Here is a situation that is all too familiar at corporations around the world. The third quarter has just begun. The chief information officer and other senior information technology leaders are enmeshed in a flurry of activity, writing up their proposed capital investment budgets for the coming year. Knowing that unforeseen demands are inevitable, they introduce placeholders into the budget: unspecified project lines to be filled in later.
Fast-forward to the end of the following year. Sure enough, unexpected problems and needs have arisen. Those placeholders have become hidden buffers that IT executives dip into to fund cost overruns, project scope creep, and a variety of pet projects that would not have passed the rigorous scrutiny of the formal budget process. Meanwhile, in the wake of the financial crisis, severe capital constraints are making it impossible to pay for all these buffers. The funding for placeholders is questioned, even as the demand for expanded service grows more insistent. The IT department bears the brunt of the blame and pressure, but the actual problem goes deeper: The entire company is at a strategic impasse.
Underlying this impasse is an outmoded way of managing requests for information technology development and support. Corporate IT investments — which added up to more than US$1.3 trillion worldwide in 2009, according to Gartner Inc. — are allocated in most companies through a fragmented process. In many companies, requests are submitted on a project-by-project basis, each with its own business case. Most funding grants are based on historical spending patterns and financial projections, not on the strategic needs of either the full company or the individual businesses. Local teams tend to execute their IT projects in isolation from one another. The results are often suboptimal, and the costs are far greater (per dollar of revenue) than they would be if there were an ethic of sharing IT projects among as many products and services as possible.
Worse still, as each project encumbers the underlying enterprise architecture with new requirements, it becomes inflexible and layered with unnecessary complexity. Some business units refuse to retire older systems, even when they have been replaced by newer ones elsewhere in the company. As a result, the fixed costs of IT operations rise; when old systems aren’t retired, every dollar of new IT support raises ongoing base costs by 10 to 15 percent. Ultimately, local leaders lose confidence in IT altogether. They come to see it as a pure cost center: a necessary evil for keeping the business engine running.
The alternative is to build a company-wide rationale for information technology, bringing the internal supply (IT function) and demand (business unit) sides together to focus investment on the few distinctive capabilities that set the company apart. Most top executives understand this reality. They recognize the strategic value of visionary IT leadership, especially in helping their companies understand which strategies are most viable. Some companies have been able to achieve that kind of IT leadership. But many do not know, in practice, how to get there from where they are today.
If you are a CEO or executive leader seeking better strategic value from IT, or a CIO or IT leader determined to provide it, then you (and your IT department) can achieve this goal. But you will need a capabilities-driven IT strategy: a road map to strategic relevance. Over the past five years, a number of companies have put these road maps in place, and achieved a new kind of IT and operational leadership. If you want to join them, your journey will have four stages. In each one, you answer a fundamental question about the role of IT in your business. First, what are your company’s distinctive capabilities — those that support your strategic priorities — and how can they be improved with information technology? Second, how should you prioritize your IT projects accordingly? Third, what sequence of investment and activity will allow you to reach the goals you’ve set, and close the gaps you need to close? And fourth, what kinds of cultural and governance support do you need to put this IT strategy into practice?