CIOs' New Choice: Get Strategic...Or Else!

By Erik Sherman  |  Posted 07-19-2002

CIOs' New Choice: Get Strategic...Or Else!

FACT: Some 47 percent of respondents in a poll of CIOs and business executives say IT is a reactive problem-solver at their companies, while only 28 percent say IT has input into business strategy. —CIO Insight Balanced Scorecard Survey, 2002.

Even before the technology bubble burst, Ralph Larsen, then Johnson & Johnson's CEO, was growing worried about how much the company might be spending on technology, as he had no precise idea. Following a companywide crash of J&J's e-mail systems in the fall of 1997, Larsen asked his corporate controller, JoAnn Heisen, to step in and take over as CIO to turn things around. Heisen's mandate from Larsen? "Fix it," recalls Heisen, who embarked on a cost-cutting mandate aimed at shaving IT costs by $50 million per year by 2003. "Nobody knew what was wrong; they just knew it wasn't working. Nobody was talking to each other."

Since the economic downturn, CEO aggravation with IT has gone increasingly public. Companies such as Kmart Corp., Samsonite Corp., Whirlpool Corp. and Hershey Foods Corp. have ended up losing millions on failed technology. In February 2001, for example, Nike Inc.'s supply chain management system went haywire, leading to excess inventory and delays in orders for its sports gear that cost an estimated $100 million in lost sales. Complained Nike CEO Phil Knight: "This is what we get for our $400 million?"

FACT: Seventy-nine percent of business leaders feel their massive ERP efforts weren't fully effective, making business executives cautious about additional tech spending.—The Forrester Report, September 2001.

And more companies are likely still feeling the pain: A new Gartner/Morgan Stanley study of 25 years of tech spending estimates that U.S. companies lost $130 billion on unnecessary software and hardware in the past two years alone. Worldwide, says London-based Gartner research director Andy Kyte, companies waste as much as 20 percent of the $2.7 trillion spent on technology. Kyte's analysis of benchmarking projects Gartner has undertaken with companies worldwide pegs the loss to project delays and needless purchases.

Why the lousy track record? Sometimes guided by the CIO, sometimes not, a lot of companies stampeded into the wrong technology, bought too much and didn't implement new technology properly. They also underestimated the time needed to make it all work. And CEOs, especially during the tech-boom years, often drove spending for projects without clear goals. "People viewed technology then as black magic, so why understand it," says Charles Phillips, a managing director at Morgan Stanley Dean Witter & Co. who heads up a monthly roundtable of 300 CIOs from global companies. Admits Richard Resch, the chief executive of Green Bay, Wis.-based office furniture maker KI, formerly Krueger International: "We became fascinated by technology and stopped thinking."

Show Me the Payoff

Show Me the Payoff

FACT: One out of two business executives don't measure the success of their technology spending.—The Forrester Report, September 2001.

Not anymore. At companies across the corporate landscape, chief executives have had enough and are once again shaking up their corporate IT departments. Their mantra: Show me the payoff.

Sure, some companies, from J&J to Campbell Soup Co., are trying to improve technology's bang for the buck by thinking more strategically, hiring or installing a business person as CIO, or kicking their CIO upstairs, making him or her part of the executive team so as to more closely align technology goals to business strategy and avoid wasted spending.

But there's also some evidence lately that some companies are moving in the opposite direction, reducing the size of their IT departments or limiting the focus of the CIO—if not outsourcing much of the job, or the CIO, altogether.

Consider some of the evidence. In May, CMS Energy Corp. of Dearborn, Mich., jettisoned its CIO in a cost-cutting move. Now, IT staffers report to an interim business manager. Parsons Corp., a Pasadena, Calif.-based construction firm, is outsourcing the CIO job to Perot Systems Corp.'s CIO John Thomas. At Houston-based BMC Software Inc., the old CIO left, and sales vice president Jay Gardner was sent in to be the new CIO so as to "give business some input into technology," he says.

