made with input from both business and IT executives (Ross and Beath 2002). The focus group agreed. “Our partnerships are key to our success,” stated a manager. “It’s not the same as it was a few years ago. People now work very closely together.” Partnership is not just a matter of “involving” business lead- ers in IT strategy or vice versa or “aligning” business and IT strategies. Effective strategizing is about continuous and dynamic synchronization of capabilities (Smith and McKeen 2010). “Our IT programs need synchronizing with business strategy—not only at a high level, but right down to the individual projects and the business changes that are necessary to implement them properly,” explained another participant.
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42 Section I • Delivering Value with IT
The Many diMensions oF iT sTraTegy
One of the many challenges of developing effective IT strategy is the fact that technology can be used in so many different ways. The opportunities are practically limitless. Unfortunately, the available resources are not. Thus, a key element of IT strategy is determining how best to allocate the IT budget. This issue is complicated by the fact that most businesses today require significant IT services just to operate. Utility and basic support costs eat up between 30 and 70 percent of the focus group members’ budgets. That’s just the cost of “keeping the lights on”—running existing applications, fixing problems, and dealing with mandatory changes (e.g., new legisla- tion). IT strategy, therefore, has two components: how to do more with less (i.e., driving down fixed costs) and how to allocate the remaining budget toward those projects that will support and further the organization’s business strategy.
With occasional exceptions, CIOs and their teams are mostly left alone to deter- mine the most cost-effective way of providing the IT utility. This has led to a variety of IT-led initiatives to save money, including outsourcing, shared services, use of software- as-a-service (SaaS), global sourcing, and partnerships. However, it is the way that IT spends the rest of its budget that has captured the attention of business strategists. “It used to be that every line of business had an IT budget and that we would work with each one to determine the most effective way to spend it,” said a manager. “Now there is much more recognition that the big opportunities are at the enterprise level and cut across lines of business.”
Focus group members explained that implementing a strategic program in IT will usually involve five types of initiatives. Determining what the balance among them will be is a significant component of how IT strategy delivers business value. Too much or too little emphasis on one type of project can mean a failure to derive maximum value from a particular strategic business theme:
1. Business improvement. These projects are probably the easiest to agree on because they stress relatively low-risk investments with a tangible short-to-medium-term payback. These are often reengineering initiatives to help organizations streamline their processes and save substantial amounts of money by eliminating unnecessary or duplicate activities or empowering customers/suppliers to self-manage transac- tions with a company. Easy to justify with a business case, these types of projects have traditionally formed the bulk of IT’s discretionary spending. “Cost-reduction projects have and always will be important to our company,” stated one member. “However, it is important to balance what we do in this area with other types of equally important projects that have often been given short shrift.”
2. Business enabling. These projects extend or transform how a company does business. As a result, they are more focused on the top-line or revenue-growing aspects of an enterprise. For example, a data warehouse could enable different parts of a company to “mine” transaction information to improve customer ser- vice, assist target marketing, better understand buying patterns, or identify new business opportunities. Adding a new mobile channel could make it easier for customers to buy more or attract new customers. A customer information file could make it more enjoyable for a customer to do business with a company (e.g., only one address change) and also facilitate new ways of doing business.
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Chapter 2 • Delivering Business Value through IT Strategy 43
Often the return on these types of projects is less clear, and as a result it has been harder to get them on the IT priority list. Yet many of these initiatives represent the foundations on which future business strategy will be built. For example, one CIO described the creation of a customer information file as “a key enabler for many different business units. . . . It has helped us build bench strength and move to a new level of service that other companies cannot match” (Smith 2003).
3. Business opportunities. These are small-scale, experimental initiatives designed to test the viability of new concepts or technologies. In the past these types of proj- ects have not received funding by traditional methods because of their high-risk nature. Often it has been left up to the CIO to scrounge money for such “skunk- works.” There is a growing recognition of the potential value of strategic innovation projects in helping companies to learn about and prepare for the future. In some companies the CEO and CFO have freed up seed money to finance a number of these initiatives. However, although there is considerably more acceptance for such projects, there is still significant organizational resistance to financing projects for which the end results are unpredictable (Quinn 2002; Weiss and Thorogood 2011). In fact, it typically requires discipline to support and encourage innovation exper- iments, which, by definition, will have a high number of false starts and wrong moves (DeSouza 2011). The group agreed that the key to benefiting from them is to design them for learning, incorporate feedback from a variety of sources, and make quick corrections of direction.
4. Opportunity leverage. A neglected but important type of IT project is one that oper- ationalizes, scales up, or leverages successful strategic experiments or prototypes. “We are having a great deal of success taking advantage of what we have learned earlier,” said one manager. Coming up with a new strategic or technological idea needs a different set of skills than is required to take full advantage of it in the mar- ketplace (Charitou and Markides 2003; DeSouza 2011). Some companies actually use their ability to leverage others’ ideas to their strategic advantage. “We can’t compete in coming up with new ideas,” said the manager of a medium-sized company, “but we can copy other peoples’ ideas and do them better.”
5. Infrastructure. This final type of IT initiative is one that often falls between the cracks when business and IT strategies are developed. However, it is clear that the hardware, software, middleware, communications, and data available will affect an organization’s capacity to build new capabilities and respond to change. Studies have found that most companies feel their legacy infrastructure can be an impediment to what they want to do (Peslak 2012; Prahalad and Krishnan 2002). Research also shows that leading companies have a framework for making targeted investments in their IT infrastructure that will further their overall strate- gic direction (Weill et al. 2002). Unfortunately, investing in infrastructure is rarely seen as strategic. As a result, many companies struggle with how to justify and appropriately fund it.
Although each type of project delivers a different type of business value, typi- cally IT strategy has stressed only those initiatives with strong business cases. Others are shelved or must struggle for a very small piece of the pie. However, there was a general recognition in the group that this approach to investment leads to an IT strategy
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44 Section I • Delivering Value with IT
with a heavy emphasis on the bottom line. As a result, all participating companies were looking at new ways to build a strategy-development process that reflects a more appropriate balance of all dimensions of IT strategy.
Toward an iT sTraTegy-develoPMenT ProCess
Strategy is still very much an art, not a science, explained the focus group. And it is likely to remain so, according to strategy experts. Strategy will never again be a coherent, long-term plan with predictable outcomes—if it ever was. “Leaders can’t predict which combinations [of strategic elements] will succeed [and] they can’t drive their organiza- tions towards predetermined positions” (Quinn 2002). This situation only exacerbates the problem that has long faced IT strategists—that is, it is difficult to build systems, information, and infrastructure when a business’s direction is continually changing. Yet this degree of flexibility is exactly what businesses are demanding (Chakravarty et al. 2013; Luftman and Zadeh 2011; Korsten 2011). Traditional IT planning and budgeting mechanisms done once a year simply don’t work in today’s fast-paced business envi- ronment. “We always seem to lag behind the business, no matter how hard we try,” said a manager.
Clearly, organizations need to be developing strategy differently. How to do this is not always apparent, but several companies are trying ways to more dynamically link IT strategy with that of the business. Although no one company in the focus group claimed to have the answer, they did identify several practices that are moving them closer to this goal:
• “Rolling” planning and budget cycles. All participants agreed that IT plans and budgets need attention more frequently than once a year. One company has cre- ated an eighteen-month rolling plan that is reviewed and updated quarterly with the business to maintain currency.
• An enterprise architecture. This is an integrated blueprint for the development of the enterprise—both the business and IT. “Our enterprise architecture includes business processes, applications, infrastructure, and data,” said a member. “Our EA function has to approve all business and IT projects and is helpful in identify- ing duplicate solutions.” In some companies this architecture is IT initiated and business validated; in others it is a joint initiative. However, participants warned that an architecture has the potential to be a corporate bottleneck if it becomes too bureaucratic.
• Different funding “buckets.” Balancing short-term returns with the company’s longer-term interests is a continual challenge. As noted earlier, all five types of IT projects are necessary for an effective IT strategy (i.e., business improvement, business enabling, business opportunities, opportunity leverage, and infrastruc- ture). In order to ensure that each different type of IT is appropriately funded, many companies are allocating predetermined percentages of their IT budget to different types of projects (Smith and McKeen 2010). This helps keep continual pressure on IT to reduce its “utility costs” to free up more resources for other types of projects. “Since we implemented this method of budgeting, we’ve gone from spending 70 percent of our revenues on mandatory and support projects to spending 70 percent on discretionary and strategic ones,” said a manager. This
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Chapter 2 • Delivering Business Value through IT Strategy 45
is also an effective way to ensure that IT infrastructure is continually enhanced. Leading companies build their infrastructures not through a few large investments but gradually through incremental, modular investments that build IT capabilities (Weill et al. 2002).
• Relationship managers. There is no substitute for a deep and rich understand- ing of the business. This is why many companies have appointed IT relationship managers to work closely with key lines of business. These managers help business leaders to observe their environments systematically and identify new opportunities for which IT could be effective. Furthermore, together relationship managers can identify synergies and interdependencies among lines of business. One organization holds both intra- and interfunctional strategy sessions on a regular basis with busi- ness managers to understand future needs, develop programs, and design specific roadmaps for reaching business goals. “Our relationship managers have been a sig- nificant factor in synchronizing IT and business strategies,” said its manager.
• A prioritization rubric. “We don’t do prioritization well,” said one participant. IT managers have long complained that it is extremely difficult to justify certain types of initiatives using the traditional business case method of prioritization. This has led to an overrepresentation of business improvement projects in the IT portfolio and has inhibited more strategic investments in general capabilities and business opportunities. This problem is leading some companies to adopt multiple approaches to justifying IT projects (Chakravarty et al. 2013; Ross and Beath 2002). For example, business-enabling projects must be sponsored at a cross-functional level on the basis of the capabilities they will provide the enterprise as a whole. Senior management must then take responsibility to ensure that these capabili- ties are fully leveraged over time. Infrastructure priorities are often left up to IT to determine once a budget is set. One IT department does this by holding strategy sessions with its relationship and utility managers to align infrastructure spending with the organization’s strategic needs. Unfortunately, no one has yet figured out a way to prioritize business opportunity experiments. At present this is typically left to the “enthusiasms and intuitions” of the sponsoring managers, either in IT or in the business (DeSouza 2011). “Overall,” said a manager, “we need to do a better job of thinking through the key performance indicators we’d like to use for each type of project.”
