In working with leaders of dozens of companies, I have heard lots of complaints about their IT organizations. That dissatisfaction translates into a set of real problems that must be overcome when trying to execute strategy. The dissatisfaction stems from a lack of shared understanding. IT folks don’t understand business folks as well as the business folks would like them to, and business folks don’t fully understand how tough it is to manage IT. This isn’t necessarily a problem; IT organizations exist because of their specialized knowledge, despite the fact that professionals outside IT have become more sophisticated in their understanding of technology. Yet only by making some effort to bridge the gap can companies hope to improve the alignment of IT spending with business strategy.
The purpose of IT organizations is to spend money on behalf of their parent companies and their business units. How IT organizations obtain the money they spend and how they decide to spend the money determines the impact of technology on the organization’s ability to create value. Seems simple, doesn’t it? Yet virtually every company struggles with the problems of ensuring a return on IT investments, managing the growth of IT spending and—most important—making sure IT is aligned with the company’s business strategy. This last point, of course, is the key. How can businesses make sure they’re getting the most strategic value out of their IT organizations? The answer: Follow the money.
I draw a sharp line between business unit managers, who are the primary consumers of IT, and senior executives, who are primarily responsible to shareholders or owners. They see things differently. Business unit managers understand intuitively that their businesses depend on information technology in terms of both day-to-day operations and long-term success. They know that if IT fails, they can’t run their businesses.
On the other hand, senior-level executives generally understand the crucial role played by IT, but they also have to consider overall spending. And what they see is IT spending increasing faster than other key indicators of growth, such as revenue, and that, they instinctively believe, is a problem. Of course, carried to the extreme, it is a problem. If IT and all the other expenses overtake revenue, obviously there won’t be any profit.
But the role of IT has evolved over the decades, from simply increasing productivity to connecting people with information inside the firm, to connecting the firm with its customers, to leveraging the value of information itself. Many IT expenditures are no longer an option. Organizations simply must have e-mail to communicate, they must have Web sites to reach their customers, they must play by the rules of other organizations (such as Wal-Mart) in order to survive. It is inevitable that IT increases as a share of expense as businesses use IT more intensively.
By following the money, it becomes clear that much of the problem of aligning IT with business strategy boils down to how business unit managers and senior executives make IT financing decisions involving three issues: overall IT spending, resource allocation and cost recovery. There is little conventional wisdom among companies; some have explicit spending caps for instance, while many do not. How companies allocate discretionary IT resources varies widely. And while many companies use some form of cost allocation and chargeback, others don’t bother at all. Every company has a unique set of policies that are deeply rooted and hard to change.