If you are a CIO in your first 100 days on the job, chances are good that your
predecessor was fired over the company's bottom line. After you figure out
where your parking place is, how close the bathrooms are to your office and
how to reach the emergency exit, the first order of business is to conduct a
technology stress test of your new company.
A stress test is necessary due to one alarming fact: seven out of 10
companies grew costs faster than revenues from 2004 to 2007. That's what
Diamond Management & Technology Consultants found in its 2009 "Operating
Leverage" report, in which we analyzed 400 companies with over $100 million
in revenue. We assessed their cost growth in relation to revenue growth and
capital expenses and researched capital expenses in prior years, along with
their impacts on margins.
How can you avoid the same mistake and ensure IT-related expense reductions
improve margins, but leave room for structural improvements? First, consider
your new company's financial situation and take action accordingly. Likely
your new company is facing one of four financial situations:
1. High cash and accelerating demand potential. Invest for growth and
move the business to lower cost curves than competitors.
2. Low cash and accelerating demand potential. Manage profitability to
build cash.
3. High cash but flattening demand potential. Capture market share by
acquiring companies with undervalued assets.
4. Low cash and deteriorating demand potential. Survive by strategic cost
cutting.
If you - like many companies in this economy - are in the unenviable caboose
position, don't think you can cut your way to greater efficiency. It's
natural for the fight/flight instinct to take over in stressful situations,
but knee-jerk reactions must give way to an integrated approach that
combines "inside-out" and "outside-in" thinking.
Too many CIOs are expected to reduce budgets without an operations-based
view of actual cost drivers. Sometimes, costs are cut business line by
business line, making it almost impossible for the CIO to contribute by
improving a complex business's margin. In other cases, CIOs are expected to
maintain service levels and run operations as usual at the same time they're
told to drive the expenses out of the company.
Since relying on the organization as usual to reduce expenses will not
deliver the expected savings, take an integrated perspective of the business
design to find the 15 to 20 percent savings that will save your job.
As Diamond sees it, the business design comprises four key components:
business model, operations, structures and incentives, and the technology
platform. Each aspect of the business design should be contributing
strategic value, but often internal and external factors serve as barriers.
In creating an integrated view of the business design at a Fortune 100
insurer, we found that the company segmented its customers by level of risk,
but loaded expenses based on the customer size. This incongruence ignored
the true cost-to-serve based on customer behavior. We also found that:
1. Pre-tax operating income for a particular segment was negative.
2. Most of the value-added services being offered to this segment created
losses at the policy level.
3. Customers in this segment were interested in using online self-service
tools
4. The company provided 75 customer services-three times more than
management assumed.
The CIO was able to help make improvements in technology and processes,
eliminating most of the one-off service customizations that were sapping
company resources without delivering value to customers. Ultimately,
operating expenses were cut by 15 percent while improving service processes
for long-term success.
If not done strategically, expense reductions can make a bad situation
worse. Cutting your way to greater efficiency could have unintended
consequences on revenue and margin.
To avoid suffering a similar fate as your predecessor, take an integrated
perspective to cost-cutting. The new CIO needs to quickly scan the company,
looking at strategy, operations and financial drivers to accurately identify
areas for high-yield IT improvements.
Then comes the hard part: resolving the hidden constraints that increase the
risk of missing expense reduction targets.
Chris Curran is the CTO for Diamond Management & Technology Consultants.
Visit his blog at www.ciodashboard.com
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