Although it is unlikely that strategy development will ever become a completely formalized process, there is a clear need to add more structure to how it is done. A greater understanding of how strategy is developed will ensure that all stakeholders are involved and a broader range of IT investments are considered. The outcomes of strategy will always be uncertain, but the process of identifying new opportunities and how they should be funded must become more systematic if a business is going to real- ize optimum value from its IT resources.
Challenges For Cios
As often happens in organizations, recognition of a need precedes the ability to put it into place. IT leaders are now making significant strides in articulating IT strategy and linking it more effectively with business strategy. Business leaders are also more open
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46 Section I • Delivering Value with IT
to a more integrated process. Nevertheless, some important organizational barriers that inhibit strategy development still remain.
A supportive governance structure is frequently lacking. “Now that so many s trategies are enterprisewide, we need a better way to manage them,” explained one manager. Often there are no formal structures to identify and manage interdepen- dencies between business functions and processes. “It used to be that everything was aligned around organizational boundaries, but strategy is now more complex since we’re working on programs with broader organizational scope,” said another. Similarly, current managerial control systems and incentives are often designed to reward thinking that is aligned to a line of business, not to the greater organiza- tional good. Enterprisewide funding models are also lacking. “Everything we do now requires negotiation for funding between the lines of business who control the resources,” a third stated. Even within IT, the group suggested it is not always clear who in the organization is responsible for taking IT strategies and turning them into detailed IT plans.
Traditional planning and budgetary practices are a further challenge. This is an often-neglected element of IT strategy. “Our business and IT strategies are not always done in parallel or even around the same time,” said a participant. As a result, it is not easy to stay aligned or to integrate the two sets of plans. Another commented, “Our business plans change constantly. It is, therefore, common for IT strategies to grow far- ther and farther apart over time.” Similarly, an annual budgeting process tends to lock an organization into fixed expenditures that may not be practical in a rapidly changing environment. IT organizations, therefore, need both a longer-term view of their resourc- ing practices and the opportunity to make changes to it more frequently. Even though rolling budgets are becoming more acceptable, they are by no means common in either IT or the business world today.
Both business and IT leaders need to develop better skills in strategizing. “We’ve gotten really good at implementing projects,” said an IT manager. “Strategy and inno- vation are our least developed capabilities.” IT is pushing the business toward better articulation of its goals. “Right now, in many areas of our business, strategy is not well thought through,” said another manager. “IT is having to play the devil’s advocate and get them to think beyond generalities such as ‘We are going to grow the business by 20 percent this year.’” With more attention to the process, it is almost certain to get better, but managers’ rudimentary skills in this area limit the quality of strategy development.
Over and over, the group stressed that IT strategy is mainly about getting the balance right between conflicting strategic imperatives. “It’s always a balancing act
Barriers to Effective IT Strategy Development
• Lack of a governance structure for enterprisewide projects • Inadequate enterprisewide funding models • Poorly integrated processes for developing IT and business strategies • Traditional budget cycles • Unbalanced strategic and tactical initiatives • Weak strategizing skills
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Chapter 2 • Delivering Business Value through IT Strategy 47
Conclusion
Effective strategy development is becoming vital for organizations. As the impact of IT has grown in companies, IT strategy is finally getting the attention it deserves in business. Nevertheless, most organizations are still at the earliest stages of learning how to develop an effective IT strategy and synchronize it with an overall business strategy. Getting the balance right between the many differ- ent ways IT can be used to affect a business is a constant challenge for leaders and one on
which they do not always agree. Although there is, as yet, no well-developed IT strat- egy–development process, there appears to be general agreement on certain critical suc- cess factors and the key elements involved. Over time, these will likely be refined and bet- ter integrated with overall business strategy development. Those who learn to do this well without locking the enterprise into inflexible technical solutions are likely to win big in our rapidly evolving business environment.
References
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Casadesus-Masanell, R., and J. Ricart. “How to Design a Winning Business Model.” Harvard Business Review 89, nos. 1–2 (January–February 2011): 100–107.
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between our tactical and operational commitments and the work that builds our long- term capabilities,” said a participant. Deciding how to make the trade-offs between the different types of IT work is the essence of effective strategy. Unfortunately, few businesses do this very well (Burgelman and Doz 2001; Luftman and Zadeh 2011). According to the focus group, traditional business thinking tends to favor short-term profitability, while IT leaders tend to take a longer-term view. Making sure some types of IT work (e.g., infrastructure, new business opportunities) are not underfunded while others (e.g., utility, business improvement) are not overfunded is a continual challenge for all IT and business leaders.
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Korsten, P. “The Essential CIO.” IBM Institute for Business Value. Somers, NY: IBM Global Business Services, 2011.
Luftman, J., and H. S. Zadeh. “Key Information Technology and Management Issues 2010– 2011: An International Study.” Journal of Information Technology 26, no. 3 (2011): 193–204.
McKeen, J., and H. Smith. Management Challenges in IS: Successful Strategies and Appropriate Action. Chichester, England: John Wiley & Sons, 1996.
Osterwalder, A., and Y. Pigneur. Business Model Generation. Hoboken, NJ: John Wiley & Sons, 2010.
Peslak, A. R. “An Analysis of Critical Information Technology Issues Facing Organizations.” Industrial Management and Data Systems 112, no. 5 (2012): 808–27.
Porter, M. “What Is Strategy?” Harvard Business Review (November–December 1996): 61–78.
Prahalad, C., and M. Krishnan. “The Dynamic Synchronization of Strategy and Information Technology.” MIT Sloan Management Review (Summer 2002): 24–33.
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Rivard, S., B. Aubert, M. Patry, G. Pare, and H. Smith. Information Technology and Organizational Transformation: Solving the Management Puzzle. New York: Butterworth Heinemann, 2004.
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49
C h a p t e r
3 Making IT Count1
1 This chapter is based on the authors’ previously published article, Smith, H. A., J. D. McKeen, and C. Street. “Linking IT to Business Metrics.” Journal of Information Science and Technology 1, no. 1 (2004): 13–26. Reproduced by permission of the Information Institute.
From the first time IT started making a significant dent in corporate balance sheets, the holy grail of academics, consultants, and business and IT managers has been to show that what a company spends on IT has a direct impact on its performance. Early efforts to do this, such as those trying to link various measures of IT input (e.g., budget dollars, number of PCs, number of projects) with various measures of business performance (e.g., profit, productivity, stock value) all failed to show any relationship at all (Marchand et al. 2000). Since then, everyone has prop- erly concluded that the relationship between what is done in IT and what happens in the business is considerably more complex than these studies first supposed. In fact, many researchers would suggest that the relationship is so filtered through a variety of “conversion effects” (Cronk and Fitzgerald 1999) as to be practically impossible to demonstrate. Most IT managers would agree. They have long argued that technology is not the major stumbling block to achieving business performance; it is the business itself—the processes, the managers, the culture, and the skills—that makes the differ- ence. Therefore, it is simply not realistic to expect to see a clear correlation between IT and business performance at any level. When technology is successful, it is a team effort, and the contributions of the IT and business components of an initiative cannot and should not be separated.
Nevertheless, IT expenditures must be justified. Thus, most companies have concentrated on determining the “business value” that specific IT projects deliver. By focusing on a goal that matters to business (e.g., better information, faster transaction processing, reduced staff), then breaking this goal down into smaller projects that IT can affect directly, they have tried to “peel the onion” and show specifically how IT delivers value in a piecemeal fashion. Thus, a series of surrogate measures are usually used to demonstrate IT’s impact in an organization. (See Chapter 1 for more details.)
More recently, companies are taking another look at business performance met- rics and IT. They believe it is time to “put the onion back together” and focus on what
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really matters to the enterprise. This perspective argues that employees who truly understand what their business is trying to achieve can sense the right ways to per- sonally improve performance that will show up at a business unit and organizational level. “People who understand the business and are informed will be proactive and … have a disposition to create business value every day in many small and not-so-small ways” (Marchand et al. 2000). Although the connection may not be obvious, they say, it is there nevertheless and can be demonstrated in tangible ways. The key to linking what IT does to business performance is, therefore, to create an environment within which everyone thoroughly understands what measures are important to the business and is held accountable for them. This point of view does not suggest that all the work done to date to learn how IT delivers value to an organization (e.g., business cases, productivity measures) has been unnecessary, only that it is incomplete. Without close attention to business metrics in addition, it is easy for IT initiatives and staff to lose their focus and become less effective.
This chapter looks at how these controversial yet compelling ideas are being pursued in organizations to better understand how companies are attempting to link IT work and firm performance through business metrics. The first section describes how business metrics themselves are evolving and looks at how new management philosophies are changing how these measures are communicated and applied. Next it discusses the types of metrics that are important for a well-rounded program of business measurement and how IT can influence them. Then it presents three differ- ent ways companies are specifically linking their IT departments with business met- rics and the benefits and challenges they have experienced in doing this. This section concludes with some general principles for establishing a business measurement pro- gram in IT. Finally, it offers some advice to managers about how to succeed with such a program in IT.
Business MeasureMent: an Overview
Almost everyone agrees that the primary goal of a business is to make money for its shareholders (Goldratt and Cox 1984; Haspeslagh et al. 2001; Kaplan and Norton 1996). Unfortunately, in large businesses this objective frequently gets lost in the midst of people’s day-to-day activities because profit cannot be measured directly at the level at which most employees in a company work (Haspeslagh et al. 2001). This “missing link” between work and business performance leads companies to look for ways to bridge this gap. They believe that if a firm’s strategies for achieving its goal can be tied much more closely to everyday processes and decision making, frontline employees will be better able to create business value. Proponents of this value-based manage- ment (VBM) approach have demonstrated that an explicit, firmwide commitment to shareholder value, clear communication about how value is created or destroyed, and incentive systems that are linked to key business measures will increase the odds of a positive increase in share price (Haspeslagh et al. 2001).
Measurement counts. What a company measures and the way it measures influence both the mindsets of managers and the way people behave. The best measures are tied to business performance and are linked to the strategies and business capabilities of the company. (Marchand et al. 2000)
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Although companies ascribe to this notion in theory, they do not always act in ways that are consistent with this belief. All too often, therefore, because they lack clarity about the links between business performance and their own work, individuals and even business units have to take leaps of faith in what they do (Marchand et al. 2000).