Meanwhile, troubled Polaroid Corp., like many companies facing red ink, is sending in business-side shock troops to make quick fixes. There, Cindy Micavich, a former business-side executive in charge of technology operations, agreed to trade in her old job for the CIO title, on orders to "downsize" Polaroid's IT operations. During the past eight months, Micavich has scrapped an upgrade of the company's business software, scrapped its frame-relay network in favor of a cheaper, Net-based VPN, reduced the size of the old IT department, shut down separate IT departments for specific business units and replaced the old IT organization with a central help desk responsible for servicing the entire company. "I wouldn't want to do it again, but it's amazing how much we cut from IT without impacting the basic business," says Micavich, who now reports to the CFO.

Indeed, says headhunting executive David Brown, "traditional CIOs don't seem to be doing very well lately." Brown, a managing director in the Chicago office of Russell Reynolds Associates, says: "Every day, I get between five and 20 resumes e-mailed to me from people who have been CIOs. But there aren't very many CIO searches under way. We may have a few big ones, for a super-CIO, where it's critical for a company to bring in a new CIO to drive new strategy. But there are also some companies that think they can survive without a CIO. In places like these, I think, it's because the CIO didn't live up to the CEO's expectations."

No kidding. Says Steve Schuckenbrock, managing partner of client services for the Feld Group, an IT leadership consultancy that provides CIO services to major corporations: "If you step back over the last five years, I do think the IT profession is in somewhat of a credibility crisis."

Old-Style CIOs, Beware

The shake-up by fed-up CEOs isn't just a short-term trend brought on by tougher economic times. Gartner vice president Marianne Broadbent and others suggest more permanent, structural changes are occurring. Broadbent, for one, sees a hollowing out, or "devolution," of the traditional CIO role in a small number of companies as technology becomes more important to the business side—and as many CIOs struggle to make the transition between technologist and business strategist. "Look at the well-run IT shop these days, and frequently you'll find some business jock at the head," says Bobby Cameron, chief technology analyst at Forrester Research Inc. "Do they have the title of CIO? Sure. But the job is different now in some places, less tech-oriented and more strategy-focused. The purely technical CIO, as we have known it, is disappearing."

The trend may be accelerating. In the past 18 months, Broadbent says, "there's been a small but very evident trend under way by some companies to dismantle the 'corporate CIO' role and retain only business-level CIOs and IT directors." She agrees that some of this is being triggered by the new focus on cost-cutting and negative experiences installing ERP systems. But not all of it.

"A number of companies, including those in manufacturing, have gone from having an office of the corporate CIO that mirrors the centralized, shared services structure of the corporation and are instead reversing that into a more devolved structure, in which case they don't believe they require a corporate-level CIO," Broadbent says. And they buy in services and don't see the need to have someone at a very strategic level."

Who's to blame? Adds Broadbent: "It's often a combination of unrealistic expectations, an embedded culture of business autonomy and the realization that perhaps the businesses don't share customers, suppliers or processes that can be easily centralized by IT."

So what does this all mean for today's CIO—especially those who want to stick around? John Parkinson, chief technologist for Cap Gemini Ernst & Young, says CIOs have basically two choices. "There are two viable roles for the CIO going forward: upward—as a peer with the executive team contributing directly to executive business strategy—or as a line manager of technology, who will eventually be outsourced."

Ceasing CIO Control

Ceasing CIO Control

FACT: U.S. companies spent $130 billion in the past two years on unnecessary software and other technology, while worldwide, as much as 20 percent of the $2.7 trillion spent annually on technology went into unnecessary projects, delays and quality problems.—Gartner Inc., 2002.

Recent budget, spending and outsourcing surveys indicate that split may already be occurring: CIO control over the budget—and what gets built—is, in some cases, on the wane at some companies. According to an April study by Gartner Research, control over a company's technology budget is beginning to erode, with some of it going to the business side: Non-IT spending on technology is up 15 percent this year over last, and is expected by CIOs answering Gartner surveys to reach as much as 50 percent by 2005. In some cases, say experts, that is a good thing—a sign of budgetary and spending alignment between the IT and business sides of the company. But for some companies, those same experts say, the trend might also reflect a backlash against IT, "chiefly if there's been a perception that the old CIO wasn't able to make things work or get the business side buy-in needed to make sure projects were implemented properly," says Forrester's Cameron.

