IT Strategist on Alignment and 'Creative Destruction'

By CIOinsight  |  Posted 01-07-2003

IT Strategist on Alignment and 'Creative Destruction'

Richard Nolan is the William Barclay Harding Professor of Management of Technology at Harvard Business School. Nolan was co-founder and chairman of Nolan, Norton & Co., the premier IT strategy firm of its time. What follows is an edited transcript of Dr. Nolan's remarks to attendees of the September CIO Insight/Balanced Scorecard Collaborative Strategic Alignment Summit in Chicago.

What we've all been going through during the last 30 years or so is this fundamental transition from the industrial economy with very well-known management theories and principles for accounting and organization and so forth, and we've been going through a creative destruction process, moving into the information economy.

And we haven't been able to just cast off the old and embrace the new. We've had to essentially invent and create the new. I think the notion of creation is a very, very difficult recursive process, and we're not done with it yet.

Consider the notion of the Renaissance CIO. These are very balanced people. They're very, very good in technology, and they're also very, very good in business. What is important about the Renaissance CIO is the idea of the fiduciary responsibility that he or she actually has. I call it "assume and assert." When you're working with the business people, you can't simply react. You must be the experts in technology.

Today, technology is changing extremely rapidly, and therefore, there are opportunities that CIOs need to seize. They need to help their companies internalize technology opportunities and get the buy-ins required to incorporate them into the execution of business strategy.

Today, we are in a business malaise, which is very dangerous for CIOs. It's very easy to discount the power of the Internet, given the fall of the dot-coms, but it would be gravely wrong to do so.

It's very important for Renaissance CIOs to maintain a long-term view about the benefits of information technology to the corporation, because they're in a long-term type of business. It's also important that CIOs don't overreact to these huge cost-cutting kinds of actions that are going on in IT right now and do damage to the organization. Take the long-term view.

And remember—it's not the computer, it's the information that's valuable. Information is enabled by the computer, therefore, information has economics that are driven by Moore's Law. The costs continue to drop.

In the past 10 years, we really have taken advantage of that in the economy, and let me illustrate. Consider Wells Fargo bank. Their technology target initially was to automate transactions. When it applied the technology, we saw the economics of computers take the cost of the transaction in the bank from the physical branch of $1.50 down to 50 cents down to a penny, and that has led to the restructuring of the banking industry. Before this started, there were 30,000 banks in the United States, and now there are around 5,000. And this has happened in every industry.

So there have been the economic effects of the lowered transaction cost that IT has enabled, and this has resulted in a huge restructuring of industries. Consider steel-making. From 1960 to 1999, employment in that industry in the United States went from 600,000 down to 230,000, yet in both of these periods, U.S. steel companies made roughly the same amount of steel. What we saw here was the power of technology to make revolutionary changes.

Grasping IT

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Grasping IT's Benefits

Also during the past 10 years, there's been a building up of a body of knowledge about how to harness the benefits of IT. A key notion here is that information technology or computers essentially take a dominant form and then the economy and organizations learn how to implement, gain benefits and master those technologies. Then there's a redefinition of industry and business, and another dominant form of technology evolves and drives the next wave.

And here we see that the first wave, the first dominant form of the technology was in the form of a machine, it was in the form of a large piece of hardware that was designed to automate transactions. It took us about 20 years to learn enough about this technology to really understand that it enabled collaboration and enabled information, and we see the new technology coming out or the new dominant design which was the personal computer. But the flaw was that it still was standalone.

Modern American business, right up until 1995, thought that it was pursuit of the Holy Grail to network more than a small number of computers. So the computer, the concept of the computer in business was standalone, whether it was a PC with modest networking for e-mail and such, or whether it was a mainframe. And it was almost solely controlled within the organization.

What's interesting here is that there was another group that started about the same time that saw computers coming into organizations, right around the 1960s. This small group was a band that came together at MIT and essentially had a very, very different concept of the ultimate role of computers in the economy. Their vision was articulated in an article, "As We Think" that was written in 1945 by Vannevar Bush, and published in the Atlantic Monthly, which said that "the role of computers is to leverage intellect."

When he went back to MIT, led to the formation of the Lincoln Lab in 1951 and a band of people that started to implement this vision. It's a very unique thing, a compelling vision by a small group of academics that ultimately led to computer science, as we know it today.

These people went to the various universities—Berkeley, Carnegie, Stanford and other places—all working on the various parts of the component technologies necessary to implement this vision of collaborative computing, or network computing, as we know today.

Ultimately, the last piece fell in place. Xerox PARC was a major piece that started pulling the technologies together. The last piece was the browser, and it fell into place in 1995. At that point in time, there was a sea change in the concept of computers and organizations. This was a compelling vision; it was a vision that millions of computers could be architected in such a way that they could communicate with each other.

The realization of that was the Internet. It led to the dot-com phenomenon. The bet was that old companies would not be able to adapt to these new structures and they would not be able to transform that fast, and therefore, there would be these new companies.

Well, we know what ended up happening. It went too fast. But it's the concept that's really important. It's important that CIOs look beyond the dot-com vertigo effects and understand what the real lessons are from the Internet boom.

Why? There's now a new infrastructure that is being put into place. Literally every company uses the Internet now in one way or another. The danger is to say, oh yeah, we do that, we have a Web site–without really understanding that this is a fundamental sea change; it's a step function in the way computers are used in organizations, and we're just beginning in this world.