Nowhere has this been more of a problem than in IT. As has been noted often, IT investments have not always delivered the benefits expected (Bensaou and Earl 1998; Holland and Sharke 2001; Peslak 2012). “Efforts to measure the link between IT investment and business performance from an economics perspective have… failed to establish a consistent causal linkage with sustained business profitability” (Marchand et al. 2000). Value-based management suggests that if IT staff do not understand the business, they cannot sense how and where to change it effectively with technology. Many IT and business managers have implicitly known this for some time. VBM simply gives them a better framework for implementing their beliefs more systematically.
One of the most significant efforts to integrate an organization’s mission and strategy with a measurement system has been Kaplan and Norton’s (1996) balanced scorecard. They explain that competing in the information age is much less about managing physical, tangible assets and much more about the ability of a company to mobilize its intangible assets, such as customer relationships, innovation, employee skills, and information technology. Thus, they suggest that not only should business measures look at how well a company has done in the past (i.e., financial performance), but they also need to look at metrics related to customers, internal business processes, and learning and growth that position the firm to achieve future performance. Although it is difficult putting a reliable monetary value on these items, Kaplan and Norton sug- gest that such nonfinancial measures are critical success factors for superior financial performance in the future. Research shows that this is, in fact, the case. Companies that use a balanced scorecard tend to have a better return on investment (ROI) than those that rely on traditional financial measures alone (Alexander 2000).
Today many companies use some sort of scorecard or “dashboard” to track a vari- ety of different metrics of organizational health. However, IT traditionally has not paid much attention to business results, focusing instead on its own internal measures of performance (e.g., IT operations efficiency, projects delivered on time). This has per- petuated the serious disconnect between the business and IT that often manifests itself in perceptions of poor alignment between the two groups, inadequate payoffs from IT investments, poor relationships, and finger-pointing (Holland and Sharke 2001; Peslak 2012; Potter 2013). All too often IT initiatives are conceived with little reference to major business results, relying instead on lower-level business value surrogates that are not always related to these measures. IT organizations are getting much better at this bot- tom-up approach to IT investment (Smith and McKeen 2010), but undelivered IT value remains a serious concern in many organizations. One survey of CFOs found that only 49 percent felt that their ROI expectations for technology had been met (Holland and Sharke 2001). “Despite considerable effort, no practical model has been developed to measure whether a company’s IT investments will definitely contribute to sustainable competitive advantage” (Marchand et al. 2000). Clearly, in spite of significant efforts over many years, traditional IT measurement programs have been inadequate at
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assessing business value. Many IT organizations believe, therefore, that it is time for a different approach to delivering IT value, one that holds IT accountable to the same measures and goals as the rest of the business.
Key Business Metrics fOr it
No one seriously argues that IT has no impact on an organization’s overall financial performance anymore. There may be disagreement about whether it has a positive or a negative impact, but technology is too pervasive and significant an expense in most firms for it not to have some influence on the corporate bottom line. However, as has been argued earlier, we now recognize that neither technology nor business alone is responsible for IT’s financial impact. It is instead a joint responsibility of IT and the busi- ness. This suggests that they need to be held accountable together for its impact. Some companies have accepted this principle for individual IT projects (i.e., holding business and IT managers jointly responsible for achieving their anticipated benefits), yet few have extended it to an enterprise level. VBM suggests that this lack of attention to enter- prise performance by IT is one reason it has been so hard to fully deliver business value for technology investments. Holding IT accountable for a firm’s performance according to key financial metrics is, therefore, an important step toward improving its contribu- tion to the corporate bottom line.
However, although financial results are clearly an important part of any mea- surement of a business’s success today, they are not enough. Effective business metrics programs should also include nonfinancial measures, such as customer and employee satisfaction. As already noted, because such nonfinancial measures are predictive of future performance, they offer an organization the opportunity to make changes that will ultimately affect their financial success.
Kaplan and Norton (1996) state “the importance of customer satisfaction probably cannot be overemphasized.” Companies that do not understand their customers’ needs will likely lose customers and profitability. Research shows that merely adequate satis- faction is insufficient to lead to customer loyalty and ultimately profit. Only firms where customers are completely or extremely satisfied can achieve this result (Heskett et al. 1994). As a result, many companies now undertake systematic customer satisfaction surveys. However, in IT it is rare to find external customer satisfaction as one of the metrics on which IT is evaluated. While IT’s “customers” are usually considered to be internal, these days technology makes a significant difference in how external custom- ers experience a firm and whether or not they want to do business with it. Systems that are not reliable or available when needed, cannot provide customers with the informa- tion they need, or cannot give customers the flexibility they require are all too common. And with the advent of online business, systems and apps are being designed to inter- face directly with external customers. It is, therefore, appropriate to include external customer satisfaction as a business metric for IT.
Another important nonfinancial business measure is employee satisfaction. This is a “leading indicator” of customer satisfaction. That is, employee satisfaction in one year is strongly linked to customer satisfaction and profitability in the next (Koys 2001). Employees’ positive attitudes toward their company and their jobs lead to posi- tive behaviors toward customers and, therefore, to improved financial performance
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(Rucci et al. 1998; Ulrich et al. 1991). IT managers have always watched their own employee satisfaction rate intently because of its close links to employee turnover. However, they often miss the link between IT employee satisfaction and customer satisfaction—both internal customer satisfaction, which leads to improved general employee satisfaction, and external customer satisfaction. Thus, only a few companies hold IT managers accountable for general employee satisfaction.
Both customer and employee satisfaction should be part of a business metrics program for IT. With its ever-growing influence in organizations, technology is just as likely to affect external customer and general employee satisfaction as many other areas of a business. This suggests that IT has three different levels of measurement and accountability:
1. Enterprise measures. These tie the work of IT directly to the performance of the organization (e.g., external customer satisfaction, corporate financial performance).
2. Functional measures. These assess the internal work of the IT organization as a whole (e.g., IT employee satisfaction, internal customer satisfaction, operational performance, development productivity).
3. Project measures. These assess the performance of a particular project team in delivering specific value to the organization (e.g., business case benefits, delivery on time).
Functional and project measures are usually well addressed by IT measurement programs today. It is the enterprise level that is usually missing.
Designing Business Metrics fOr it
The firms that hold IT accountable for enterprise business metrics believe this approach fosters a common sense of purpose, enables everyone to make better decisions, and helps IT staff understand the implications of their work for the success of the organi- zation (Haspeslagh et al. 2001; Marchand et al. 2000; Potter 2013; Roberts 2013). The implementation of business metrics programs varies widely among companies, but three approaches taken to linking IT with business metrics are distinguishable.
1. Balanced scorecard. This approach uses a classic balanced scorecard with mea- sures in all four scorecard dimensions (see the “Sample Balanced Scorecard Business Metrics” feature). Each metric is selected to measure progress against the entire enterprise’s business plan. These are then broken down into business unit plans and appropriate submetrics identified. Individual scorecards are then developed with metrics that will link into their business unit scorecards. With this approach, IT is treated as a separate business unit and has its own scorecard linked to the business plan. “Our management finally realized that we need to have everyone thinking in the same way,” explained one manager. “With enterprise systems, we can’t have people working in silos anymore.” The scorecards are very visible in the organization with company and business unit scorecards and those of senior execu- tives posted on the company’s intranet. “People are extremely interested in seeing how we’re doing. Scorecards have provided a common framework for our entire company.” They also provide clarity for employees about their roles in how they affect key business metrics.
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Although scorecards have meant that there is better understanding of the business’s drivers and plans at senior management levels, considerable resistance to them is still found at the lower levels in IT. “While developers see how they can affect our customers, they don’t see how they can affect shareholder value, profit, or revenue, and they don’t want to be held accountable for these things,” stated the same manager. She noted that implementing an effective scorecard program relies on three things: good data to provide better metrics, simplicity of metrics, and enforcement. “Now if someone’s scorecard is not complete, they cannot get a bonus. This is a huge incentive to follow the program.”
2. Modified scorecard. A somewhat different approach to a scorecard is taken by one company in the focus group. This firm has selected five key measures (see the “Modified Scorecard Business Metrics” feature) that are closely linked to the com- pany’s overall vision statement. Results are communicated to all staff on a quarterly basis in a short performance report. This includes a clear explanation of each mea- sure, quarterly progress, a comparison with the previous year’s quarterly results, and a “stretch” goal for the organization to achieve. The benefit of this approach is that it orients all employees in the company to the same mission and values. With everyone using the same metrics, alignment is much clearer all the way through the firm, according to the focus group manager.
In IT these key enterprise metrics are complemented by an additional set of business measures established by the business units. Each line of business identifies one or two key business unit metrics on which they and their IT team
Sample Balanced Scorecard Business Metrics
• Shareholder value (financial) • Expense management (financial) • Customer/client focus (customer) • Loyalty (customer) • Customercentric organization (customer) • Effectiveness and efficiency of business operations (operations) • Risk management (operations) • Contribution to firmwide priorities and business initiatives (growth)
Modified Scorecard Business Metrics
• Customer loyalty index. Percentage of customers who said they were very satisfied with the company and would recommend it to others.
• Associate loyalty index. Employees’ perception of the company as a great place to work. • Revenue growth. This year’s total revenues as a percentage of last year’s total revenues. • Operating margin. Operating income earned before interest and taxes for every dollar of
revenue. • Return on capital employed. Earnings before interest and tax divided by the capital used
to generate the earnings.
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will be measured. Functional groups within IT are evaluated according to the same metrics as their business partners as well as on company and internal IT team performance. For example, the credit group in IT might be evaluated on the number of new credit accounts the company acquires. Shared IT services (e.g., infrastructure) are evaluated according to an average of all of the IT func- tional groups’ metrics.
The importance the company places on these metrics is reflected in the firm’s generous bonus program (i.e., bonuses can reach up to 230 percent of an individual’s salary) in which all IT staff participate. Bonuses are separate from an individual’s salary, which is linked to personal performance. The percentage influence of each set of business measures (i.e., enterprise, business unit, and individual/team) varies according to the level of the individual in the firm. However, all staff have at least 25 percent of their bonus linked to enterprise performance metrics. No bonuses are paid to anyone if the firm does not reach its earnings-per-share target (which is driven by the five enterprise measures out- lined in the “Modified Scorecard Business Metrics” feature). This incentive sys- tem makes it clear that everyone’s job is connected to business results and helps ensure that attention is focused on the things that are important to the company. As a result, interest is much stronger among IT staff about how the business is doing. “Everyone now speaks the same language,” said the manager. “Project alignment is much easier.”