In addition, more IT work is getting outsourced by some companies, and for some CIOs, that can mean less influence among higher-ups. Forrester says the average Fortune 1,000 firm outsources 28 percent of its IT budget to third parties, with the expectation that by the end of next year, it will be 34 percent. And that's average. Chevron, before its recent merger with Texaco Corp., for example, spent 70 percent of its IT budget with third parties. Nortel Networks outsources roughly 75 percent, Cameron says. The danger to CIOs, says Rob Enderle, a research fellow at Giga Information Group, is this: "In times when the economy goes into a tailspin, IT will sometimes get slashed and then can't provide the level of service that a particular business unit wants, so that unit will then go around IT and outsource it, or do it themselves." When this happens, he says, "the CIO becomes more of a service provider to everybody else, so he can become less strategic."

Combine all of that with the new trend to outsource corporate business processes, such as payroll and logistics, and it's enough to keep some CIOs up at night. True, few companies are outsourcing such processes—yet. But less than 15 percent of business process outsourcing contracts, one of the fastest-growing segments of the services sector, are even signed by CIOs, Forrester says.

The upshot? Unless CIOs find a way to become partners on business strategy, much of the technology spending will go out of the company through outsourcing—and that may include technology that may no longer be under the control of the CIO. "There is a very important phenomenon under way, which is that CIOs are in danger of losing some control," says Forrester's Cameron. "Things that used to require technology managers to get involved—complex technologies, sophisticated contracts and so forth—those levels of complexity no longer exist in an increasing number of technology investments, meaning I can go and hire someone to host my Web site and to build it and to run all of my technology. Now the COO can do it."

Further, Cameron says, technology investments are increasingly driven by business relationships, and not all CIOs have forged such ties—but should. John Mahoney, vice president and research director at Gartner, says that unless CIOs start becoming more strategic and start fighting to achieve the same recognition as other executive leaders, "the CIO could face a real prospect of becoming a 'zero-budget CIO' by the end of the decade."

Barbara Gomolski, a Gartner research director, agrees that CIOs are at a crossroads. No question that they're still today's key technology buyers, she says. But outsourcing trends and the recent backlash at some firms should send a wake-up call to all IT executives. "As specific business departments become more familiar with IT and what it can do for the business, they won't necessarily turn to a centralized IT department," says Gomolski, "unless they're convinced the people in IT are working directly for their interests." Otherwise, she warns, CIOs will have to "fight increasingly for the business of the in-house business unit, competing against outside vendors."

Skunk Works 2.0

To fight back, some CIOs have begun developing their own "skunk works" projects, in order to develop a business case to get project funding from senior executives. Bell Canada International Inc. CIO Eugene Roman says he formed a team of IT and business specialists to focus on writing business case proposals, and set up a lab in Toronto called exCITE! to build working prototypes of systems he'd like to put in place. The mission of the lab: prove that positive ROI can be achieved from a technology project—before IT execs go to senior management for approval. Roman says he observed a similar approach at Ford Motor Co., and combined it with lessons learned from several other companies.

At Yellow Corporation, top IT executive Lynn Cadell has been put in charge of Yellow Technologies, a new tech R&D arm that develops technology for both internal use and sale to customers. In the past, expectations for technology were often accepted uncritically by those in senior management. Now, though, such decisions are being controlled by business executives. "Technology isn't going to help if business isn't right," says Bill Zollars, CEO of Yellow Corp., a transportation company based in Overland Park, Kan. "It gets you to the wrong answer faster."

Finding a Balance

Finding a Balance

Still, there are some IT experts who worry that too much business-side input into technology strategy isn't good, either—and worry that the devolution trend at some companies could be bad news for those firms in the long run. Getting more disciplined about technology is great, says Jerry Luftman, an information systems and alignment professor at Stevens Institute of Technology. "But it would be a mistake to diminish the role of the CIO, because IT is not going to go away. When the economy turns, you want the CIO to be investing in opportunities—and overseeing tech investments—in order to assure the best impact for the business."

