Only 'Knuckleheads' Think IT Isn't a Differentiator

By Allan Alter  |  Posted 11-06-2007

Only 'Knuckleheads' Think IT Isn't a Differentiator

Is IT becoming less important? No way: Technology hasn't been this strategic since the dot-com boom of the 1990s. That's what some of Gartner's top analysts told us when we went beyond the formal presentations at October's Gartner Symposium/IT Expo and met individually to discuss immediate and long-term IT priorities, the strategic role of IT and whether the CIO function will survive. Following are edited versions of our conversations with Mark McDonald and Dale Kutnick, group vice president and senior vice president, respectively, of Gartner Executive Programs, the division that works most closely with CIOs.

CIO Insight: What items top your list of CIO priorities?
Mark McDonald: Growth is a challenge. Business leaders are expecting IT to provide some sort of competitive difference in support of that growth. That's leading CIOs to concentrate on projects to promote growth. Improving the skills of their people is another top priority: Skills are the single biggest inhibitor of IT effectiveness. CIOs are working in an expanded environment. Traditionally, CIOs have worked with technology. About two years ago we started to see CIOs get involved in technology and process. Now, in the leading organizations we work with, we're starting to see CIOs involved in four things: technology, process, information/ analytics and customers.

Haven't CIOs been involved in these areas for a long time?
By starting, I mean the IT skills and capabilities are now either a positive contributing or a negative limiting factor on a company's ability to grow. That's coming in part from three major trends: First, the penetration of IT into core processes is largely complete.

Now that these processes are automated and infomated, businesses are going on to the next round of benefits. Executives are telling CIOs, I'm glad you automated it, now go on and do something new with it. Another significant trend is, for companies to grow, they have to be different in a way that matters to the customer. That's driving a whole new way of business process and information transformation built around changing the way organizations work. The last trend driving this together is that the value of information as a component of product and services is rising dramatically. So with all those things, for the first time in seven years, IT effectiveness is a major factor in the CEO's success. The last time IT effectiveness was a major factor was back in the dot-com days.

Is this a break from the past?
For highly effective organizations, it is. Going into 2008, too many organizations have an IT strategy that is generic. It's not differentiated for the company, for the industry, etc. We've been comparing CIOs' top initiatives for the year; there's about 80 percent overlap on average. The list includes network and ERP upgrades and business intelligence and security projects. From a business perspective, saying that my IT function is basically pursuing the same strategy as other companies' IT functions creates no competitive advantage. And that's what's accelerating this thing. Once an IT organization establishes a consistent track record for delivery and credibility, there's an explosion of expectations around processes, information and customers and an expectation that IT will no longer follow a me-too strategy.

Next Page: CIOs Shape Expectations

CIOs Shape Expectations

So the idea that IT for competitive advantage is going away is nonsense?
It is nonsense. We've found that highly effective IT organizations contribute significant value to their enterprises. We have to eliminate this notion of generic IT, of my IT being like everyone else's IT is OK.

It means there should be five parts to everyone's IT plan for 2008: A clear statement of how IT supports the enterprise's sources of competitive advantage; the set of business metrics IT is willing to hold itself accountable for; a statement of principles that will drive IT decisions; a clearly stated plan on how they are building and investing in skills for IT personnel; and a statement of what IT will be in 2010. That statement should be different for different companies. 2010 is a major mental milestone that gives CIOs the opportunity to shape expectations and the conversation about the future of IT. If they don't take this opportunity, others will shape that conversation for them.

We're in a moment of economic uncertainty. How will broader economic trends affect IT?
The economy is not driving IT strategy and views right now, but if conditions continue to change, many CEOs and CFOs will take the wrong course of action in an environment of inflation and lower economic growth, in large part because none of them have managed in this environment before.

I don't know if we'll go back to the same situation [of high inflation and low growth] as when Jimmy Carter was president, but latent inflationary pressures exist inside most companies. So here's the wrong decision: A CFO who's never managed in this environment will have a tendency to believe it's a short-term phenomenon because every other financial crisis in the past 10 years has been short-term. However, in the face of sustained upward price pressures, they'll have a tendency to cut SG&A [selling, general and administration] costs like IT instead of changing their cost structure, which might increase the IT budget slightly. It takes a savvy CFO to recognize that difference—between cutting one to two percent of my cost structure or restructuring 98 percent of my cost structure.

I can remember something my dad said in the late 1970s. We moved to a different house and took a bigger mortgage, and he said, "Don't worry, I'm paying it back in cheaper dollars." That kind of thinking is counterintuitive. You may want to kick up your capital spending to improve your cost structure. Here's the big difference between then and now: in 1978 to 1981, most enterprises passed their price pressures up the chain to the customer because there was no globalization. We're finding now you can't pass material price increases on to your consumers as easily as you could in the past. That further solidifies the need to change the way you work, and change your cost structure rather than slashing. Slashing costs is not sustainable.

