Future of IT: Why Tech Managers Will Need Sharper Skills

By Brian P. Watson  |  Posted 11-06-2007

Future of IT: Why Tech Managers Will Need Sharper Skills

The IT organization is changing--so much so that, soon enough, it may be unrecognizable.

A number of factors in play for years are gaining steam, and together they'll likely force a dramatic transformation in the size and scope of the IT department.

Internal organizations are becoming smaller, more nimble and more focused. Globalization is affecting the costs of labor and the scope of the marketplace. CIOs, with a greater emphasis on business acumen, are reconsidering what is truly core to their departments--and with more processes and systems being deemed commodities, they're shipping a greater number of IT functions to specialists.

Welcome to the Hollowing of Big IT.

More than half of CIOs foresee a revolutionary reshaping of their IT departments in the next five years, according to CIO Insight research, with the IT organization moving away from a monolithic department to a smaller team of managers, analysts and planners. Most specialty work will be farmed out to consultants, contractors or offshore service providers.

Gone, our survey shows, are the days of hundreds or thousands of staffers divvying up responsibilities for application development, systems administration, infrastructure maintenance and other tasks. "IT departments are moving away from [outsourcing] low-risk, low value-add activities and [outsourcing] higher-risk, higher valueadd activities," says Sam Maitra, a director in PricewaterhouseCoopers' outsourcing and shared services advisory practice. "It's a confluence of maturity of the markets, positive experiences and technology."

Add to that the need for companies to innovate faster and introduce new capabilities while dealing with increased commoditization of information technology.

Moving to a leaner model, focused on their organizations' strengths and shipping out the rest, is becoming the reality. "People are realizing now that the model must change," says Bob Willett, CIO of Best Buy and CEO of Best Buy International. "You have to partner with the best of the best to deliver the big picture."

To be sure, the hollowed-out model hasn't been adopted by everyone, or even the majority. A key driver--outsourcing--has been an integral component of IT strategy for years, at least in terms of farming out hardware and systems functions. Today, though, businesses outsource more specialized work, from software development to knowledge management.

"This isn't something that was a neat idea five or 10 years ago, when you had some trophy CIOs who talked about global sourcing and managing IT like a business," says Michael Gerrard, a vice president and distinguished analyst at Gartner, who previously served as a CIO in the financial services sector. "The world has changed that. To compete in the new environment, IT becomes more strategically important than it was before. And that's making businesses rethink their expectations of the CIO and their expectations of IT."

Still, some signs point to the contrary. Nearly 40 percent of respondents to our September cost management survey said if their companies had to make emergency spending cuts, services like consulting and outsourcing would go first. But most organizations don't plan for emergencies. And though 68 percent of respondents to our March survey on outsourcing said the practice was overrated as a cost-cutting strategy, a growing number of CIOs see outsourcing as a way to acquire hard-to-get skills, not just as a cost-saver. When push comes to shove, many organizations won't be able to function without outsourcing.

For those CIOs and executives adopting the model, a number of changes are under way. Not only must they contend with severely limited staff time and departmental budgets, but they must learn to operate in a changing environment where they're expected to manage and control alliances and negotiate contracts and service-level agreements, all while staying in tune with business needs and priorities.

The CIO at the helm of the hollowed-out IT organization needs a new arsenal of weapons--and a progressive view of what's ahead. IT executives must make tough decisions about what projects to assign internally vs. outsource, what level of departmental headcount they require and how to build sustainability into their new models.

If successful, CIOs can achieve a new level of recognition among the higher ranks of the C-suite. If not, they can jeopardize their own careers--and the viability of the departments they run.

Next Page: Evaluating Core Competencies

Evaluating Core Competencies

Evaluating Core Competencies

"We started out, many years ago, that everybody needed an IT department. No one questioned why," says PricewaterhouseCoopers' Maitra. The question arising more frequently today isn't around why companies need IT departments but what those departments are supposed to do.