3. Strategic imperatives. A somewhat different approach is taken by a third focus group company. Here the executive team annually evaluates the key environmen- tal factors affecting the company, then identifies a number of strategic imperatives for the firm (e.g., achieve industry-leading e-business capability, achieve 10–15 percent growth in earnings per share). These can vary according to the needs of the firm in any particular year. Each area of the business is then asked to identify initiatives that will affect these imperatives and to determine how they will be measured (e.g., retaining customers of a recent acquisition, increased net sales, a new product). In the same way, IT is asked to identify the key projects and mea- sures that will help the business to achieve these imperatives. Each part of the company, including IT, then integrates these measures into its variable pay pro- gram (VPP).
The company’s VPP links a percentage of an individual’s pay to business results and overall business unit performance. This percentage could vary from a small portion of one’s salary for a new employee to a considerable proportion for senior management. Within IT, the weight that different measures are accorded in the VPP portion of their pay is determined by a measurement team and approved by the CIO and the president. Figure 3.1 illustrates the different percentages allo- cated to IT’s variable pay component for a typical year. Metrics can change from year to year depending on where management wants to focus everyone’s attention. “Performance tends to improve if you measure it,” explained the manager. “Over the years, we have ratcheted up our targets in different areas. Once a certain level of performance is achieved, we may change the measure or change the emphasis on this measure.”
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56 Section I • Delivering Value with IT
An important difference from the scorecard approach is the identification of key IT projects. “These are not all IT projects, but a small number that are closely aligned with the strategic business imperatives,” stated the manager. “Having the success of these projects associated with their variable pay drives everyone’s behavior. People tend to jump in and help if there’s a problem with one of them.” The goal in this process is for everyone to understand the VPP measures and to make them visible within IT. Targets and results are posted quarterly, and small groups of employees meet to discuss ideas about how they can influence business and IT goals. “Some amazing ideas have come out of these meetings,” said the manager. “Everyone knows what’s important, and these measures get attention. People use these metrics to make choices all the time in their work.”
Each of these business measurement programs has been implemented somewhat differently, but they all share several key features that could be considered principles of a good business metrics program for IT:
1. Focus on overall business performance. These programs all focus employees on both financial and nonfinancial enterprise performance and have an explicit expecta- tion that everyone in the organization can influence these results in some way.
2. Understanding is a critical success factor. If people are going to be held accountable for certain business results, it is important that they understand them. Similarly, if the organization is worried about certain results, this must be communicated as well. Holding regular staff meetings where people can ask ques- tions and discuss results is effective, as is providing results on a quarterly basis. Understanding is the goal. “If you can ask … a person programming code and they can tell you three to four of their objectives and how those tie into the compa- ny’s performance and what the measures of achieving those objectives are, you’ve got it” (Alexander 2000).
3. Simplicity. Successful companies tend to keep their measures very simple and easy to use (Haspeslagh et al. 2001). In each approach already outlined, a limited number of measures are used. This makes it very easy for employees to calculate
Business Results 40%
Report Card Goals 30%
Partner Satisfaction
10%
Application Delivery Effectiveness
5%
Production Availability
5%
Member Retention
5%
Product Recovery
5%
Key Projects 30%
IT Performance 60%
IT Variable Pay 100%
figure 3.1 Percentage Weightings Assigned to IT Variable Pay Components for a Particular Year
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Chapter 3 • Making IT Count 57
their bonuses (or variable pay) based on the metrics provided, which further strengthens the linkage between company performance and individual effort.
4. Visibility. In each of the programs already discussed, metrics were made widely available to all staff on a quarterly basis. In one case they are posted on the com- pany’s intranet; in another they are distributed in a printed report; in a third they are posted in public areas of the office. Visibility encourages employee buy-in and accountability and stimulates discussion about how to do better or what is working well.
5. Links to incentive systems. Successful companies tend to include a much larger number of employees in bonus programs than unsuccessful ones (Haspeslagh et al. 2001). Extending incentive schemes to all IT staff, not just management, is important to a measurement program’s effectiveness. The most effective programs appear to distinguish between fair compensation for individual work and competencies and a reward for successfully achieving corporate objectives.
aDvice tO Managers
The focus group had some final advice for other IT managers who are thinking of implementing a business metrics program:
• Results will take time. It takes time to change attitudes and behavior in IT, but it is worth making the effort. Positive results may take from six months to a year to appear. “We had some initial pushback from our staff at the beginning,” said one manager, “but now the metrics program has become ingrained in our attitudes and behaviors.” Another manager noted, “We had a few bumps during our first year, but everyone, especially our executives, is getting better at the program now [that] we’re in our third year. It really gets our staff engaged with the business.” If there has been no dramatic difference within three years, management should recognize that it is either using the wrong measures or hasn’t got employee buy-in to the pro- gram (Alexander 2000).
• Have common goals. Having everyone measured on the same business goals helps build a strong team at all levels in the organization. It makes it easier to set priorities as a group and collaborate and share resources, as needed.
• Follow up on problem areas. Companies must be prepared to take action about poor results and involve staff in their plans. In particular, if companies are going to ask customers and employees what they think, they must be prepared to act on the results. All metrics must be taken seriously and acted on if they are to be used to drive behavior and lead to continuous improvement.
• Be careful what you measure. Measuring something makes people pay attention to it, particularly if it is linked to compensation. Metrics must, therefore, be selected with care because they will be a major driver of behavior. For example, if incen- tives are solely based on financial results, it is probable that some people may be so driven that they will trample on the needs and interests of others. Similarly, if only costs are measured, the needs of customers could be ignored. Conversely, if a metric indicates a problem area, organizations can expect to see a lot of ingenuity and sup- port devoted to addressing it.
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• Don’t use measurement as a method of control. A business metrics program should be designed to foster an environment in which people look beyond their own jobs and become proactive about the needs of the organization (Marchand et al. 2000). It should aim to communicate strategy and help align individual and organizational initiatives (Kaplan and Norton 1996). All managers should clearly understand that a program of this type should not be used for controlling behavior, but rather as a motivational tool.
Conclusion
Getting the most value out of IT has been a serious concern of business for many years. In spite of considerable effort, measurement initiatives in IT that use surrogates of busi- ness value or focus on improving internal IT behavior have not been fully successful in delivering results. Expecting IT to participate in achieving specific enterprise objectives— the same goals as the rest of the organiza- tion—has been shown to deliver significant benefits. Not only are there demonstrable financial returns, but there is also consider- able long-term value in aligning everyone’s behavior with the same goals; people become more supportive of each other and more
sensitive to the greater corporate good, and decisions are easier to make. A good business metrics program, therefore, appears to be a powerful component of effective measure- ment in IT. IT employees may initially resist accountability for business results, but the experiences of the focus group demonstrate that their objections are usually short lived. If a business measurement program is carefully designed, properly linked to an incentive pro- gram, widely implemented, and effectively monitored by management, it is highly likely that business performance will become an integral part of the mind-set of all IT staff and ultimately pay off in a wide variety of ways.
References
Alexander, S. “Business Metrics.” Computerworld 34, no. 24 (2000): 64.
Bensaou, M., and M. Earl. “The Right Mind-Set for Managing Information Technology.” Harvard Business Review 76, no. 5 (September–October 1998): 110–28.
Cronk, M., and E. Fitzgerald. “Understanding ‘IS Business Value’: Derivation of Dimensions.” Logistics Information Management 12, no. 1–2 (1999): 40–49.
Goldratt, E., and J. Cox. The Goal: Excellence in Manufacturing. Croton-on-Hudson, NY: North River Press, 1984.
Haspeslagh, P., T. Noda, and F. Boulos. “Managing for Value: It’s Not Just About the Numbers.” Harvard Business Review (July–August 2001): 65–73.
Heskett, J., T. Jones, G. Loveman, E. Sasser, and L. Schlesinger. “Putting the Service Profit Chain to Work.” Harvard Business Review (March– April 1994): 164–74.
Holland, W., and G. Sharke. “Is Your IT System VESTed?” Strategic Finance 83, no. 6 (December 2001): 34–37.
Kaplan, R., and D. Norton. The Balanced Scorecard. Boston: Harvard Business School Press, 1996.
Koys, D. “The Effects of Employee Satisfaction, Organizational Citizenship Behavior, and Turnover on Organizational Effectiveness: A Unit-Level, Longitudinal Study.” Personnel Psychology 54, no. 1 (Spring 2001): 101–14.
Marchand, D., W. Kettinger, and J. Rollins. “Information Orientation: People, Technology
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and the Bottom Line.” Sloan Management Review (Summer 2000): 69–89.
Peslak, A. R. “An Analysis of Critical Information Technology Issues Facing Organizations.” Industrial Management and Data Systems 112, no. 5 (2012): 808–27.
Potter, K. “Business Key Metrics Data: Accelerate the IT Value Journey.” Gartner Group, ID: G00256958, October 16, 2013.
Roberts, J. P. “Define Strategic IT Metrics as Part of Your IT Strategy.” Gartner Group, ID: G0025861, November 5, 2013.
Rucci, A., S. Kirn, and R. Quinn. “The Employee- Customer-Profit Chain at Sears.” Harvard Business Review 76 (January/February 1998): 82–97.
Smith, H., and J. McKeen. “Investment Spend Optimization at BMO Financial Group.” MISQ Executive 9, no. 2 (June 2010): 65–81.
Ulrich, D., R. Halbrook, D. Meder, M. Stuchlik, and S. Thorpe. “Employee and Customer Attachment: Synergies for Competitive Advantage.” Human Resource Planning 14 (1991): 89–103.
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C h a p t e r
4 Effective Business– IT Relationships1
1 This chapter is based on the authors’ previously published article, Smith, H. A., and J. D. McKeen. “Building a Strong Relationship with the Business.” Communications of the Association for Information Systems 26, Article 19 (April 2010): 429–40. Reproduced by permission of the Association for Information Systems.
There is no doubt that a strong business–IT relationship is now critical to the success of an organization’s successful and effective use of IT (Bassellier and Benbasat 2004; Kitzis and Gomolski 2006). With the rapid evolution of IT in busi- ness, simply “keeping the lights on” and delivering systems on time and on budget are not enough. Today, IT’s ability to deliver value is closely linked with the nature of its relationship with a large number of business stakeholders. Recognizing this, many IT functions have tried to become “partners” with the business at the most senior strategic levels, but with limited success (Gordon and Gordon 2002). It has become clear from these initiatives that business–IT interactions are more complex and highly resistant to change than first assumed and that building a strong relationship with business is a major challenge for most IT leaders.