What should your cost-cutting strategy be for the latter part of the decade?
You want to move as much cost as reasonable to the variable category. Larger organizations will have to think about better matching their revenue streams to their cost structure. A quick example: A lot of IT costs, in reality, are denominated in rupees. No CIO really knows that. The price appreciation of the rupee relative to the dollar, plus higher labor rates in India, are creating pressures that will affect CIOs. They have a currency risk exposure; IT has never dealt with that sort of thing before. We're seeing some people who are considering inshoring back to the States, because this way they have their cost and revenues base back on the same level—dollar-denominated costs and dollardenominated revenues. Somewhere and sometime, whatever appreciation of the rupee will come through and hit you.

Could that drive offshoring to other countries? Yes, but look at the dollar relative to other currencies. That's why we are starting to hear of major global companies building IT capability back in the U.S., as part of the long-term bet against the dollar.

What is the CFO's' future role and its impact on IT? The CFO is the most focused executive on delivering the current quarter and year plan. That gives CFOs a concentrated focus that can be too short for the enterprise to get all the value associated with the use of information and technology. At the same time, many CEOs' views are out in that 36-to 48-month window.

This creates a middle ground that involves changing the way companies work. We've seen CIOs create significant value by delivering changes that impact the operation in the 12-to 18-month timeframe, changes that fundamentally change the way the business works. There's this territory between tactics and strategy. That is the opportunity space for CIOs to play.

Not only is IT strategic; it's a competitive differentiator, and only 'knuckleheads' think otherwise.

Next Page: IT Going Away? Not a Chance

IT Going Away

? Not a Chance">

CIO Insight: Some business and technology analysts are asking whether the CIO role and IT organizations will survive. What are your thoughts?
Dale Kutnick: In the last 20 years, many people have said IT will disappear, will get embedded in the business. We go through this anarchy phase all the time: "We don't need CIOs, any moron can run that." The problem is, from a regulatory standpoint, it ain't going to fly. Companies need a senior officer in charge of IT to know what's going on. More important is the amount of money spent on IT, and the fact that shared services are growing. Take financials: I can do my financials on my spreadsheet. So why is my financial organization getting larger? Because finance is a shared service. Most companies have centralized or federated human resources, too. IT's the same; there's leverage to be gained. That's why the idea of IT being absorbed into the business is nutty. Why would business executives worry about license fees and managing servers? That's dumb.

Your colleague Mark McDonald says the argument that IT for competitive advantage is going away is nonsense. What do you think about the link between IT and strategy?
It's only being questioned by knuckleheads. There are always naysayers who pop up and say IT isn't strategic, it's becoming less strategic, it's becoming a commodity; the Nicholas Carr B.S. And we've responded to it; we're quite vocal. There's not a doubt in my mind that IT is more strategic than it was before, for two reasons. One, most organizations in the past 10 years have doubled the amount of money they spend on IT. It's now getting attention at the board of directors. Which means you'd better not screw it up or you'll find out how strategic it was.

Moreover, there are absolutely, unequivocally companies in every industry that have used IT as a competitive differentiator. Not absolute IT, but IT as part of business process. I recently talked to a transportation company; they use IT to differentiate their scheduling and distribution strategies. IT is an undeniable component of all that, and is becoming more important all the time. In that business the motto is, before we move something, let's think through the consequence of it from an information standpoint. To me, IT is becoming more strategic than ever.

Think about where IT is going in terms of solving real-world problems. Think about the aging population: Who's going to take care of us old folks? We will need surveillance cameras, robotics, sensors and things that react. If we fall, they call the doctor. We'll have chips under our skin that will track our vital signs. We have to get over our hang-up about devices being embedded or attached to us.

Being green, especially in Europe, is very important. Here, people talk about saving money cooling their data centers. In Europe, everyone talks about carbon footprint. In Europe, half the CIOs talk about how IT will be extremely important in managing energy. We will see a redesign of all systems that utilize energy to better use or exploit IT to make decisions about energy use.

How much fuel do I use? How much energy do I need to heat the building? How do I recycle? You will see a lot of breakthroughs in the next five years.
These are social responsibilities: becoming green, helping our aging populations. Governments have a duty as well. That said, there are significant economic opportunities in this. We have not applied as much knowledge to what I call the next computer industry.

What new IT and business strategies are on the horizon?
IT enabling new businesses and business processes. Since companies are doing a better job documenting their business processes because of Sarbanes-Oxley and other legal issues, they're starting to examine business process patents. Document management plus business process management equals business process patents. NTP [the patent law holding company] sued Research in Motion [manufacturer of the BlackBerry personal digital assistant] and won $612 million for a business process. Amazon patented its online shopping cart. Visa and MasterCard own patents for credit card authorization.

As companies apply technology to existing processes, they think about new things they can do with it. A process is nothing but some business components with an information flow. Apple did it with excellence in the iPod. Apple didn't invent anything; it's really combinatorial innovation. We're combining business components and processes in different ways. We're able to source business components and product components from halfway around the world to do concurrent engineering. Think of the concurrent engineering when Boeing built its new jetliner. They have to ship components around the world, with millimeters of tolerance.

We are a couple of years away from nanotechnology and biotechnology being im portant stuff. We will program molecules. I'm a huge believer in materials science. We are right on the verge of all sorts of real cool things happening. The possibilities are very exciting.