Trends: IT and Innovation

By V. Sambamurthy  |  Posted 12-01-2001

Trends: IT and Innovation

 

Introduction

Until recently, efficiency and effectiveness were the watchwords in evaluating corporate IT—efficiency in managing IT assets and services, and effectiveness in such measures as client satisfaction and the ability to hire and retain valued personnel. That made sense in a stable business environment where neither the core technology nor the markets in which companies operated changed much over time. But in today's fast-changing digital world, corporations of every stripe face newly hypercompetitive business environments, where globalization, technological innovation, mobility of talent and greater opportunities for customer switching are pressuring firms to be innovative, customer-centric and fast. Agility—the ability to sense shifts and respond with the appropriate blend of capabilities, business processes, organization structures, and products and services—has emerged as a critical prerequisite of success.

In such a world, IT must not only support but also shape every company's ability to manage customer relationships and business partnerships, and to introduce innovative products, services and distribution channels. That's why speed, adaptability, transparency and innovation have become the new measures of IT performance.

What's the best way to restructure in order to meet all the new demands being placed on CIOs? Should IT be centralized or decentralized? Is it best to outsource or to build in-house? Should you buy infrastructure or lease it? The range of restructuring choices is vast. IT is expected both to shape new business initiatives and to organize IT activities so that technology costs can be closely monitored and business value clearly demonstrated. How should CIOs design and build their organization to achieve maximum payoff? How do they ensure that IT is able to meet the competitive challenges of the 21st century digital economy?

A number of forward-looking CIOs are actively experimenting with new structures for their organizations. (See "Central Intelligence.") Among the most vivid examples is the restructuring that took place at General Motors in 1998. GM has more than 25,000 people on its IT staff, but the majority of them are outside contractors. GM's IT has been characterized as a "virtual" organization that employs only about 260 IT professionals, with another 1,200 distributed among its various business units. One of the first tasks undertaken by GM CIO Ralph Szygenda was the creation of an innovative management structure: Divisional information officers were appointed to see to it that the IT organization was aligned with business concerns in each of the company's key geographical and business product markets. Other examples of innovative structuring include Bell Atlantic (now Verizon Communications Inc.), British Petroleum Co. (now BP PLC), and Marshall Industries (now Avnet Inc.).

To discover some answers for the many challenges facing CIOs seeking to create flexible IT organizations, we recently collaborated with the Advanced Practices Council of SIM International on an extensive two-year field study that included a Delphi study of thought leaders from industry and academia, and interviews with CIOs of 30 Fortune 1,000 firms. We asked the CIOs of these companies to explain how they decided to change the structure and governance of their IT organizations and to discuss their experiments with innovative management strategies designed to respond better to the forces shaping competition and business in the digital economy.

We started our research looking for the Holy Grail—an IT organizational design that could be presented as a "best practice" model. But our search was futile, so we turned our efforts to finding a new organizing logic and model for thinking about and discussing IT organizational design. We offer what we call "modular logic" as a fresh perspective for CIOs involved in the design of their companies' IT organizations.

Easy Pieces

Easy Pieces

Modular logic involves breaking up IT activities into units aligned with the two primary tasks of all IT organizations: value-creating activities, or value streams, on the one hand, and capabilities on the other. Value streams—the key IT processes that are essential to boosting innovation and business performance—are further divided into primary and secondary activities. The primary value streams include "value innovation" (the conceptualization of strategic IT applications), "solutions delivery" (the development of applications) and "services provisioning" (the availability of reliable IT services such as desktop support, help desk and call centers). Secondary activities are equally important to developing agile and innovative IT groups, though they also influence IT performance. They include activities such as strategic planning, financial management, the leveraging of IT best practices and innovations across the company and, at some companies, generating revenue from superior IT skills or in-house capabilities.

Capabilities—organizational skills and knowledge that are essential to strategic IT innovation—include infrastructure, highly skilled IT workers, and the ability to work with business clients, executive management, dispersed IT staff and external IT partners.

To apply modular logic, first identify your firm's critical value stream activities and capabilities. Then pinpoint the best organizing option for each value stream and capability. Solutions delivery, for instance, might best be centralized, decentralized, federal, outsourced or organized as an independent IT subsidiary. Infrastructure might be either centralized, leased, outsourced or provided through an ASP (see a complete list of the organizing options for each value stream and capability).

Once the organization of each value stream and capability is chosen, they must all be tied into the overall IT architecture. Our study suggests seven possible architecture strategies. Whichever one you choose must be supplemented with other integration options to devise the best IT organizational architecture for your needs.

Our study showed that the notion of a "one size fits all" IT organizational design is false; there simply are no silver bullets that would work well for every corporation. All IT organizations face a unique set of management challenges and strategic imperatives, and so every organizational design must be customized. Further, any decision that the CIO makes must inevitably be influenced by historical context. Even within the same industry, we found a variety of different IT organizational structures.