We know that the nature and quality of the business–IT relationship are affected by many factors such as the subfunction of IT involved (e.g., operations, application development), the business unit involved, the management levels involved, changing expectations, and general perceptions of IT (McKeen and Smith 2008). However, research suggests that IT managers are still somewhat naïve about how relationships work in business and that interpersonal interaction and clear communication are often missing between the groups. We have also learned that perceptions of the value IT delivers are correlated with how well IT is perceived to understand and identify with the business (Anonymous 2002; Gold 2006; Tallon et al. 2000).
Nevertheless, we still know very little about the elements that contribute to a “strong relationship” between IT and business, nor even about how to characterize such a relationship (Day 2007). This chapter first looks at the nature of the business–IT relationship and how an effective relationship could be characterized. Then it examines in turn each of the four foundational elements of a strong, positive relationship, making suggestions for how IT managers could strengthen them.
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The NaTure of The BusiNess–iT relaTioNship
“The IT-business relationship is a set of beliefs that one party holds about the other and how these beliefs are formed from the interactions of . . . individuals as they engage in tasks associated with an IT service” (Day 2007). The business–IT relationship in orga- nizations tends to span the full range of relationship possibilities. Some members of the focus group felt they had generally healthy and positive relationships, and others labeled them negative or ineffective. Overall, “there’s still a general perception that IT is slow, expensive, and gets in the way,” said one manager. Even the focus group member with the most positive business–IT relationship admitted it was “not easy,” and one set of researchers has described it as typically “arduous” (Pawlowski and Robey 2004).
Although “you can’t have a one-sided relationship,” as one focus group manager remarked, agreement is almost universal that IT needs to change if it is to improve. Literally dozens of articles have been written about what IT should be doing to make it better. For example, IT should better understand the fundamentals of business and aim to satisfy the “right” customers (Kitzis and Gomolski 2006); act as a knowledge broker (Pawlowski and Robey 2004); get involved in the business and be skilled marketers (Schindler 2007); manage expectations (Ross 2006); convince the business that it under- stands its goals and concerns and communicate in business language (Bassellier and Benbasat 2004); and demonstrate its competencies (Day 2007). In short, “IT has to keep proving itself” to the business to demonstrate its value (Kaarst-Brown 2005). Thus, prac- titioners and researchers both consistently stress that cultivating a strong business–IT relationship is “a continuous effort” (a focus group member); “ongoing” (Luftman and Brier 1999); a “core IT skill” (Feeny and Willcocks 1998); and “ emergent” (Day 2007).
On the business side of the relationship, two features stand out. First, business managers are often disengaged from IT work, according to both the focus group and researchers (Ross and Weill 2002). For example, in some cases in the focus group, IT staff have taken on business roles in projects in order to get them done. Second, it is clear that what business wants from this relationship is continually changing. “The business–IT relationship is cyclical,” explained one manager. “The business goes back and forth about whether it wants IT to be an order taker or an innovator. Every time the business changes what it wants, the relationship goes sour.”
So what do we know about the business–IT relationship in organizations? First, we know it is a multifaceted interaction of people and processes. It is unfortunately true that the existence of positive relationships between individual business and IT professionals does not necessarily mean that interactions will be positive on a particular develop- ment project, with the IT help desk, with an individual business unit, or between IT and the business as a whole (McKeen and Smith 2008). Because relationships manifest themselves in so many ways—formal and informal, tacit and explicit, procedural and cultural—we must recognize that their complexity means that they don’t lend them- selves to simplistic solutions (Day 2007; Guillemette et al. 2008; Ross 2006).
Second, we know difficult, complex relationships often exhibit lack of clarity around expectations and accountabilities and difficulty communicating (Galford and Drapeau 2003; Pawlowski and Robey 2004). This, in turn, leads to lack of trust. In the business–IT relationship, “complexity often arises when expectations differ in vari- ous parts of an organization, leaving a CIO with the difficult task of reconciling them and elucidating exactly what the IT function’s mission and strategic role should be”
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(Guillemette et al. 2008). Several focus group members complained that different parts of their business expected different things from IT. “In some parts of our business, they want IT to be an order-taker; in others, they want us to be thought leaders and innova- tors,” stated one manager. Another noted, “We live in an age of unmet expectations. There’s never enough resources to do everything the business wants us to do.”
Third, assumptions by the business about IT tend to cluster into patterns. One researcher has identified five sets of assumptions: (1) IT is a necessary evil, (2) IT is a support, not a partner, (3) IT rules, (4) business can do IT better, and (5) business and IT are equal partners. Business leaders who espouse one of these sets will tend to have sim- ilar ideas about who should control IT’s direction, how central IT is to business strategy, the value of IT skills and knowledge, how to justify IT investments, and who benefits from IT (Kaarst-Brown 2005). Building on this idea, another study has also shown that business–IT relationships tend to vary along similar patterns. Different organizations tend to adopt one of five IT value profiles and expect IT to behave in accordance with the profile selected (see Appendix A). Problems arise when the assumptions and value profiles espoused by IT conflict with those of the organization or a specific part of the organization. As a result, many “disconnects” are often present in the relationship. For example, although IT organizations often seek to be a business partner, their participa- tion in this way is not always welcomed by the business (Pawlowski and Robey 2004).
Focus group members defined a strong business–IT relationship in ways that recognize each of these factors. To them, it should include the following:
• Clearly defined expectations, governance models, and accountabilities. • Trust between the two groups. • Articulation and incorporation of corporate and client values and priorities in all
IT work. • A blurred line between business and IT (i.e., no “us vs. them”). • IT dedicated to business success. • IT serving as a trusted advisor to the business. • Mutual recognition of IT value.
In short, a strong business–IT relationship is one where realistic, mutual expectations are clearly articulated and communicated through individual and procedural interactions and where both groups recognize that all facets of this relationship are important to the successful delivery of IT value.
Characteristics of the Business–IT Relationship
• IT has to keep proving itself. • The business is often disengaged from IT work. • Business expectations of IT change continually. • The relationship is affected by the interaction of many people and processes at multiple
levels. • Clarity is often lacking around expectations and accountabilities. • Business assumptions of IT tend to cluster. • There are many “disconnects” between the two groups.
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The fouNdaTioN of a sTroNg BusiNess–iT relaTioNship
Strong relationships do not simply happen. They are built over time and, if they are to deliver value for the organization, they must be built to endure (Day 2007). The focus group told several stories of how the business–IT relationship in their organization had deteriorated when a business or IT leader changed or when a project wasn’t delivered on time. Because it can so easily become dysfunctional, constant attention and nurturing are needed at all levels, said the focus group. However, building a strong relationship is not easy to do. Although there is no shortage of prescriptions, the sustained nature of problems in this relationship suggests that some underlying root causes need to be addressed (Appendix B provides one organization’s view of what is needed in this relationship).
We have suggested previously that four components must be in place in order to deliver real business value with IT: competence, credibility, interpersonal inter- action, and trust. The focus group reviewed these components and agreed that they also form the foundation of a successful and effective business–IT relationship. The focus group saw that developing, sustaining, and growing a strong business–IT rela- tionship in each of these areas is closely intertwined with IT’s ability to deliver value with technology. Therefore, a consistent and structured initiative to strengthen the business–IT relationship in these dimensions will also lead to an improved ability to deliver value successfully (see Figure 4.1). In the remainder of this chapter, we look at these four components in turn, discussing in detail how each acts as an important building block of a strong business–IT relationship and suggesting how each could be strengthened.
Value
Trust
Interpersonal Interaction
Credibility
Competence
figure 4.1 Strong Relationships are Built on a Strong Foundation
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64 Section I • Delivering Value with IT
Building Block #1: Competence
Although a competent IT organization that consistently delivers cost-efficient and reli- able services is the bare minimum for an IT function, businesses today expect a great deal more of both their IT organizations and their IT professionals. Although many IT organizations have adopted an internal service model in order to “operate IT like a business” and have demonstrated that they can provide services as effectively as exter- nal service providers, these competencies fall short of what business now expects of IT (Kitzis and Gomolski 2006). Over the last decade, researchers and practitioners have identified a number of new competencies that are now required—to a greater or lesser extent—from all IT professionals.
First and foremost, IT staff need business knowledge. This goes beyond basic know- ledge of a single business unit to include the “big picture” of the whole organization. IT personnel need to understand the business context in which their technologies are deployed, including organizational goals and objectives, capabilities, critical success factors, environment, and constraints. At all levels, they need to be able to “think about and understand the development of the business as [any other business] member would and participate in making [it] successful in the same way” (Bassellier and Benbasat 2004). Furthermore, they need to be able to apply their business understanding to help the organization visualize the ways in which “IT can contribute to organizational per- formance and look for synergies between IT and business activities” (Bassellier and Benbasat 2004). In this regard, an important competence an IT department and its staff can bring to an organization is cross-domain and cross-functional business knowledge (Kitzis and Gomolski 2006; Wailgum 2008a).
Developing business knowledge does not mean that IT staff should become busi- nesspeople but that they should be able to demonstrate they understand the business’s goals, concerns, language, and processes and are working to help achieve them (Feeny and Willcocks 1998). One focus group organization surveyed its senior managers about IT and found that these managers felt IT staff had a poor understanding of the business; as a result, they didn’t trust IT’s ideas.
Other key competencies that IT must cultivate include the following:
• Expertise. This includes having up-to-date knowledge, being able to support a technical recommendation, applying expertise to a particular business situation, and offering wise advice on risks, options, and trade-offs, as well as the ability to bring useful new ideas and external information (e.g., about new technolo- gies or what the competition is doing with technology) to the business (Joni 2004; Pawlowski and Robey 2004).
• Financial Awareness. Awareness of how IT delivers value and the ability to act in accordance with this value is a rare and prized skill (Mahoney and Gerrard 2007). All the focus group members felt pressure to continually demonstrate the business value of IT and recognized a strong need to make all IT staff more aware of such concepts as ROI, total cost of ownership, and how IT affects the bottom line and/or business strategy.
• Execution. It is not enough to understand the business and develop a vision; IT must also operationalize them. Since much of the business–IT relationship is dynamic—that is, continually being re-created—every IT action speaks about its competence. It is well known that the inability to deliver an individual project on
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time and within budget will undermine the business’s view of IT’s overall compe- tence. However, it is also the case that the actions of IT operations, the help desk, and other IT subfunctions will also be held up to similar scrutiny. As one focus group manager stated, “Poor delivery of any type can break a relationship.”