This is just Step One. Never will we ever go back again to where we'll see a vendor be able to control the core operating system as IBM did; it won't be Microsoft. What we're actually seeing is, in my view, is a whole new environment where IT architecture is starting to mirror the organization and the organization is starting to mirror the architecture. This is a very strong position to be in because you end up having this compatibility between the way the organization wants to operate and the enabling technologies that enable it to operate.

The Strategic I

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The Strategic I-net

And this is about what I call the strategic I-net.

What is this? First, it's real-time messaging architecture. The real-time messaging architecture of today is a technology that enables you to go from the budget pace of allocating resources on the annual basis to dynamic resource allocation. And these companies operate in a very different way.

The second aspect is data warehouses. Everyone works from the same data logically. Today we can easily afford a 1:1 ratio of client computers to workers, which is a situation where everybody is hooked into the network. The browser interface, the world that we came from in which you had your legacy applications where technicians designed unique and cryptic and difficult-to-negotiate interfaces, is replaced by the uniformity of the browser. My browser gets me anywhere, and everybody knows how to use it.

We now have directories that can handle a billion objects. So we have the capability today to be able to build the security into the access that will now make these things realities in your business.

The Web site becomes the front-door receptionist. Self-service is very important to the economics and the efficiency of the business. It's about what me and my computer can do for ourselves.

There is also the notion of collaborative computing, which enables you to work with a power to do searches and hypothesis testing and instant communication, and it works fast rather than going through all these filters. So it's a requirement for working in some of today's more aggressive organizations. The notion of information transparency is that you make it freely available and people can operate on that.

The walls of the enterprise are not a chain-link fence. They're not physical anymore. They're permeable, and they are organic, they can grow and contract. Often they include your customers. So the whole notion of thinking of the organization differently as an extended enterprise that changes over time is important.

And then, finally, consider knowledge management. In one way or the other, I think that as we get a peek into the future, as we look at what some Renaissance CIOs are building in their companies like Cisco or Schwab with their management teams, this is the kind of architecture that you have to have to be competitive.

Now, there's one more idea that I think is important. There are about 300 million people now on the Internet. In the U.S., we have about 280 million people. That's a pretty significant penetration.

Some of us have gotten used to thinking of the Internet as an American function, a U.S. function. But I've been going over to China for the past three years to teach an executive program on CIOs, one of our outreach activities of the Harvard Business School. Every year we bring in about 100 or so CIOs in China. And there are 1.3 billion people China.

Three years ago, the penetration was 6 million on the Internet, the next year it was 23 million, and now it's approaching 50 million.

These people are well-read. They've looked at the dot-coms, they've essentially seen the opportunities here to short circuit economic development. And as I sit there and they show me their Web sites, I see that they're not in English, they're in Chinese. And I think that this is a world phenomenon that is going to take off during the next two or three years and surprise many of us.

Looking to Internet 2

Looking to Internet 2

And don't forget Internet 2. The current Internet, Internet 1, as I call it, is connecting millions of computers. But if we look at the potential of the Net in the world, there's going to be the need to build technology that will connect billions of computers. Internet 2 is an academic effort that has been launched with that objective in mind.

Internet 1 started off as an R&D activity in the academic world to engineer something that was fundamentally different and that no one thought could be done. It then went through a set of partnerships, went through privatization, and then ultimately in 1995 or so, when the last piece was put in place, it was discovered by private business and took the world by storm here.

Internet 2 is getting built and essentially is following the same kind of pattern as Internet 1. The difference is that the partnerships are easier to strike. You see who's involved in this, and you see Cisco, Microsoft and the various companies that are interested in it and that have the technology capability, and they're all getting into it early. It's still largely an academic phenomenon, but it's probably a lot further along than what you think in terms of getting into the business sector.

Also, Internet 2 is more than simply a connection of networks. Internet 1 we can almost think of as one network, if you will. Internet 2 is a connection of Internets of the various countries, and there are efforts that are associated with Internet 2 in Europe, in Asia, and in South America. While we've been suffering a bit of dot-com vertigo here, those countries have built these high-speed networks by using different technologies for switching, and they're connecting into Internet 2.

So this thing is coming. And as we think about the good concepts that are out there and Renaissance CIOs and the fiduciary responsibilities they have, these are the things CIOs need to be tracking because they're going to happen faster. They are a different set of assumptions, and somehow they've got to get into the strategy conversations—the executive-level conversations—in your companies.

True, we haven't seen the Internet 2 killer apps yet, and it's very, very difficult to predict what they will be. But if we look at what Internet 2 is trying to do, the concept is one of an interactive collaboration—global interactive collaboration. That's real-time access to remote resources. Some of the work on the mapping of the human genome was driven through the Internet 2 network. Some of the work on discovering the new antimatter at CalTech was driven through the Internet 2 infrastructure. Things like data mining are going to be huge, huge opportunities in our view with Internet 2.

So as I think about IT-business, recognize that there are no rules here. It's all still new ground.

So think about the permeable organization. Craft your organization to be permeable, and design your IT to enable collaboration. Second, think about building strategic I-nets.

And finally, align your IT strategy to front-office opportunities within the realities of your situations and capabilities, but remember that your fiduciary responsibility is not only to align but to lead.