Blogging Note:  Like Gary Trudeau I am taking a week off from blogging, but I would like to share a past post that may be helpful. The origional posts were made in the Summer of 2009, but much of their points remain true.  I have made links to the original posts to make it easy to navigate to the details for each item.

12 things every business needs to know about IT

“If only the business understood IT, then the company would get move value out of IT.”  This statement is a common belief among IT professionals.  Understanding begins with the basics, framed in a language that is acceptable to the audience rather than the teacher.

A company has difficulty understanding IT in the language that IT speaks: applications, databases, technologies, etc.  But, what language do executives and managers use to understand something and its role in the company.  The answer is straightforward, think back to the last time you were at a party and someone asked you/or you asked someone “What do you do?”  Chances you talked about your job title, role and position in the organization.

Talking about IT using the language of organization, its role, what it does, position, etc provides a starting point for teaching the business about IT.  Using this staring point here are a twelve things that every business leader needs to know about IT.

#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

#12 – IT effectiveness and business effectiveness are linked. 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.

I have no issue with the metric itself.  Its clear, easy to calculate and it has an intuitive simplicity that says that there should have some meaning to it.  Unfortunately, being easy to calculate does not mean that the metric has any value in making management decisions.

IT spend to revenue is of less use (useless) to management because its one sided – on the downside.  Here is what I mean.

CIOs with an IT spend to revenue ratio about the industry average quickly find themselves forces to cut/restructure the IT budget to bring it into line with the industry average.  IT is a luxury in this case and IT budgets are fat because the IT budget is above the industry average.  We can debate the merits of such a management shortcut in another post.

CIOs with an IT spend to revenue ration below the industry average however, do not find themselves getting greater budget increases to bring them into line with the industry.  No these CIOs are rewarded by keeping the undersized budgets while executives see firms more invested in IT as being the ones at a disadvantage or uninformed.

See the one sided nature of the metric.

A good metric provides information that informs a decision that could go either way.  In this case, it is all one way – in favor of being at or below the industry average.

This metric is pernicious for another reason, namely that when sales go up, the IT budget is not allowed to expand at the same rate as sales.  Here the CFO states that IT is a source of leverage and it should not rise as fast as sales.  If there is not upside to the metric then the downside bias shows itself again.

Finally metric is increasingly irrelevant in terms of managing IT or managing sales for several reasons.

• First, IT transaction volumes have largely divorced themselves from revenue levels since the widespread use of customer and supplier Internet portals in 2003.  I talked about this in an early post about a capacity gap.    But the point is clear, there is little to say that IT resource demand increases at the same or greater rates because of sales growth.

• Second, sales revenues do not drive IT spend.  IT spend is more driven by your choices about product, process, organization, and customer views as well as service levels, structural costs, and contracting terms which all have little to do with sales.

• Finally, there is little causality at best, between sales levels and IT.  Sure when IT systems fail it’s tough to book revenue, but there is no general relationship between changes in IT spend and changes in sales levels.  IT spend is not like marketing or sales spend in this regard.

So what are we to do?

We need to recognize that the metric has no meaning because the numerator does not influence the denominator.  You might as well measure the weight of the Board of Directors and compare it to changes in sales – they have the same ‘connective’ logic between them.

Replace IT budget / revenue with a metric that has meaning – like IT headcount to Free Cash Flow.  That is a metric one CIO is using and it makes more sense because it can be managed.

Measure IT headcount because more than 70% of most IT budgets are already contractually committed – effectively removing them for short-term management changes.  IT headcount is the result of factors the CIO can control, like the level of automation, the skill of their people, the structure of their operations and the nature of their IT investment budget.

Free cash flow is a better numerator, as it is more indicative of a company’s health.  Management can influence free cash slow and manage it to some extent in either a strong or weak economies.  Case in point; look at organizations building cash in the recession.  Free cash flow is also something that IT can influence as IT systems integrate process and information flows which improves end-to-end process and cash performance.

I know it is harder to measure, free cash flow and IT headcount, but it should produce a clearer signal and inform better management decisions and actions.

One final note, remember that the value of IT exists through time, so any measure of IT should be shown across time – usually via a control chart to separate the true performance signal from day to day operational noise.

First kill all the metrics, starting with IT budget as a percent of revenue or sales.

It is hard to criticize a book dedicated to looking at the challenges facing IT leaders on a personal and professional level. The goal of Adventures of an IT Leader are admirable, present IT in a human light using a combination of techniques from Goldratt’s business novel classic “The Goal” to the case studies that are featured monthly in the Harvard Business Review.

The authors clearly know their stuff. Unfortunately, in my opinion, the authors have not been able to translate that knowledge into an effective business/IT book. While this book is interesting, well written and flows pretty good it does not provide the busienss person — particularly one with a jaundiced view if IT, or the IT professional with the insights needed to change their circumstances.

The book seems to be written for the business person to help them understand IT. The protagonist Jim Barton is a business leader asked to assume the role of CIO without any technical experience. This again is a great goal, however there are some significant issues in the book.