In short, if the IT function is not seen to be competent at executing basic IT services or able to communicate in business terms, it will simply not be given an opportunity to participate in higher-order business activities, such as planning and strategy develop- ment (Gerrard 2006).
sTreNgTheNiNg CompeTeNCe
• Find ways to develop business knowledge in all IT staff. Focus group members use “lunch and learn” sessions, job shadowing, and short-term assignments in the business to accomplish this, but they recognize that more needs to be done to develop this competence.
• Link IT’s success criteria to business metrics. This not only lifts IT’s perspective to larger business concerns, but it also introduces all IT staff to the key financial and other measures that drive the rest of the organization.
• Make business value an explicit criteria in all IT decisions. Asking why the busi- ness should care about a particular IT decision, and how it will affect the business in both the long and short terms, changes the focus of IT professionals in a subtle but very effective way, enabling them to communicate even technical decisions in business terms.
• Ensure effective execution in all IT activities. This ensures that IT sends a consis- tent message of competence to all parts and levels of the organization.
Building Block #2: Credibility
Credibility is the belief that others can be counted on to do what they say they will do. It is built in many ways. Keeping agreements and acting with integrity, honesty, and openness are essential behaviors, whereas lack of timely and substantive responses and failure to observe deadlines can undermine it (Feeny et al. 1992; Greenberg et al. 2007). Focus group managers concurred that credibility is very important to the busi- ness–IT relationship. Although in earlier days, credibility was largely about the ability to deliver systems on time and budget, now earning and maintaining credibility with the business has become more complex. Today’s IT projects often involve many more elements (e.g., multiple platforms, risk management, adherence to laws and standards) and stakeholders than in the past, and the methods and tools of delivery are constantly changing. Furthermore, research shows that it is often the “little things” that can be most significant in undermining credibility and that people often make decisions based on IT’s attention or inattention to such details (Buchanan 2005). One study concluded that “each and every IT service incident and event must be considered for its long-term influence” (Day 2007).
IT staff often assume that because they are competent they will be credible, but this is an invalid assumption. Thus, for example, a survey of CIOs found that they wished their developers “didn’t appear so clueless to the rest of the organization” (Wailgum 2008b). It is essential, therefore, that competence be demonstrated for others to feel
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someone is credible (Ross 2006). This is especially important in relationships where there is little face-to-face interaction. In these cases in particular, work must be visible and communication constant in order to demonstrate credibility (Hurley 2006).
sTreNgTheNiNg CrediBiliTy
• Communicate frequently and explicitly. Make progress and accomplishments visible in clear and nontechnical ways. Focus group members found that when difficult decisions are planned together and clearly articulated in advance, much less tension develops in the relationship.
• Pay attention to the “little things.” Wherever possible, take steps to provide prompt feedback and responses to queries and to ensure consistently high- quality service encounters.
• Utilize external cues to credibility. Examples include awards, endorsements from third parties, and the experience and background of IT staff. These specifics can be very useful when starting a new relationship with the business.
• Assess all business touch points. All focus group members stressed the need to really listen to what the business says about its expectations and the problems it feels exist in the relationship. Just the effort alone sends a strong and positive mes- sage about the importance of this relationship, said a manager. However, he also stressed that undertaking such a review creates expectations that changes will be made, so regular reports back to the business about what is being done to improve things are especially important.
Building Block #3: interpersonal interaction
The business–IT relationship is shaped by the development of mutual understand- ing, interests, and expectations, which are formed and shaped during a wide variety of interpersonal interactions (Gold 2006). Business–IT interactions must be developed and nurtured at many different levels in the business–IT relationship, said focus group managers, and although CEO–CIO interactions can set the tone for the relationship, the connections at multiple touch points contribute to its overall quality (Flint 2004; Prewitt 2005). The following are the four significant dimensions of interpersonal interaction:
• Professionalism. This is the unarticulated set of working behaviors, attitudes, and expectations that serves as the glue that keeps teams of diverse individuals working together toward the same goal. These behaviors are not only carefully watched by the business, they are also just as important within IT, said the focus group. Members noted that difficult internal IT relationships can lead to problems delivering effective IT services. Five sets of attitudes and behaviors contribute to developing IT professionalism: (1) comportment (i.e., appearance and manners on the job), (2) preparation (i.e., displaying competence and good organization), (3) communication skill (i.e., both clarity and etiquette), (4) judgment (i.e., the abil- ity to make right choices for the organization), and (5) attitude (i.e., caring about doing a job well and about doing the right thing for the company) (McKeen and Smith 2008).
• Nontechnical communication. Over and over, research has found that the inabil- ity to communicate clearly with the business in its own terms can undermine the
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business–IT relationship (Bassellier and Benbasat 2004; Kitzis and Gomolski 2006). Today, because IT staff work across many organizational boundaries, they must also be effective at translating and interpreting needs, not only from business to technology and vice versa, but also between business units, in order to enable members of different communities to understand each other (Wailgum 2008a). Increasingly, as IT programs and services are delivered collaboratively by external partners and to external partners, clarity in communication is becoming mission critical.
• Social skills. The social dimension of the business–IT relationship is often ignored by both sides, leading to misunderstandings and lack of trust (Day 2007). Social bonds help diverse groups build trust and develop a common language, both of which are essential to a strong relationship. Socialization also helps build mutual understanding, enabling all parties to get comfortable with one another and uncovering hidden assumptions, which may become obstacles to success (Kaarst-Brown 2005). Socialization also develops empathy and facilitates problem solving (Feeny and Willcocks 1998).
Unfortunately, many IT organizations are structured in ways that create barri- ers between business and IT. For example, the use of “relationship managers” to act as interfaces between IT and the business is a mixed blessing. Although individually, these managers may be skilled and viewed positively by the business, focus group members noted that their position often leads them to act as gatekeepers to the business. One manager mentioned being hauled on the carpet to explain his lunch with a business manager (a personal friend), which hadn’t been approved by the relationship manager! “We need a broad range of social interactions with the business,” said another manager. “We use account managers, but we also encourage interactions through such things as lunches and social events.” Ongoing, face-to-face interaction is the ideal, but with today’s virtual teams and global organizations, other forms of social interaction, such as networking and collaboration tools, are being introduced to help bridge gaps in this area. Social bonds can be created in a virtual environment, but these take longer and are harder to develop although they are, if anything, more important than in a more tradi- tional workplace (Greenberg et al. 2007).
• Management of politics and conflict. The business–IT relationship can be turbulent, and IT personnel are not noted for their skills in dealing with the conflicts and challenges involved. Furthermore, conflict and politics tend to be exacerbated by the types of projects most commonly undertaken by IT—that is, those that cross internal and external organizational boundaries (Weiss and Hughes 2005). As a result, IT functions and personnel need ways to effectively address conflict and use it to deliver creative solutions. All too often, conflict is avoided or treated as a “hot potato” to be tossed up the management hierarchy (Weiss and Hughes 2005). Straight talk and the development of a healthy give- and-take attitude are fundamental to dealing with conflict at its source. Experts also recommend the development of transparent processes for managing disagreements and frank discussions of the trade-offs involved in dealing with problems (Pascale et al. 1997). These not only help stop damaging escalation and growing uncertainty but also help to model conflict-resolution skills for the staff involved.
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As well, failure to understand the role of politics in a particular organization makes IT personnel less effective in their business interactions because they cannot craft “win–win” solutions. Thus, all IT staff need to understand something about politics and how they can affect their work. At more senior levels, it is imperative that IT profes- sionals learn how to act “wisely and shrewdly in a political environment” (Kitzis and Gomolski 2006). Since politics are part of every business relationship and cannot be avoided, IT personnel must learn how to work with them, said focus group members, even if they are trying to avoid them as much as possible.
sTreNgTheNiNg iNTerpersoNal iNTeraCTioNs
• Expect professionalism. IT managers must not only articulate professional values and behaviors, they must also live them and measure and reward them in their staff.
• Promote a wide variety of social interactions at all levels. Whether face-to-face or virtual, sharing information about each other’s background and interests is an important way to bolster working relationships at all levels. Therefore, even where formal relationship managers are in place, IT leaders should encourage all IT staff to connect informally with their business colleagues. “Social interaction facilitates quick problem ownership and resolution and helps to develop a com- mon language,” said a focus group participant. Although the need for socializa- tion increases as one moves up the organizational hierarchy, even at the lowest levels staff should be expected to spend about 10 percent of their time in this type of interaction (Kitzis and Gomolski 2006).
• Develop “soft skills” in IT staff. Although the need for interpersonal skills in IT has never been greater, many companies still give their development short shrift, preferring instead to stress technical competencies. In developing interpersonal skills, formal training should be only one component. It is even more important that IT managers take time to develop such skills in their staff through mentor- ing and coaching. Many focus group members have implemented “soft” skills development initiatives informally, but they have also admitted that the pressure to be instantly productive often detracts from both business and IT participation in them.
Building Block #4: Trust
Effective interpersonal interactions, a belief that the job at hand will get done and get done right, and demonstrated business and technical competence are all required to facilitate trust that IT can be a successful partner with the business. But even if these are in place, proactive measures are still needed to actually build trust between the two groups. In many firms, an underlying sense of distrust of IT as a whole remains:
IT’s processes are notoriously convoluted and bureaucratic, leaving the business unsure of how to accomplish their business strategies with IT. From strategy alignment to prioritization to budgeting and resourcing to delivering value to managing costs, it must be clear that what IT is doing is for the benefit of the enterprise, not itself. (McKeen and Smith 2008)
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The most important way to build trust at this level is through effective gover- nance. The story of how one CIO managed to transform the business–IT relationship at Farm Credit Canada illustrates its importance:
[At FCC, when Paul MacDonald became CIO], IT was considered a necessary evil. Business people were afraid of it and wished it would just go away. . . . [Transforming this relationship] was a very difficult and complex job—especially for cross-functional processes. Clear responsibilities and accountabilities had to be defined. . . . “It’s all about clarity of roles and responsibilities,” MacDonald said. The new IT governance model was validated and refined through sessions with key business stakeholders. “These sessions were important to demonstrate that we weren’t just shuffling the boxes around in IT,” [MacDonald] said. . . . MacDonald also made sure that the new model actually worked the way it was supposed to. “There were cases where it didn’t . . . and with these, we made changes in our pro- cesses.” He attributes his willingness to make changes where needed to his ability to make the new model actually function the way it was supposed to. . . .
