Running IT as a business: Myth or reality

In January this year Bob Lewis posted an article in Infoworld titled “ Run IT as a business — why that’s a train wreck waiting to happen“. In this article, Bob suggests that a lot of current thinking about running IT like a business is misguided and leading CIOs in the wrong direction. This article explores what is ‘Running IT like a business’ and what should a CIO do?

The myth of the internal customer – IT is expected to treat internal departments as customers and deliver them the software or projects that they have asked for. The problem is that customers don’t always know what they want and they are reluctant to commit anything to paper. Even if they do commit something to paper their thinking (and often budgets) demand a “silo” solution which only partially meets the needs of the enterprise. As a result, IT architecture suffers. IT becomes just an order-taker and not a partner.

IT Costs are always too high – Comparing costs of IT services to the external market is always fraught with danger. Why does a corporate laptop cost $2000 when I can buy a laptop from the local store for half of that price? It doesn’t matter that the other would not run corporate applications or the reliability is too low or it does not include software licenses. Similar stories are heard about the network costs, applications and hosting.

Challenge of the charge-back – IT as a business is expected to charge internal customers for its services. Charge-back is a popular mechanism for this. However, charge-back can create unintended behaviours, where departments try to reduce costs by avoiding IT services. I know a department, which stopped using help-desk for password resets due to the cost of the calls. This resulted in major security issues. Rather than figuring out how to reduce the overall costs, departments tend to focus on individual cost reductions.

IT seen as a vendor – Business begins to see IT as a vendor (usually an expensive one). This results in an arms-length relationship between IT and the rest of the business. As a result, trust begins to erode and outsourcing IT begins to look like an attractive proposition.

Bob believes, “The alternatives begin with a radically different model of the relationship between IT and the rest of the business — that IT must be integrated into the heart of the enterprise, and everyone in IT must collaborate as a peer with those in the business who need what they do.”

Is IT ready for the radical model?

Bob’s comments are spot-on! I agree that turning IT into an internal business unit, which conducts business transactions with other departments, is a less than optimal model. So what should a CIO do? For IT to be accepted as a credible internal partner there are a few things IT needs to get right.

  • Is IT managing service right? – When IT fails to deliver basic services and project, it would be impossible to develop any meaningful relationship with business.
  • Is IT managing the budget right? – If IT budgets are not predictable and IT does not understand or manage its costs, IT would not have much credibility in the enterprise.
  • Is IT investment generating value for the business? – IT must be able to demonstrate that its projects and investments support the business strategy and deliver benefits for the business such as, revenue growth, cost reduction, better decisions or reduction in risk.
  • Is IT managing the resources (or capability) right? – IT capabilities consist of people, technology assets, intellectual capital (processes and know-how) as well as relationships (trust and shared ownership). Successful IT groups leverage these capabilities to deliver and sustain competitive advantage for the business.
  • Is IT managing the “business of IT” right? – Managing the business of IT means managing the costs of IT services and projects, managing demand for services, having effective governance processes along with delivering and communicating value.

IT as a businessThe “radical model” moves the focus from managing IT like a business to managing IT for business value. When IT is solely focused on chargeback and internal customer requirements, it is not always working in the best interests of the enterprise as a whole. But it is neither easy nor straightforward to make the transition from the traditional to the new operating model. Martin Curley of Intel uses the business value maturity framework to describe the journey.

Managing IT for Value

There are interrelated challenges of managing IT for business value (or contribution to business success), management of IT budget, IT capability and managing the business of IT.  IT groups gradually move from one maturity level to the next and need different strategies at each level.

Managing the IT budget

The initial challenges are to get a handle on IT costs and budget and apply financial discipline of expense control as well as forecasting to ensur

Managing IT for Value

There are interrelated challenges of managing IT for business value (or contribution to business success), management of IT budget, IT capability and managing the business of IT.  IT groups gradually move from one maturity level to the next and need different strategies at each level.

Managing the IT budget

The initial challenges are to get a handle on IT costs and budget and apply financial discipline of expense control as well as forecasting to ensure that the budget is predictable. Many IT shops cannot forecast half-year or year-end expenses confidently. Executing the strategies for systematic cost reductions (e.g. demand management, SOE, adjusting service levels, BPR etc) is the next level of maturity. Optimising costs by adjusting refresh cycles or managing risk reward trade-offs is the final level of sophistication.

Managing the IT capability

IT capability is what IT can do for the business. Improving IT capability is about keeping up with the business demands and reducing the gap between demand and IT delivery. The IT capability stages of maturity are:
  • Technology provider – IT as an order-taker who can be counted upon to provide basic technologies and applications that the business requires.
  • Technical experts – IT as providers of technology services. IT is invited to provide technical inputs and expertise. Typically at this stage IT has limited business understanding.
  • Business partners – IT are included in developing business plans and solutions. IT has a good understanding of business and can engage with the business well. IT is proactive and is able to propose innovative solutions. However, the difficulty in going from good service providers to this level should not be under estimated. According to Bob Lewis, innovative CIOs are operating at this level. As Mazda CIO Jim Dimarzio writes in his CIO article, “Being in the room, however, did not automatically equate to involvement.” Jim had to develop the IT capability to effectively engage with the business and contribute to business processes and priorities.
  • Corporate core – IT is considered a core capability and a source of competitive advantage. IT has a track record of innovations that are a major source of competitive advantage.

Managing IT as a business and managing for value

I believe both these strategies are closely related. When IT is run effectively as a business it creates significant value.  The stages of maturity are:

  • Cost centre/cost focus – IT understands and manages the cost of the services well. Cost and quality of service are seen as important. Expenditure is controlled and technology life-cycle costs are considered in investment decisions.
  • Customer /benefits focus – The focus of IT engagement changes from cost to value or business benefits. Formal tools such as business case/Return on Investment (ROI) are used. Services are designed with customers’ needs in mind.
  • Portfolio approach – More sophisticated approaches are used to select investments using portfolio management and value management techniques. IT has effective measures of customer service. Mechanisms such as chargeback are used for fair distribution of IT costs and as a way of changing consumption patterns.
  • Value Centre – The organisation systematically optimises its value using portfolio management, risk trade-off and alignment with strategy. IT demonstrates a different mindset. IT has a strong stakeholder focus and is aligned to organisations’ value drivers where technology is seen as a tool rather than an end.

Conclusion

In closing, I quote Bob’s advice, “Don’t act like a separate business. Do the opposite — be the most internal of internal departments. Become so integrated into the enterprise that nobody would dream of working with anyone else.”