In Search of Overhead Heroes
By implementing market-driven management, cost centers get what has eluded them: respect and results.(originally published by Booz & Company)
The overhead business is a necessary expense that’s rarely viewed as a source of competitive advantage. Running a unit that’s considered overhead, whether its function is accounting, human resources, information technology, or marketing, is among the most frustrating corporate job there is.
Working as a chief information officer (CIO), leading a corporate information technology group, and advising other CIOs on how to run their IT departments, I feel the overhead manager’s pain. Perhaps because IT is one of the most costly support functions to run, it’s also a lightning rod for management criticism. American companies typically earmark anywhere from half to three-quarters of their annual equipment budgets for IT.
But it’s the rare company that’s happy with the results. Most business unit leaders are mystified by technology, and it irritates them to spend so much money on systems that don’t seem to make a difference. CIOs are unhappy because they find it difficult to communicate IT’s value to the business and to deliver a level of service quality that’s satisfying to end-users. CEOs are unhappy because all they generally see is the high cost and a return on investment that’s hard to measure.
Over the past four years, our IT department has tried some new approaches to improving IT service effectiveness, controlling cost, and understanding and articulating the business value of IT. One critical step we took: We stopped focusing solely on satisfying the people we call clients — C-level executives and business unit leaders who are mostly concerned with IT alignment and cost control. Instead, we adopted what we termed Market-Driven Management, which reemphasized our responsibilities to our end-users. These are the technology consumers and, often, the revenue generators of our firm. As we see it, increasing support for salespeople on the road, clerks entering orders, or (as in our case) consultants at client sites anywhere around the world translates into sales, revenue, profits — and, eventually, bonuses.
Our management ideas seem to be working. Moreover, we believe that what we have learned about overhead management in our quest to improve how we run IT has relevance for all types of support functions.
Profit Center Solution
In the early 1990s, many IT organizations dealt with this challenge by trying to become profit centers. In a weird way, this made sense. If being a cost center wasn’t working, why not try turning the support service into a profit center?
IT departments by the score sought revenue streams in a variety of ways. For example, homemade software applications, in such categories as sales force automation and customer management, were spiffed up for sale to other companies, often in direct competition with better-known brands offered by leading software makers. Large banks marketed credit card systems to small banks, while securities firms peddled trading systems to anybody. Some information technology departments even sold excess computer capacity or unused data center floor space to other firms.
But, with few exceptions, these efforts were problematic. Applications created internally and sold externally required expensive technical support and frequent updates. Meanwhile, the IT group’s internal customers complained about being shortchanged as their own IT staff ran off to serve “paying” clients. By the late 1990s the trend was over and forgotten…almost.
Today, CIOs are once again trying to transform IT departments into businesses, but with one significant difference. This time, the goal is to adopt the strategies, service definitions, product development programs, and customer support techniques of profitable businesses — but not to make money at it.
Two themes are common to this approach. The first is IT alignment with the business, which ensures that IT strategy, objectives, and processes are consistent with the direction that the company is taking. The second is a commitment to cost management, which is not just cost cutting (though that’s always welcome), but also the determination of overall measurements, assessments, and decisions involving budgets and capital investments. Both elements are achievable only if IT executives sit at the senior management table, where they can participate in discussion about the company’s direction, goals, challenges, and expectations.
Some early returns from companies running IT like a business are in, and the results are, once again, underwhelming. Internal clients do not seem to see an appreciable difference, IT management doesn’t feel better positioned within the organization, and IT staffs are frustrated by the confusing cultural changes.
The problem is, the concept of running IT like a business was not ambitious enough. Certainly, IT alignment is important and cost management is critical. But although these initiatives made IT more visible to C-level executives and business unit heads, they did little to improve the effectiveness of IT. To be successful, IT must focus on the customer, and neither alignment nor cost management guarantees that. Neither resolves the decades-old IT question: Who are the customers? Senior managers or the IT end-users?
The answer, actually, is both — something that often is not recognized because these two audiences have very different expectations about IT. As a result, CIOs tend to focus on one or the other — more often than not, senior managers. IT alignment and cost management are prime targets for these clients, but end-users are more concerned about application availability and support.
Who is right? They both are, and to serve one and not the other is a major error.
Out of this realization, in the fall of 2000, we launched Market-Driven Management. Like most IT departments, we had become pretty good at meeting the requirements of senior managers, but we lacked the skills and knowledge to serve our technology consumers. To overcome this, we examined the best consumer-focused technology vendors, companies known for understanding consumer demand. We studied Apple’s development of the iPod, Dell’s distribution model, and IBM’s sourcing strategies. We also interviewed product and account managers at leading technology vendors, learning how they reported success, identified shortcomings, and changed services.
From this research, we asked ourselves a series of critical questions we felt any market-driven business should be able to answer:
What is our purpose? Does our organization have a clear mission or charter, and is it being followed?
Who are our customers? Segmentation analysis is vital in distinguishing, for example, customers who use IT systems outside the office most of the time from customers who don’t travel at all.