“Today, at FCC user satisfaction is very high and IT is seen as being indis- pensable. . . . [MacDonald] stressed that it is important to review and refine the new governance model continually.” “There were some things that just didn’t work,” he said. “We are still constantly learning.” (Smith and McKeen 2008)
Effective governance should be designed to build common business goals and establish a good decision-making process (Gerrard 2006). Mature processes in IT and transparency about costs develop trust (Levinson and Pastore 2005; Overby 2005). A focus group manager stated succinctly, “[M]ore transparency equals fewer sur- prises and you get transparency through governance.” Aspects of governance that have enhanced trust in focus group organizations include integrated planning, defined accountabilities, a clear picture of mandates and authorities, and clarity around how work gets done.
Another focus group manager explained the importance of governance in this way:
In the past, we couldn’t break the trust barrier. Now, [with an effective governance structure] we are more proactive and are fighting fewer fires. Our processes ensure proper escalation and a new focus on value. In short, governance captures the value of a good relationship and good fences make good neighbours.
Trust is essential for both superior performance and for developing the collabora- tive relationships that lead to success (Greenberg et al. 2007). It is developed through consistency, clear communication, willingness to tackle challenges, and owning up to and learning from mistakes (Upton and Staats 2008). Both inconsistent messages to stakeholders and inconsistent processes and standards can seriously undermine trust (Galford and Drapeau 2003).
Nevertheless, it must be stressed that there is no optimal form of governance (Gordon and Gordon 2002). The key is to develop a model of IT governance that addresses the business’s expectations of its IT function. Thus, an IT organization can best build trust if it clearly understands the organization’s priorities for IT and designs its governance model to match (Guillemette et al. 2008).
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sTreNgTheNiNg TrusT
• Design governance for clarity and transparency. IT leaders should assess how the business views IT processes—from the help desk on up. It is important to recognize that all processes play a very visible role in how IT is viewed in the organization and that clear, effective, and fair processes are needed to break the “trust barrier” between business and IT at all levels.
• Mandate the relationship. Although it may seem counterintuitive, companies have had success from strictly enforcing relationship basics such as formal roles and responsibilities, joint scorecards, and the use of common metrics. Such structural measures can ensure that common expectations, language, and goals are developed and met.
• Design IT for business expectations. Clearly understanding the primary value the business wants IT to deliver can help IT understand how to focus its process and governance models (see Appendix A).
Conclusion
There is clearly no panacea for a strong busi- ness–IT relationship. Yet, the correlation between a good relationship and the ability to deliver value with IT makes it impera- tive that leaders do all they can to develop effective interpersonal and interfunctional business–IT relations. It is unfortunately still incumbent on IT leadership to take on the bulk of this task, if only because it will make IT organizations more effective. Business–IT relationships are complex, with interactions of many types, at many levels, and between both individuals and across functional and
organizational entities. This chapter has not only identified and explored what a strong business–IT relationship should look like in its many dimensions but also has described the four major components needed to build it: competence, credibility, interpersonal skills, and trust. Unfortunately, business–IT relationships still leave a lot to be desired in most organizations. Recognizing that what it takes to build a strong business–IT partner- ship is also closely related to what is needed to deliver IT value may help to focus more attention on these mission-critical activities.
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Levinson, M., and R. Pastore. “Transparency Helps Align IT with Business.” CIO Magazine (June 1, 2005).
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McKeen, J., and H. Smith. IT Strategy in Action. Upper Saddle River, NJ: Pearson-Prentice Hall, 2008.
Overby, S. “Turning IT Doubters into True Believers: Executive Summary.” CIO Research Reports (June 1, 2005).
Pascale, R., M. Millemann, and L. Gioja. “Changing the Way We Change.” Harvard Business Review (November–December 2007).
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Schindler, E. “What IT Can Learn from the Marketing Department.” CIO Web 2.0 Advisor, September 21, 2007. advice.cio.com/esther_ schindler/what_it_can_learn_from_the_mar- keting_department (accessed March 10, 2011).
Smith, H., and J. McKeen. “Creating a Process- Centric Organization at FCC: SOA from the Top Down.” MIS Quarterly Executive 7, no. 2 (June 2008): 71–84.
Tallon, P., K. Kramer, and V. Gurbaxani. “Executives’ Perceptions of the Business Value of Information Technology: A Process-Oriented Approach.” Journal of Management Information Systems 16, no. 4 (Spring 2000).
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Appendix A
The Five IT Value Profiles
Each of the following profiles is a unique way for IT to contribute to an organization. One is not “better” than the other, nor is one profile more or less mature than any other. Each represents a different, consistent way of organizing IT to deliver value. Each is different in five ways: main activities, dominant skills and knowledge, the business–IT relationship, governance and decision-making, and accountabilities.
Profile A: Project Coordinator This type of IT function coordinates IT activities between the business and outsourc- ers. Therefore, the primary value it delivers is organizational flexibility through the IT outsourcing strategy it establishes and through promoting informed IT decision making in the business units. The Project Coordinator function works with the busi- ness units, helping them formalize their requirements, and then finds an outsourcer to develop and implement what is needed. The Project Coordinator also manages the relationships between vendors and business units, not only with the organiza- tion’s current activities but also in planning for the future by developing strategic partnerships.
Profile B: Systems Provider The primary mission of the Systems Provider is to provide the organization with qual- ity information systems at the lowest possible cost. Strategically, the Systems Provider uses the organization’s business plans to set IT’s goals, prepare budgets, and determine the resources needed to implement the organization’s strategy for the required systems development projects.
Profile C: Architecture Builder The primary mission of this type of IT function is to link the firm’s various business units by integrating computerized systems, data, and technological platforms. The Architecture Builder seeks to design a flexible architecture and infrastructure that will meet the company’s needs. The architecture builder typically receives broad strategic direction from the organization and designs an architecture and infrastructure with which the organization can implement its strategy.
Profile D: Partner The main objective of the Partner IT function is to create IT-enabled business capabili- ties to support current business strategies. IT and the business collaborate to achieve a two-way strategic alignment that is developed iteratively and reciprocally over time. The Partner is a catalyst for change in business processes and seeks to improve organi- zational efficiency. As guardian of the organization’s business processes, the Partner’s mission therefore extends far beyond its technological tools.
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Chapter 4 • Effective Business–IT Relationships 73
Profile E: Technological Leader The Technological Leader tries above all to use innovation to transform the organiza- tion’s strategy. IT’s main objective is therefore to identify opportunities, find innovative organizational applications for technology that will enable the organization to secure a significant competitive advantage, and then implement such applications.
Source: Guillemette et al. 2008.
Appendix B
Guidelines for Building a Strong Business–IT Relationship
The following was provided by a focus group member and is an excerpt from a com- pany memo on improving the business–IT relationship.
Now more than ever, we must truly understand the business transformation agenda. This will require us to potentially interact differently than in the past or in a mode beyond what our executives may be looking for. We must
• Stop acting as and being viewed as order takers once IT projects have been identified.
• Develop an understanding of business improvement ideas before they become ini- tiatives or projects.
• Be prepared to offer alternative perspectives on business solutions. • Be part of the strategic equation and have “feet on the street.” • Engage early before ideas and issues turn into projects. • Continue to shape the solution during pre-concept and concept phases.
To develop a relationship with the business units where we are viewed as a trusted advisor and as adding value, we need to truly be part of their decision-making process and team. We must ask ourselves the following questions:
• Are we considered a member of the business’s senior leadership team? • Are we consulted before decisions are made or just asked to execute what has
already been decided? • Are we involved in shaping the content of the strategic agenda not just its schedule?
Creating a consistent forum for one-on-one strategic interaction should allow us to rise above the normal churn of issues, projects, or other regularly scheduled meet- ings and be positioned to truly start understanding where our help is needed. Potential short-term next steps include the following:
• Get invited to each business unit’s leadership team meetings. • Schedule a monthly one to one strategy meeting with no set agenda.
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74
C h a p t e r
5 Business–IT Communication1
1 This chapter is based on the authors’ previously published article, Smith, H. A., and J. D. McKeen. “How to Talk so Business Will Listen . . . and Listen so Business Can Talk.” Communications of the Association for Information Systems 27, Article 13 (August 2010): 207–16. Reproduced by permission of the Association for Information Systems.
At an IT governance meeting, attended by all our business executives, our IT architect was asked to discuss IT security and what steps needed to be taken to improve it. The architect proceeded to bombard the executives with extremely low-level details—an oversaturation of information, which they did not understand—and he lost their attention in very short order. What he did not do was deliver information in a positive manner geared to his audience. As a result, there was diminished business interest and understanding about this topic and a slowed-down budget for needed upgrades, which also affected other projects.
—(Senior IT manager in a global retail organization)
As this true story illustrates, the ability to communicate with the business in busi-ness terms does not appear to be a current IT strength. This is a serious problem for IT managers because as IT and business grow more entwined, IT staff are going to need to be increasingly organization savvy and possess greater business and interpersonal competencies (Basselier and Benbasat 2004; Karlsen et al.; 2008; Mingay 2005). Yet, despite consistent complaints from both business and IT leaders about how IT staff lack business and communication skills, it seems that many IT departments still hire largely for technical competencies and have little budget available for “soft skills” development (Cukier 2007). Problems communicating with business continue to play a significant part in today’s poor perceptions of IT in organizations and inhibit what IT is able to do for the organization (McKeen and Smith 2009). IT managers often bemoan the fact that IT-based initiatives—for example, to implement new technologies or establish
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Chapter 5 • Business–IT Communication 75
a standard infrastructure—which they believe could have significant benefits for their organizations are not funded. Many of the reasons for this lie in IT’s inability to explain the value of such investments in terms the business will understand.
In short, one of the most important skills all IT staff need to develop today is how to communicate effectively with business. “Effective communication between IT . . . and its stakeholders has never been so important . . . so complex or so difficult to get right.” (Mingay 2005). Over and over, research has shown that if IT and business cannot speak the same language, focus on the same issues, and communicate constructively, they cannot build a trusting relationship (Karlsen et al. 2008). And business is consistently more negative than IT about IT’s abilities in communicating effectively. In fact, even while IT collaboration is improving, business’s assessment of IT’s communication skills is declining (Willcoxson and Chatham 2004).