Words Into Action

Words Into Action

Among the companies included in our study are two large, multidivisional global manufacturers of chemicals, both with about $15 billion in 1999 revenues. Both leaders in their industry, they are direct rivals and have similar business strategies: The chemical industry is recessionary and cyclical, and both companies seek to grow through diversification. But when it comes to the design of their IT organizations, their application of modular logic has led them to very different results.

ChemCo1 has elected to outsource a majority of its IT activities—in other words, the integration architecture is that of a virtual IT organization—and distribute decision-making authority to its business units through decentralization. ChemCo2 also uses external partners to execute many significant value stream activities, but it maintains controlling "mirror-image" IT units in each business unit.

CHEMCO1: INNOVATION THROUGH PARTNERSHIP
0108 Module Operandi
Integration architecture
Outsourced: The "virtual" IT organization
Value innovation
Decentralized to business units
Solutions delivery
Outsourced
Services provisioning
Outsourced, managed in decentralized manner
Business drivers and culture
• Recessionary and cyclical industry
• Growth through diversification
• Strong autonomy in business units
Strategic imperatives for IT
• Cost reduction and productivity improvement
• Support for speedy investment and divestment
CIO's challenges
• Convincing business units about the strategic value of IT
• Governance in the context of outsourcing and shared services

At ChemCo1, the CIO heads a "core" IT policy group of about 12 people that oversees four major areas: strategic planning, architecture and standards, security and privacy policies, and human resource management—including succession planning for IT leaders. IT executives in the business units report directly to the vice president of the business unit and indirectly to the CIO. In 1997, the IT organization outsourced a majority of its activities to two partners—Computer Sciences Corp. and Arthur Andersen LLP—and created a new unit called Alliance Management to manage all the various vendor contracts. This organization is not part of ChemCo1's core IT department; nor does the Alliance manager report to the CIO.

Using modular logic, ChemCo1 has sought to achieve "value innovation" by locating the IT executives in the business units. Meanwhile, both "solutions delivery" and "services provisioning" is outsourced to the alliance partner. Each major business application is owned by a corporate employee and by a counterpart with the outsourcing firm, and some applications are shared by multiple business units. The Alliance Management office coordinates the overall process, handling demand management, financial issues, invoices, chargeback, and service and quality management. New technology research and development is performed by a group that moved to Computer Sciences, although IT still directs its work.

In a company that sees itself as lacking the formal processes to make significant improvements, the outsourcing partnerships are viewed as a win-win relationship. In addition to the cost savings and added flexibility, ChemCo1 can now avoid residual fixed costs when a line of business is eliminated or divested, and maintain more control and visibility: Business unit managers now receive real "bills" for their IT consumption.

In contrast, ChemCo2's centralized IT organization has three major entities: The first, enterprise operations (which includes enterprise resource applications and central systems), is handled through an alliance with an external vendor to do project work and applications support. The other two—new-technology development (which takes place in the expertise centers) and field services (which installs equipment, takes care of operations and manages the help desk)—are internal. About 25 IT leaders are located in business units and report both to the business unit head and to the CIO. Meanwhile, the CIO, to whom 30 managers report directly, also serves on the corporate leadership team with the top 20 executives in the company.

CHEMCO2: CENTRALIZED SERVICES CONTROL
0108 Module Operandi
Integration architecture
Centralized, with mirror image alignment in business units
Value innovation
Aligned by line of bus-iness, work process and geography
Solutions delivery
Alliance management and program management
Services provisioning
Outsourced, with centralized coordination
Business drivers and culture
• Recessionary and cyclical industry
• Growth through diversification
• Strong corporate emphasis on global leverageability
Strategic imperatives for IT
• Platform for leverageability
• Global reach and range
• Support for speedy investment and divestment; scalability
CIO's challenges
• Leveraging skills globally
• Support for the merger and acquisition process

ChemCo2's IT organization produces "value innovation" by aligning the IT leaders by work process, line of business and geography. Meanwhile, all the IT leaders serve on the Global Information Management Team, headed by the CIO, and use this forum as a way of sharing and developing ideas. "Solutions delivery" is executed using a program office concept with the alliance partner; each "project" is headed up by a ChemCo2 employee, and resources are brought in from the alliance partner as needed. Finally, "services provisioning" is outsourced and distributed to the business units in the field to ensure as much local feedback as possible.

ChemCo2 considers its IT organization as being "very scalable"—the company clearly understands its internal competencies and can bring resources to bear as needed. That also gives the company the ability to deploy IT resources globally. Meanwhile, consolidation and standardization of equipment has resulted in significant cost savings.

The Architectural CIO

The Architectural CIO

There's both good and bad news in the stories of ChemCo1 and ChemCo2. The good news is that it is possible to break away from traditional thinking about designing the IT organization and recognize that there are effective organizing options for different IT activities. A company can be both centralized and decentralized, insourced and outsourced. The bad news is that each organizational design is unique, idiosyncratic and customized, and if a CIO simply takes an existing design and emulates it, the chances of success are poor.

