CIOs Shape Expectations

By Allan Alter  |  Posted 11-06-2007 Print Email

So the idea that IT for competitive advantage is going away is nonsense?
It is nonsense. We've found that highly effective IT organizations contribute significant value to their enterprises. We have to eliminate this notion of generic IT, of my IT being like everyone else's IT is OK.

It means there should be five parts to everyone's IT plan for 2008: A clear statement of how IT supports the enterprise's sources of competitive advantage; the set of business metrics IT is willing to hold itself accountable for; a statement of principles that will drive IT decisions; a clearly stated plan on how they are building and investing in skills for IT personnel; and a statement of what IT will be in 2010. That statement should be different for different companies. 2010 is a major mental milestone that gives CIOs the opportunity to shape expectations and the conversation about the future of IT. If they don't take this opportunity, others will shape that conversation for them.

We're in a moment of economic uncertainty. How will broader economic trends affect IT?
The economy is not driving IT strategy and views right now, but if conditions continue to change, many CEOs and CFOs will take the wrong course of action in an environment of inflation and lower economic growth, in large part because none of them have managed in this environment before.

I don't know if we'll go back to the same situation [of high inflation and low growth] as when Jimmy Carter was president, but latent inflationary pressures exist inside most companies. So here's the wrong decision: A CFO who's never managed in this environment will have a tendency to believe it's a short-term phenomenon because every other financial crisis in the past 10 years has been short-term. However, in the face of sustained upward price pressures, they'll have a tendency to cut SG&A [selling, general and administration] costs like IT instead of changing their cost structure, which might increase the IT budget slightly. It takes a savvy CFO to recognize that difference—between cutting one to two percent of my cost structure or restructuring 98 percent of my cost structure.

I can remember something my dad said in the late 1970s. We moved to a different house and took a bigger mortgage, and he said, "Don't worry, I'm paying it back in cheaper dollars." That kind of thinking is counterintuitive. You may want to kick up your capital spending to improve your cost structure. Here's the big difference between then and now: in 1978 to 1981, most enterprises passed their price pressures up the chain to the customer because there was no globalization. We're finding now you can't pass material price increases on to your consumers as easily as you could in the past. That further solidifies the need to change the way you work, and change your cost structure rather than slashing. Slashing costs is not sustainable.

What should your cost-cutting strategy be for the latter part of the decade?
You want to move as much cost as reasonable to the variable category. Larger organizations will have to think about better matching their revenue streams to their cost structure. A quick example: A lot of IT costs, in reality, are denominated in rupees. No CIO really knows that. The price appreciation of the rupee relative to the dollar, plus higher labor rates in India, are creating pressures that will affect CIOs. They have a currency risk exposure; IT has never dealt with that sort of thing before. We're seeing some people who are considering inshoring back to the States, because this way they have their cost and revenues base back on the same level—dollar-denominated costs and dollardenominated revenues. Somewhere and sometime, whatever appreciation of the rupee will come through and hit you.

Could that drive offshoring to other countries? Yes, but look at the dollar relative to other currencies. That's why we are starting to hear of major global companies building IT capability back in the U.S., as part of the long-term bet against the dollar.

What is the CFO's' future role and its impact on IT? The CFO is the most focused executive on delivering the current quarter and year plan. That gives CFOs a concentrated focus that can be too short for the enterprise to get all the value associated with the use of information and technology. At the same time, many CEOs' views are out in that 36-to 48-month window.

This creates a middle ground that involves changing the way companies work. We've seen CIOs create significant value by delivering changes that impact the operation in the 12-to 18-month timeframe, changes that fundamentally change the way the business works. There's this territory between tactics and strategy. That is the opportunity space for CIOs to play. Not only is IT strategic; it's a competitive differentiator, and only 'knuckleheads' think otherwise.



 

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