Much attention has been paid to organizational alignment between IT and business (e.g., governance, structure), while very little has been paid to the nature and impact of the social dimension of alignment, a big element of which involves communication (Reich and Benbasat 2000). This chapter explores the business and interpersonal competencies that IT staff will need in order to do their jobs effectively over the next five to seven years and what companies should be doing to help develop them. It begins by characterizing the state of communication in the business–IT rela- tionship and why “good communication” is becoming increasingly important. Then, it explores what is meant by “good communication” in this relationship and looks at some of the inhibitors of effective communication between these groups. Finally, it dis- cusses the key communication skills that need to be developed by IT staff and makes recommendations for how organizations can improve or develop communication in the business–IT relationship.
CommuniCation in the Business–it Relationship
“Poor communication is a constant source of irritation, confusion, and animosity,” said one focus group manager. Another agreed: “So many of our IT staff don’t under- stand organizational dynamics. They say and do things that would be completely inappropriate anywhere else in our company.” There is general agreement between practitioners and researchers that poor business–IT communication is the source of poor relationships and alignment between these groups (Bittler 2008; Reich and Benbasat 2000). One study noted:
Many IT people have “turned off” their business peers with too much techni- cal jargon. This is one reason why the number of IT people that are “allowed” to speak with business people has been deliberately limited in many organizations. (Bittler 2008)
Communication is both an enabler and an inhibitor of a good business–IT relationship. On one hand, poor communication tends to be persistent and of lasting concern to practitioners (Coughlan et al. 2005). Often, IT personnel are perceived to live in an “ivory tower,” disengaged from the needs of the business (Burton et al. 2008). Typically, these problems are described as a communication or a cultural “gap”
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76 Section I • Delivering Value with IT
between the two groups and are considered a major cause of systems development fail- ures (Coughlan et al. 2005; Reich and Benbasat 2000). “We struggle with communica- tion gaps and challenges,” said a manager. “There’s a lot of IT arrogance we need to deal with.” Another commented, “IT doesn’t listen and doesn’t talk the talk.”
On the other hand, there is broad recognition that good communication is essential for many reasons. First, it is fundamental to building a strong, positive business–IT rela- tionship. “When business people believe IT people ‘get it,’ the relationships are always improved” (Bittler 2008). Second, it helps set sensible expectations of IT and helps IT to manage how it is perceived in business (Day 2007). Third, it is an essential element of building trust and partnership, which in turn help drive the delivery of business value (McKeen and Smith 2012). Fourth, it is essential to conveying the business value of IT (Hunter 2007). And finally, it is critical to understanding the priorities and pressures of the business. Focus group managers spoke of the need for staff who would listen and look for new opportunities to deliver business value. In short, good communication is widely seen as being critical for IT to deliver successful projects, effective performance, and value ( Karlsen et al. 2008; Reich and Benbasat 2000; Willcoxson and Chatham 2004).
As a result, improving communication is increasingly recommended as a top pri- ority for IT managers (Burton et al. 2008; Mingay 2005). Several managers stated that they are working on building communication into their annual goals and into their expectations of staff. What is missing, however, is a better understanding of the nature of good business–IT communication and some of the obstacles IT managers face in improving it (Coughlan et al. 2005). Thus, poor communication continues to be the norm in most organizations (Pawlowski and Robey 2004).
What is “Good” CommuniCation?
Unfortunately, there is no magic formula for defining and teaching “good” communica- tion since it is a complex concept that has many dimensions. There are, however, some principles that are recognized as important elements of effective communication which can be used as guidelines for those who wish to assess their communication performance.
• Principle 1: The effectiveness of communication is measured by its outcomes. Communication is successful when it achieves the outcomes we desire (Gilberg 2006). However, all too often we measure communication by our intentions rather than its out- comes. The problem with that is this: “Communication is in the ear of the beholder,” and even the most direct, clear, understandable, and consistent message can there- fore get distorted through such filters as politics, culture, and personal points of view. As messages get passed along to others, they get further distorted, much like in the children’s game of “Telephone.” One study showed that although 97 percent of managers believed their own communication was clear, only 25 percent of the same people believed that the communication they received from their direct superior was clear and effective (Martin 2006). Another study showed that IT managers feel their communication is more effective than business managers feel it is (Willcoxson and Chatham 2004).
• Principle 2: Communication is social behavior. Communication not only trans- mits ideas but also negotiates relationships. Thus, how you say what you mean is
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Chapter 5 • Business–IT Communication 77
just as important as what you say (Tannen 1995). This is an especially important principle for IT staff to learn because, as teams become increasingly diverse and virtual, many of the traditional nonverbal signals that we instinctively rely on to provide meaning are lost. A host of factors act as a social subtext to our commu- nication: tone of voice, rate of speed, degree of loudness, and pacing and pausing. These are all culturally learned signals that affect how we evaluate each other as people (Tannen 1995). Gender and culture are key social filters that all of us use. For example, the degree of directness and indirectness in communication has often been a source of significant misunderstandings. Women learn to be more indirect when telling others what to do so as not to be perceived as “bossy”; men are indi- rect when admitting to fault or weakness. In short, there is no one “right” way to speak, but speakers and listeners need to become more aware of the power of dif- ferent linguistic styles, and managers must learn to use and take advantage of these styles in different communication situations (Tannen 1995).
• Principle 3: Shared knowledge improves communication. It is all too well known that many IT people don’t “speak the language of the business.” As one manager stated, “Many IT staff think they’ve ‘communicated’ by explaining a technology need or a technology decision, instead of ensuring that everyone understands the business implications of what’s involved.” Studies show that the more IT staff learns about the business, the better communication becomes (Reich and Benbasat 2000). This is true not only because IT people understand business better but also because shared knowledge leads to increased frequency of communication and greater mutual under- standing, both of which lead to more success in implementation, which in turn leads to more communication and improved relationships (Reich and Benbasat 2000). Thus, the creation of shared knowledge can be the beginning of a “virtuous circle” of con- tinuously improving communication (see Figure 5.1).
• Principle 4: Mature organizations have better communication. Although commu- nication is a social process, it is also embedded within and fundamental to organiza- tional processes (Coughlan et al. 2005). Organizational maturity plays a significant part in the effectiveness of business–IT communication because strong practices support and reinforce good interpersonal communication. “You can’t be a part- ner unless you’re a mature IT organization,” explained one manager. The research supports this contention, showing that high-performing IT functions have a strong foundation of communication (Peppard and Ward 1999; Reich and Benbasat 2000). Thus, successful IT organizations embed appropriate communication in their pro- cesses and consider this to be a significant component of IT’s work (Mingay 2005). This work is even more important in times of organization transformation. “We are quite good about communicating operationally,” said a manager, “but we need to improve when talking with our business executives about strategy.” Another com- mented, “we need better skills to move up the ‘run, change, innovate’ curve, and we need the organizational maturity to do this.” The focus group identified some of the areas where improved maturity could help communication: developing busi- ness cases; assessing risk; integrating with the “big picture”; and communicating across business silos. In short, although communication is often seen as an individ- ual competency, it should be viewed and managed as an IT functional competency at all levels.
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78 Section I • Delivering Value with IT
oBstaCles to effeCtive CommuniCation
Why is it so difficult to achieve effective business–IT communication? The principles haven’t changed much over time, but they have often not been applied, or they have been forgotten or ignored as busy IT managers focus on tight timelines and major deliverables (Mingay 2005). However, in addition to these considerations, some other obstacles to effective communication can hinder or prevent communication from occurring. These include the following:
• The changing nature of IT work. There is no question that IT work has become more complex over time. Increasingly, IT staff are intermediaries between third-party contract staff, global staff, or external stakeholders and vendors as well as tradi- tional business users. When multiple cultures, different political contexts, diverse time zones, and virtual relationships are added into the mix, communication simply becomes more multifaceted and challenging. Furthermore, organizations are expect- ing IT to do more for them. Transformation, innovation, or simply bigger and more visible projects all require more communication than the norm and therefore more management attention (Mingay 2005). “We must take a broader view of communi- cation,” stated an IT manager. “And we need conversations at many levels.” Thus, although IT may have adopted communication solutions that meet the needs of the past, these are inadequate for present and future needs.
Shared Knowledge
Increased Communication
Mutual Understanding and “Common Sense”
THE VIRTUOUS COMMUNICATION
CYCLE
Implementation Success
fiGuRe 5.1 Shared Knowledge Leads to Improved Communication
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Chapter 5 • Business–IT Communication 79
• Hiring practices. “IT organizations can no longer support smart, super-talented, but socially disruptive people who cannot work well with a team or with the business,” said one manager. The group concurred that IT skills are changing to become more consultative and collaborative. Yet, frequently their organizations still hire for technology skills, rather than the “softer” skills, such as communication, which are essential for success these days. One study found that there is seri- ous misalignment in hiring between “the skills needed for a job (which heavily emphasize communication and general business skills . . . ) [and] the job require- ments that are . . . advertised (which tend to emphasize formal technical training)” (Cukier 2007).
• IT and business organization structures. A few years ago, many IT functions attempted to deal with their communication problems by creating relationship managers. These were skilled IT individuals whose job was to bridge the busi- ness and IT organizations and thus act as a communication conduit between the two groups. Unfortunately, relationship managers have become a mixed blessing at best and an obstacle at worst, restricting contact between the two groups and thereby limiting the development of shared knowledge and mutual understand- ing. “Relationship managers appear to do more to exacerbate rather than amelio- rate,” found one study (Coughlan et al. 2005). A focus group manager agreed, “You can’t partner if your only contact is through a relationship manager.” Furthermore, business silos can make communication about enterprise issues extremely chal- lenging for IT staff, who can be expected to play a “knowledge broker” role, not only between IT and business but also between business units (Pawlowski and Robey 2004).
• Nature and frequency of communication. It’s a bit of a chicken-and-egg situa- tion: More frequent contact with business leads to improved communication, but IT’s communication is often so full of jargon, technocentric, and inappropriate that many organizations have sought ways to limit the amount and nature of commu- nication between the two groups. One study found that about one-third of IT staff simply did not speak to the business at all (Basselier and Benbasat 2004). However, some of the focus group stated that, even when they are not restricted, IT staff often have trouble getting business to take the time to sit with them. Researchers have pointed out that it is the sharing of tacit and unstructured knowledge, which takes place in low-risk and informal settings, that contributes most to effective communi- cation and mutual understanding (Basselier and Benbasat 2004; Dunne 2002; Kitzis and Gomolski 2006). Limiting one’s focus to formal interactions (e.g., through IT governance processes) has been shown to be the least effective way of communicat- ing successfully
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