Giga's Enderle agrees. Line managers, he says, don't often have the financial or technical background needed to take over IT decision-making. "They may be expert in the business, but they have not received the breadth of training to make the financial decisions they're being asked to make about technology, affecting the entire company, so they can often make bad ones," he says. Further, Enderle says, CIOs have a bird's-eye view of the company that few others do. Regardless of outsourcing trends, he says, many CIOs are in a great position to assert themselves as the key technology strategist liaison between third-party outsourcers and the corporate boardroom.

Indeed, some CEOs are upgrading the job of the CIO so as to foster greater cooperation between IT and the business. At Safeco Corp., a Seattle-based insurance company, president and CEO Mike McGavick hired former IT consultant Yom Senegor to serve as both CIO and director of strategic planning. "I wanted someone who understood our business challenges and how technology could solve them, " McGavick says.

Still, though, not all CIOs are up to the task. Though the number of super-CIOs has grown, they are still in short supply—making it critical for some companies, Enderle says, to train corporate technologists in the ways of business strategy. "I would say that it's probably only about 35 percent [of CIOs] who have stepped up into this strategy role and have the skills to do it," says Joe Eckroth, the super-CIO at Mattel Inc. "I think for some CIOs, it's too late because of their own volition. They never stepped out from the back to the front, and maybe they never wanted to." That sends a message to CIOs who want staying power: Boost your input, your skills and strategic vision—or perish.

Still skeptical? Ask KI CEO Resch. When manufacturing and salespeople come to him now, he says, "I tell them that we've spent X million dollars on this, and I want to see the benefit before we spend another cent." So far, he says, it's working. "All of a sudden, the staff finds they can implement it, find the benefits, cut back on people and improve on quality," Resch says.

Could he have done this sooner? Sure, says Resch. "CEOs are also to blame for some of the technology waste," he says. "People ok'd the systems and then walked away." But now, nobody cares who's to blame. "Now it's time in the evolution of this Internet thing to stop the big talk and make it all work," he says. "It's payback time."

Erik Sherman covers technology for a variety of publications, including Newsweek and Computerworld. Russ Banham and Debra D'Agostino contributed to this story. Please send comments to editors@cioinsight.com.

Make IT Spending Pay

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Make IT Spending Pay Off

What some companies are doing to get a better payoff for their spending on information technology.

Outsource the CIO Job
company Parsons Corp.
action The Pasadena, Calif.-based engineering and construction firm hired Perot Systems Corp.'s CIO John Thomas to do project management work. Thomas continues to work on contract for the company.
others doing it Delta Air Lines Inc., Heidrick & Struggles, ERCOT Inc.

Replace the CIO and Devolve the Position
company Polaroid Corp.
action Cut the IT budget by 40 percent, cut staff by 60 percent, scrapped an upgrade of business software, collapsed separate IT departments and replaced them with a central help desk servicing the entire company.
others doing it Nike Inc.

Put Business Person in Charge of IT
company BMC Software Inc.
action Replaced the old CIO with sales vice president Jay Gardner in an effort to boost IT accountability and business involvement in technology strategy.
others doing it Kmart Corp., Johnson & Johnson

Develop a CIO-led Tech Profit Center
company Yellow Corp.
action Named CIO Lynn Caddell to head Yellow Technologies Inc., a new technology R&D arm that develops new tech for the parent corporation for both internal use and sale to noncompany customers.
others doing it Webcor Builders, Bell Canada International Corp.

Elevate CIO Into a Super-CIO Position
company Safeco Corp.
action Named change agent Yom Senegor as both CIO and head of strategic planning to stem losses and boost IT-business cooperation.
others with strategic CIOs Eli Lilly and Co., Mattel Inc., General Motors Corp., Fidelity Investments

Resources

Resources

Books

Competing in the Information Age: Strategic Alignment in Practice Edited by Jerry N. Luftman, Oxford University Press, 1996

Reinventing the IT Department By Terry White Butterworth-Heinemann, 2001