What do different customers want and need to be more effective in their jobs? How can we best meet their needs?
What services and products should we, and can we, provide? In what instances do we have the competency in-house to perform the task, and when must we rely on external experts?
Are we satisfying our customers? Revenue is the ultimate measure of success for a for-profit business, but we needed a different set of performance measures to objectively track the value we delivered to customers based on the type and quality of service we provided.
Answering these questions required that we change many of our processes. We considered elements as varied as our sourcing of IT products and our management of system capacity. We also modified our organizational structure, supplementing the traditional “functional factory” side of IT, such as applications development and data center management, with a totally new “front office” organization staffed by IT professionals whose job was to understand customer demand.
We added two new front-office positions. Account managers, whose duties are akin to what marketing support staffers do for technology vendors, were assigned to a subset of consumers, selected by geography, business unit, customer segment, or a combination of the three. Today, these account managers understand our consumers’ requirements and explain to them how our products and services can help. The account managers also serve as the main communication channel between the consumer and the functional factory. When a customized application is requested, the account manager is the chief contact between customers and technical designers.
The other position we created was the service offering manager — whose job is similar to that of a product manager for a technology vendor. The service offering manager handles the selection, distribution, and ongoing support tasks for one or more products or services. For example, he or she makes decisions about where the service should be sourced (internally or externally), how it should be distributed and supported, and how performance should be measured.
At first, we were concerned about adding a new layer of staff between our customers and the people they traditionally worked with in the functional factory. Aren’t account managers and service offering managers just another level of bureaucracy?
No, according to the technology vendors we studied. They told us that having customers work directly with functional factory staff was neither good for factory workers (their productivity fell) nor satisfying for customers (they felt misunderstood). More important, the services produced this way didn’t reflect business needs as well as those championed by the IT staff, whose responsibility it was to really know customer needs.
Internal surveys tell us that our new management approaches are working. Clients and technology consumers are happier with our services. Over the past three years, our cost-to-serve (total firmwide IT operating costs divided by head count) has been reduced by about a third. And the IT team feels more in control of its role and is pleased with its performance.
We believe we’ve been successful in large part because we didn’t cherry-pick where and when to implement process improvements. We went for total change with an integrated approach. Indeed, we initiated a near-simultaneous assault on seven business areas:
Governance ensures that IT and the firm are going in the same direction, that we have a way to measure progress, and that we can adjust our course. Senior management from business units, geographies, and support functions work with IT in determining the firm’s technology direction.
Strategy and planning articulate business direction and the technology needed to achieve business goals. This process paints a picture of what IT should look like three years, or more, from now and provides a road map for getting there.
Demand management ensures that we can identify the IT services needed to satisfy customer needs and requests. It includes portfolio management (making sure that everyone who should be included in a project budget is included); joint business unit and IT operational planning and budgeting; and a customer representative program, in which IT and business unit managers jointly develop future plans, manage budgets, and ensure that the right services are provided.
Service offering management is our primary reason for being. This consists of consumer identification and segmentation, service planning, sourcing, service production, product delivery, consumer support, and customer satisfaction. It is the place where demand meets supply.
Market intelligence shows us how our services and costs compare to others. Internal staffers interview their counterparts in other IT organizations; service offering managers interview product managers from vendors and suppliers. The goals are to validate what we are doing right and to identify where we can improve.
Value creation analysis is an objective and rigorous process that helps the IT department understand the value it adds under different sets of circumstances. We use this analysis to determine whether to turn to an external source (a vendor) or an internal source (our own IT shop) when we need something, and to sort out the roles each should play.
Performance measurement and reporting tells us, and our customers (clients and technology consumers), how we are doing. Service levels are driven not only by strategy, but by consumer needs. (See “A CIO's View of the Balanced Scorecard,” by George Tillmann, s+b, Spring 2004.)
We learned from other organizations that culture change is eased by training, not just in the classroom but in the day-to-day interactions with customers and other IT staff. Staffers now know that they must be concerned with service offerings instead of just hardware and software, and that performance will be measured against the customer experience, not just technology use. IT professionals are becoming more conscious of such strategy and management concepts as competitive positioning, price points, disintermediation, and customer segmentation. Segmentation is especially relevant for our newly appointed service offering managers, who are taught to think of customers’ needs and services in terms of our distinct customer segments.
Although our new way of running IT as a business affects all of IT, the majority of the staff members still perform the same functional duties as before. Programmers code and engineers tinker with expensive equipment. What’s different is having a front office where service differentiation and resource allocation are discussed among IT employees and clients, and those discussions influence decisions.
So where are the overhead heroes? In the eyes of clients, they are the for-profit experts who have been teaching us about strategy and governance all these years. And for technology consumers, they are the gurus who understand consumer demand. The overhead heroes have been here all along; we just didn’t know how to recognize them.
Reprint No. 05201
George Tillmann (email@example.com) is a vice president with Booz Allen Hamilton in McLean, Va. He spent his first 17 years at the firm as a management consultant specializing in information technology, and the last five years as its chief information officer.