Modular logic offers value in many ways. Each capability and value stream can be custom-designed, and because the focus is on modular units, the process of making changes to the design of the IT organization is not as onerous as it might seem. As new opportunities and constraints present themselves—e-business, for example—each value stream and capability architecture can be changed as needed, without significantly affecting the rest of the organization. The key, of course, is to ensure that the organizing structure and the logic underlying it remain viable through a continual and recurrent process of reassessment and evaluation.

Most significantly, modular logic reinforces the view that CIOs and senior IT executives must develop their skills as organizational architects in order to position their units to support and shape their firms' business agility and creativity. Modular logic provides a sound basis for initiating thinking and communicating about how IT functions should evolve.


RITU AGARWAL and V. SAMBAMURTHY are associate professors of Information Systems at the Robert H. Smith School of Business at the University of Maryland who specialize in the strategic issues associated with the deployment and use of information technologies in organizations. Comments on this story can be sent to editors@cioinsight.com.

Mix and Match

Mix and Match

A study revealed seven possible options for IT organizations:

Centralized
Top-down responsibility for solutions delivery, conceptualizing, developing and implementing IT solutions for all parts of the business.

PRO

  • Economizes on IT skill needs
  • Reduces coordination overhead within IT

CON

  • Weaker client relationships
  • Ineffective development of business area knowledge and expertise
  • May inhibit customization of IT to strategic business needs

GOOD FOR: Small firms with a lean IT staff and related lines of business

Centralized, aligned through role
Single solutions delivery component with additional account manager role.

PRO

  • Improved client relationships
  • Improved focus on strategic business needs

CON

  • Dedicated staff needed for account manager role
  • Challenges in implementing account manager role
  • Coordination overhead between account manager and solutions delivery teams

GOOD FOR: Small firms with a lean IT staff and somewhat differentiated lines of business

Centralized, aligned through mirror-image unit
Multiple solutions delivery groups aligned with different lines of business, but still part of the overall IT organization.

PRO

  • Customization of IT to strategic business needs
  • Improved client relationships

CON

  • Expanded need for IT staff
  • Reduced ability to leverage across business units
  • Limits on customization of IT to strategic business needs

GOOD FOR: Medium- to large-scale organizations with relatively undifferentiated lines of business, but with a greater customization need

Federal
Multiple solutions delivery groups aligned with the varied lines of business. These groups report into the line of business as well as into the IT organization. Coordination achieved through IT manage-ment and executive councils.

PRO

  • Balance between local innovation and enterprise coordination
  • Customization of IT to strategic business needs
  • Appropriate for leveraging cross-unit synergies

CON

  • Complex coordination challenges due to dual reporting relationships
  • High administrative and staff costs

GOOD FOR: Medium- to large-scale firms with differentiated business units

Decentralized
Solutions delivery groups aligned with the different lines of business. These groups report directly into the business units and have a dotted-line relationship with the CIO. Coordination achieved through IT management and executive councils.

PRO

  • Enhanced customization of IT to strategic business needs
  • Greater business unit ownership of IT initiatives

CON

  • Limits to enterprise opportunities for IT leverage
  • Greater total cost of IT operations

GOOD FOR: Large firms with differentiated lines of business

Independent subsidiary
IT function structured as a separate unit with the mandate to be the firm's preferred IT provider of choice, while also looking to sell IT services to other business firms. The CIO also serves as president of the IT business unit.

PRO

  • Attention to "profit-and-loss" mentality toward IT operations
  • Greater visibility of the costs and benefits of IT services
  • Opportunities for commercializing IT assets and services to generate revenue

CON

  • Commercial focus could distract the IT function from internal client relationships

GOOD FOR: Firms of all sizes where corporate philosophy focuses on cost accountability

Outsourced
Most, if not all, IT activities are performed outside the boundary of the firm. The internal IT organization retains aspects of the overall strategic visioning and coordination of IT efforts.

PRO

  • Cost economies and flexibility of IT operations
  • Ability to leverage specialized competencies of external partners

CON

  • Strategic vulnerability to alliance partner
  • Premium on contracting and relational skills

GOOD FOR: Firms of all sizes guided by management's philosophy regarding external ownership of IT

Resources

Resources

Papers

Building Change— Readiness Capabilities in the IS Organization: Insights from the Bell Atlantic Experience
By Charles E. Clark, Nancy C. Cavanaugh, Carol V. Brown and V. Sambamurthy. MIS Quarterly, 21 (4), Dec. 1997, p. 425.

Transformation of the IT Function at British Petroleum
By John Cross, Michael J. Earl and Jeffrey L. Sampler. MIS Quarterly, 21 (4), Dec. 1997, p. 401.

IT-Intensive Value Innovation in the Electronic Economy: Insights from Marshall Industries
By Omar A. El Sawy, Arvind Malhotra, Sanjay Gosain and Kerry M. Young. MIS Quarterly, 23 (3), Sept. 1999, p. 305.