Over the years, IT departments have increasingly been pushed to create business value. To do so, CIOs and their teams have had to identify what some would call IT "waste"--the processes or skills unessential to setting it apart, or that an outside partner could do better.

So a simple rule of thumb is: Keep core competencies (applications, processes and systems that create market advantage against competitors) in-house, and consider outsourcing the rest. But the difference between core and non-core differs greatly from business to business, even for those in the same industry. Best Buy's Willett is one CIO who has moved to the hollowed-out model: in the past three and a half years, he has created an IT organization of about 35 in-house staffers and 1,300 or so consultants from Accenture.

At the same time, he's seen his IT spending decrease each year as a percentage of revenue.

For Willett, there are a few simple considerations when evaluating what to outsource vs. insource. The first is how to keep ahead of the competition by innovating faster and more quickly delivering new capabilities.

Once Willett determines what needs to be done on a particular project, for instance, he considers how it can be accomplished. Then he and his team evaluate whether the project falls into their core competencies, or if it's something a specialty firm or outsourcer could accomplish more readily.

In the past three years, Willett has found numerous instances in which an outside firm was better equipped than his own staff. "There are people out there who spend more money on software development than you ever could," he says. "So by definition, you're smarter to partner with them on software."

In finding an outside firm to complete the work, Willett says he opts for companies that not only offer best-of-breed capabilities but focus on delivering value to end users--for Best Buy, that means its millions of in-store customers. "You start to build partnerships with providers that are synergistic with your own values," he says. "I think that's the way to gain pace and concentrate on what you do best."

Insurance giant Chubb has sourced out its infrastructure maintenance and some business processes, but CIO June Drewry prefers to keep application development in-house. The logic? Chubb's IT personnel are business-minded and have close relationships with line-of-business executives--and consequently know what they want and need.

On top of that, Drewry says Chubb values its employees' input and contributions, and doesn't want them to be bypassed for outsourcers and then leave to join competitors. "So we've chosen not to sacrifice that for some labor arbitrage we just don't think has the same payback in terms of information capital," she says. But when it comes down to it, Drewry weighs the true competitive advantage Chubb gains from its own processes and what value it could gain from outsourcing.

"Once you separate the business rules, you say, why would I want to build a basic commodity service when I could find one outside?" she says. "A lot of people make the decision to build it because, they say, it's tailored to the process. But it's protecting their turf."

The vast majority of companies use many of the same tools, such as financial applications for general ledger and accounts receivable. Businesses used to pride themselves in building these applications in house, but the advent of customizable, packaged offerings from various vendors has diminished the need for internal development.

As vendor offerings proliferate, CIOs and executives will have to refocus their departments. "There are companies all around the world that write great applications," Maitra says. "They can do it better. In all probability, they can do it cheaper. And, usually, they have the skill sets to do it better."

Next Page: Outsourcing Risks

Outsourcing Risks

Outsourcing Risks

Cutting costs and adding flexibility are two primary reasons companies turn to outsourcers. Businesses hire fleets of domestic consultants to focus solely on a particular project, which, in many cases, delivers a higher return than forcing internal staffers to juggle that project along with other responsibilities. For offshore outsourcers, the return, conceivably, is greater: The most talented workers in foreign countries typically work for less than most in the U.S. The formula appears to be working and remains high on CIOs' radar. In the next five years, top IT executives expect U.S. companies to outsource more work to foreign countries than to domestic providers, our January Future of IT survey found. Many of these senior executives believe U.S. firms will at least double their spending on IT outsourcing by 2012.

Still, outsourcing carries risks. Outside vendors can hold up projects and companies can lose internal competence by farming out tasks, according to Eric K. Clemons, professor of operations, information management and management at the Wharton School of the University of Pennsylvania. What's more, companies jeopardize their control over proprietary skills and information, Clemons says.

There are operational risks, too. In the past, when companies gave application specifications to developers, for instance, they would ensure efficiency and reduce potential errors through constant negotiations and "back-channel communications," Clemons says.

