The most capable downstream companies have managed this by building distinctive capabilities in value-chain integration. They use their own proprietary information technology to create an information-rich trading and supply system that links all the critical points in an oil distribution network. Wholesale prices flow from the market to the trading and pricing desks; crude oil supply, logistics, and cost data are used to adjust the production schedules in refineries and the inventory levels in terminals and storage facilities; and decision makers at every point have a clearer understanding of the customer demand, product movement, and available margins throughout the system. Operations complexities, rather than being treated as a series of impediments to overcome, are regarded as an ongoing strength. The company can routinely offer more competitive prices and make more ambitious supply commitments without having to go into crisis mode to deliver them.
In this stage, drawing on the overall corporate strategy, you spell out those three to six distinctive capabilities that your strategy depends on, the ways in which information technology supports them, and the ways in which they could be better supported by IT. The senior executives responsible for overall strategy and the IT leaders can accomplish this only if they work together. The CIO plays a role that may seem unusual in some companies: He or she doesn’t just recommend and build the best IT packages, but also counsels the strategic team by informing and challenging its choices. By asking for a more explicit view of these key strategic levers and offering his or her own assessment of what it will take to develop them, the CIO brings a crucial element to the decision — the understanding of how technology can help create and capture advantage.
2. How Do You Prioritize?
In this second stage, conducted largely by the CIO and the rest of the IT team, you create a functional strategy. You look freshly at your priorities, assess the gaps between your current services and your goals, and estimate the benefits and costs for closing each of these gaps.
Start with an assessment of your IT portfolio, including every project for which you’ve planned investment in the current and next fiscal year. Rank them high or low on two criteria. The first criterion, based on stage one, is strategic importance: the extent to which these investments will be needed for your company’s distinctive capabilities. Remember to focus on their relevance to the entire company, not to individual business units, products, or services.
The second criterion is value potential. Assess each project’s anticipated return on your investment, either through improved performance and reduced cost or through the value gained in fulfilling a strategic purpose. Given the pressure on capital, you will need to consider whether these investments are “self-funding”; in other words, whether they lead to near-term cash savings, to growth that covers the costs of the information technology investment, or to both. You need not make an exhaustive inventory of all projects, but you do need enough detail to make cogent decisions about every major investment.
As you rank each of the projects, you will find they naturally fall into one of four categories. (See Exhibit 1.)
• Invest to grow. The most important IT projects are those with high strategic importance and high value potential. They are best positioned to help grow the top line, filling in the gaps in the capabilities you need most. For example, in the United States, some healthcare industry leaders, such as Aetna Inc., are investing heavily in customer relationship management, customer call centers, and claims automation. This ongoing focus on capabilities, driven by the CEO and the executive team as well as by the IT function, enables these companies to serve an expanding base of customers — a critically distinctive position in the wake of the 2010 Patient Protection and Affordable Care Act. In your company, these investments should be amortized across most or all products and services, and thus be large enough to fulfill your expectations for them. For maximum effectiveness, implement these projects with full coordination among IT, operations, and learning and development.