The Cost Of Bad IT Economics

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But CIOs and IT executives have been making this argument for years. Why aren't they getting any traction?

Rubin: There is no senior executive who will not say technology is critical to the business. But it's viewed as a cost, so the cause and effect of IT investment and business performance hasn't been very visible.

Look at the world of accounting; those principles have been around for thousands of years. IT has only been in the business environment since the 1960s or so. We're looking at something that has only a 40-year history in this big geologic era where business performance, measurement, design and theories have been able to merge. The interesting thing is that when things are in their infancy, you can figure out the costs, but you can't really figure out the dynamics on the other side.

It's only in the past five years that discipline and real good cost accounting--not just by allocations but by bottom-up cost accounting and cost transparency--hit the radar scope in IT organizations. You can't do cause and effect, or even look at the linkages between what you've done and what comes out on the other side and return on any investments, until you can really allocate costs.

It's only in the past five years that people are getting a handle on where the IT dollars are going and can bring it back to a business-product level.

You're suggesting that the people who make those judgments--CEOs, CFOs and other executives--aren't viewing IT as a strategic asset. Are those people creating this perception?

Rubin: Most IT departments do not have effective communication and marketing programs. Again, in business history, these organizations are young, and their strategic value is clouded and not clearly articulated. Most technology people revert and talk about things in technology terms. Having someone at a table for strategic planning when the business is trying to identify how they're going to grow products, grow business, where future revenue is coming from, how they'll launch into new markets ... until you get the special CIO who's able to communicate in business terms and not this technology or that technology, it really doesn't work on the pure side of driving the business forward.

It's also, how does the CIO view the role? It's very complex. If you're hired as the CIO of a major organization and the business manager says, "We understand IT is strategic, and we're hiring you, but you need to control the cost," then boom: What's your mission? Is it creating value? Or controlling cost? Suddenly you have this bipolar existence. CIOs have this complex dilemma of having a lot of visibility through cost, being able to express value through anecdotal instances but limited participation in strategic planning.

Peter Weill at MIT talks about organizations being IT-savvy. Savvy IT organizations understand how IT is a key lever in producing business value, and there's clearly strong communication and the organization is technologically facile.

The CIO's role is obviously to be an effective manager and deal with the cost aspect, but number two, to work with the business to see if you're creating an IT-savvy organization as a whole--a sort of evangelist for technology, in a careful fashion that raises awareness of the interaction of business and technology and business success across the whole place. Eventually, you end up with an organization that has an innate understanding of how technology contributes to the business at a high level and a product level, and the boundary between the technology person and businessperson gradually slips away.

We see more CIOs reporting to CFOs. What impact does that dynamic have on the perception of IT?

Rubin: There are companies whose CIO channel is through strategy, CEO and the business executive table, and those whose CIO channel is through the CFO side. The language they speak depends on what channel they're planted in. If you speak the language of cost, you're condemned ever to deal with reducing cost; when you're on the business strategy side, then you're speaking the language of investments. So the channel controls the language and the interface, and CIOs who are constrained in the cost side need to learn the new language and move themselves across.

In tough economic conditions, companies are concerned about revenue growth. You need to protect revenue, but you also need to control operating expense. IT comes up on the expense radar and is usually whacked. In a time of crisis, companies typically revert to treating IT as a cost, and they put it under the CFO and get into cost-containment mode. They don't pay attention to the fact that, in the average company, IT is 7 percent of operating expense--maybe 15 to 20 percent in financial services--and maybe they want to reduce that. But if you're 7 or 15 percent of operating expense, that means there's 93 to 85 percent of operating expense that isn't IT, and they're squeezing the wrong side of the equation. The business reflex in a crisis is to cut the most visible costs and that's usually IT. The value of IT is visible enough, and they don't understand that when they reduce IT cost, they reduce the possible leverage to get a big multiplier out there.

Page 3: The CIO's Failure?

This article was originally published on 02-11-2008
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