"As software is developed remotely, by people with very different cultures and very different experiences, and with very limited opportunities for back-channel interactions, the quality of the spec deteriorates rapidly," he says. "As clients outsource more sophisticated software development, the operational risk--the risk that the software simply will not fully conform to the users' requirements--is very dramatically increased."

And globalization is altering the geographic strategies most companies and outsourcers have employed in the past. Years ago, businesses pushed work to Japan, Korea and other countries where they could pay lower rates for top talent. Then workers in those countries started commanding higher fees than U.S. workers.

So the next great frontier became India. But fees there have been growing steadily--to the point where many companies are exploring the world for other countries with low-cost talent pools. "Chasing lowcost labor to do the same things has extreme limitations," Maitra says. "You're not going to stay on in India forever, because if you went there to reduce costs at a lower level, those costs are going up."

In our March outsourcing survey, a majority of executives expressed a willingness to outsource strategic IT functions and applications. Still, that will only go so far, says Rich Brennen, who heads the information officer practice at the executive search firm Spencer Stuart. "It's sneaking up more than it's becoming an inherent strategy," he says. "Will it ever get there 100 percent? That depends." For example, Brennen doubts that a firm like Merrill Lynch would ever outsource its trading system or a company like FedEx would farm out its supply chain system.

But that's not to say there won't be some surprises in the tasks companies decide to outsource. Brennen harkens back to the "creep" of outsourcing, pointing to industries that have used outside firms to produce what many would consider those companies' competitive advantages. He cites retail businesses that have farmed out not only the production of their apparel but also the design, as well as product manufacturers that now have someone else create their key product lines.

Few thought any of that would ever happen. And if it's any indicator of corporate motivation for divvying up IT work, more crucial projects will be done by outsiders in the future.

Next Page: Implications for CIOs

Implications for CIOs

Implications for CIOs

With this change in the structure of IT organizations come new skill sets and responsibilities for CIOs. Brennen, who's constantly speaking with businesses about what they want in their next CIO, sees the role morphing from the traditional tech-savvy manager to more of a business operative. The CIO of the future "is a general manager," he says. "He's an integrator of best of breed from multiple suppliers. He's also a great negotiator."

Drewry has seen more of her time shift to managing alliances and partnerships related to outsourced work. It hasn't been easy, she says, for her or for her peers in different industries.

But the emergence of transformative technologies and techniques, such as service-oriented architecture, which encompass a broader chunk of the IT infrastructure than a simple, standalone application, has created change.

"Things are much more flexible and configurable with these new tools and technology--it's a lot easier to take it and adapt it without having to rewrite it or bastardize it," she says. "I truly can configure it to meet my need, and change it on the fly as I learn that maybe my need wasn't the best need."

Drewry and Willett, both IT management veterans-- Drewry worked at various financial services firms, Willett headed Accenture's global retail practice-- embody what CIOs in the hollowed model will look like. IT executives who focus more on technology than business will be a thing of the past. "IT managers who still see themselves as IT managers in five years won't be managers anymore," says Gartner's Gerrard. One trend already in play is companies appointing business executives with little technology experience to CIO posts. Those companies want to make sure their IT chiefs will naturally align themselves with the business--no prodding necessary. "If you don't meet that description, the business will not make the investment needed to align you with them," says Gerrard.

Beyond becoming more business-savvy in general, CIOs must adopt the characteristics of business executives. One such quality: IT heads have to be strong negotiators, because they're being relied on to strike favorable deals with outsourcers and ensure that business needs are met.

This forces the CIO to create a culture of collaboration between internal staff and outside vendor teams. Building that trust, Willett says, isn't easy. In that kind of client-service situation, many internal staffers will be quick to point fingers at the service provider for anything that goes wrong. "Beware of the blame culture," he warns, "where everyone wants to blame the third party because that's the easiest thing to do."