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#12 IT effectiveness and enterprise effectiveness are linked — twelve things every business leader should know about IT

by Mark P. McDonald  |  April 26, 2009  |  3 Comments

The real reason that business leaders need to know about IT is that IT is an important part of any effective business.  While that sounds like a claim that is more often opinion than observation, it is something that we have been studying at Gartner Executive Programs for some time.  The good news is that the two are related.  The better news is that we can quantify the difference between high and low effectiveness performers.  The best news is that IT effectiveness matters, it is linked to enterprise effectiveness and this makes all the other 11 things meaningful.

First off, Gartner Executive programs has assessed the link between enterprise and IT effectiveness for more than three years as part of our annual CIO survey.  The 2009 CIO survey show that effective enterprises outperform their peers by achieving better results.  An analysis of enterprise effectiveness conducted for this survey by the MIT Sloan School Center for Information Systems Research found that top performers have greater financial effectiveness.

Financial performance measures reflect the ability of enterprises to change their fundamentals in the face of economic and strategic challenges.  In the areas of return on equity (ROE), return on assets (ROA) and return on invested capital (ROIC), top effectiveness performers have outpaced the field in six of the last eight years. 

In 2007, the most effective enterprises (as identified by surveyed CIOs) outperformed their peer groups by the following margins:

  • A mean return on equity (ROE) of 18.2%, which was more than 40% greater than the peer average and more than 200% greater than bottom performers
  • A mean return on assets (ROA) of 8.8%, which was 90% higher than the peer group mean; bottom performers had an ROA of -0.26%
  • A mean return on invested capital (ROIC) of 10.6%, which compares to a negative mean for the peer group

Enterprise and IT effectiveness are linked according to this study with more than 80% of companies having similar levels of both.  In addition, the more effective the enterprise, the more confident the CIO and IT team are in their ability to achieve results. 

So What???

Effectiveness matters and that is the reason why the other 11 things every business leader should know about IT are so important.  Reviewing those 11 things in the context of effectiveness builds the case for why executives who work in both IT and other parts of the organization need to know more.

#1 – IT is horizontal.  This item points to the particular or peculiar position (depending on your point of view) that IT holds in an enterprise.  Effective enterprises take advantage of that horizontal nature to drive proven practices and integration across the enterprise.  Less effective organizations struggle with IT’s lateral nature, which often arises, at budgeting and funding times as everyone benefits from IT but no one wants to pay for it.

#2 – IT is a hybrid organization.  This item, compounding with the first, makes IT a mystery to many executives.  The hybrid nature of IT is its role in both current operations and future transformation projects.  Effective enterprises recognize both roles and manage these roles differently.  Other organizations are frustrated by these roles either seesawing between cycles of development and operations, or by separating the two functions into entirely different organizations.

#3 – IT is part of a capability.  Technology has been an end to itself for more than 30 years and effective organizations understand the fallacy of that belief.  They look to change technology in coordination with information, business process and human capital.  The old adage of ‘people, process and technology’ is well worn and sometimes trite, but effective organizations understand its meaning while others only hear rhetoric.

#4 – IT applies information to replace cash, capital and operations.  Effective organizations recognize that they manage assets that go beyond their balance sheet.  They target information as a tool for cycle time, quality and operational performance improvements.  Others view information as a resource to be hoarded, often in data ‘warehouses’.  Effective organizations see information as a resource to be applied to raise business performance.

#5 – IT is complex because the business is complex.  This notion is lost on many executives both in IT and the rest of the enterprise.  They see complexity as an intrinsic quality, one that cannot be readily controlled.  Effective organizations work to make themselves complex where it matters and simple everywhere else.  This means that they leverage IT as part of a capability and look to change more than just systems when they transform their enterprises.

#6 – Executives can easily misapply IT.  Take the first five items together and it is easy to see how executives and IT professionals can get IT that is costly, inflexible and delivers a mixed level of services.  Effective organizations have a clear Information strategy, understand customer and market expectations and most importantly communicate those expectations clearly across the enterprise.

#7 – Executives misunderstand IT in strategy.  The elements of corporate strategy involve decisions regarding the competitive nature of the enterprise, its products and markets.  Given that view, it’s easy for executives to think of something that is operational in nature – like IT – to be something that is supportive but not necessarily strategic.  Effective enterprises understand the connections that translate strategic intent into operational performance and build upon traditional classic strategies to derive approaches that leverage all elements of a capability.

#8 – IT can evolve faster than management thinking.  The truth of this statement is behind the ‘lag’ that many report between the adoption of new technologies and the benefits realized from those investments.  That lag has been the excuse for poor results in ERP, CRM, SCM and other technology investments.  Effective enterprises apply IT in coordination with changes in the way they manage and work across the enterprise.  They invest in management capability at the same time as technology capability.

#9 – IT plays different roles in different companies and industries.  True enough but too often the cost, uncertain value, and complexity of IT driven by the other items on this list have led executives to adopt ‘industry standard solutions.”  Effective enterprises follow that same path, but they leverage item #3 and change the other aspects of a capability to create competitive advantage.

#10 – IT financials require improvement.  Effective enterprises right now are looking for better alternatives to funding IT given its horizontal #1 and hybrid #2 nature.  Allocating IT budgets, chargeback, project Roy’s are all methods that are nearing the end of their useful life.  Check this space for future innovations.

#11 – IT requires ongoing investment in its core, like other operations, just faster.  Effective enterprises recognize the power behind Moore’s law and the need to invest in IT as an operational resource, the same as their supply chain, sales force etc.  Effective enterprises invest more in IT because they see the results of IT.

Executives, both those working in IT and other areas of the enterprise, face a future of challenge, competition and creation.  They need to understand how all of their resources work to contribute to the enterprise’s current performance and future potential.  IT has been one of those resources for more than thirty years and during those 30 years the desire to teach the business IT has never gone away.

These 12 points seek to address this challenge by building understanding that begins with the basics, framed in a language that is acceptable to the audience rather than the teacher.  Using the language that executives and managers use provides a common ground for moving forward.  A ground based on the most important thing – the business.  I hope that these twelve things that every business leader needs to know about IT can help your organization strengthen that common ground for your mutual success.

Category: 12-things-business-should-know-about-it  cio  leadership  strategy  

Tags: 12-things-business-should-know-about-it  leadership  strategy  

Mark P. McDonald
8 years at Gartner
24 years IT industry

Mark McDonald, Ph.D., is a former group vice president and head of research in Gartner Executive Programs. He is the co-author of The Social Organization with Anthony Bradley. Read Full Bio

Thoughts on #12 IT effectiveness and enterprise effectiveness are linked — twelve things every business leader should know about IT

  1. […] 28, 2009 by Wolfgang Tonninger In his recent blogpost Gartner fellow Marc McDonald lists 12 things every business leader should know about IT – bringing some new facets to the alignment topic of business and IT which are worth mentioning. […]

  2. Mark McDonald says:

    Thanks Wolfgang for reviewing the items. I agree that the two items you chose are very important to the success of IT. The other 10 items also set the broader context for the business/IT interaction and often what we try to ‘teach’ business people with mixed results.

  3. […] this LINK for a posting that discusses this graphic and the study in more […]

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