I do not recommend this book be given by an IT professional to a business executive. Particularly if you want to show a business person what life in IT is all about.

Furthermore I would not recommend a business person read this book in an attempt to learn what IT is all about.

While these recommendations are harsh here are my reasons:

1. A business reader can easily interpret the book as making IT look incompetent, from managers who do not understand what their staff do (Chapter 3) to their inability to control major projects (Chapter 7), to their in ability to protect the company (Chapter 11).

2. From a business perspective, the book resolves every IT issue with spending more money. Sure the leader shuts down a project, only to pay $3 million and get nothing, then have to start the project up all over again for more money. The solution pattern offered in the book could easily support business suspicions that IT is about spending money than creating value.

3. IT people may play well with each other but play poorly with the business. The major project (Chapter 7) that was led by the business is cancelled and pulled back up under IT. The new CIO takes over responsibility for the IT budget across the enterprise – because they cannot get infrastructure projects funded. The business and IT cannot agree on the status of projects, turning a meeting into a finger pointing session led by the IT person (Chapter 6)

4. The book brushes past major concepts and challenges in IT with short and passing explanations. Terms like shared service, web 2.0, and infrastructure are discussed in passing which undercuts their importance to the business and the future of IT.

5. That you only have to be a CIO for a year, one in which you handle a crisis but do not seem to deliver any major value, and that you will get your dream job and move up to COO at a bigger company. I know the authors had to end the book, but ending on such a triumphal note when the performance during the year was mediocre at best sends the wrong message to the business reader.

CIOs in real life who work hard, face real challenges, and make real progress. The book does not show much of this. They also have the job an average of 4 years not 365 day wonders. Its true that this is a business fable, but if you are trying to educate people even fables have significant grains of truth to them.

There are other books that describe IT better ranging from “IT Savvy” (Weill and Ross), “The New CIO Leader” (Broadbent and Kitzis), “Straight to the Top” (Smith) among others.

The authors do a good job of sequencing a set of events that IT leaders will recognize: runaway projects, de-motivated staff, security issues, etc. While this book is ok for IT people to read, it does not put these challenges in a particularly interesting light or an environment where new concepts and approaches can be illustrated.

IT professionals will recognize this environment and say that is accurate. That is a good thing. However, the book is not the story of an IT turnaround – rather it is a descriptive story based on the new CIO lurching between IT topic areas (Cost/Value, Project Management, Runaway Projects, IT Priorities/governance, IT and the board) rather than discussing the combination of things that raise IT performance. The authors have drained the story of suspense, decisions, actions and results that are essential in using the business novel format.

IVK – the fictional loan/mortgage originating financial services company has all the characteristics of a poorly run IT shop: lack of standards, a hero culture focused around the CISO, good people in management roles who seemed outgunned. While Barton, the new CIO builds up a white board with key ideas; these ideas are more accumulated than implemented. The result is an IT shop that is more transformed by events than by management and leadership.

The book uses these circumstances to introduce and review concepts that were developed several years ago such as Death march projects, power maps, IT portfolios, etc. Many of these tools are self referential as coming from the Cutter Consortium – the home of one of the three authors. IT professionals will recognize these techniques as they are well established. They will learn little from them as they are not exercised in the text – merely catalogued and described with partial samples attached at the end of some chapters.

I kept reading this book, hoping that it would get better as I agree with the premise and the need to build bridges across IT and the rest of the enterprise. Unfortunately in my experience and from reading this book – I can see where it can do more harm than good — particularly as a tool to help business people understand IT.

Sorry for such a critical review. I am not trying to bash the book, but when I look at it from a business perspective I see it doing more harm than help. I hope that I have explained the reasons behind my rating in this review.

Review also posted to Amazon at: http://tinyurl.com/nub7bg

It is more important that IT understand the business.  The reason is simple; IT cannot be successful in an unsuccessful business.  Business knowledge is situational making knowledge of your enterprise more valuable than general trends or ideas.  

With that in mind, here are a dozen things that every IT professional must know about their enterprise.

1)   Realize that the enterprise has choice in terms of who, how and where they get their IT.  This is a new one and one that undermines many of the core practices in IT.  The internal IT organization is no longer the only game in town and more competitors are coming (Cloud, Software as a service, Social Computing, etc).  If you do not become the object of choice in your enterprise, then do not be surprised when the enterprise does not choose you.

2)   Know how your business peers make the money that pays for your projects and salaries.  That sounds harsh but its true.  Unless you carry revenue responsibility you are not ‘making the rain that waters the company.’  You believe IT understands the business better than the business, but it’s the business that turns their knowledge into profit.

3)   Know how your enterprise makes money or delivers its mission.  There are thousands of ways to be successful-which ones are at the core of your enterprise?  IT people need to know the foundation of your economic model and what defines success.  Are you high volume/low value, customer intimate, low volume/high ere value?  If you do not know this then you only know the technology.

4)   Recognize that an executive’s number one priority really is #1.  IT professionals praise their ability to multi-task viewing it as a form of productivity.  In the business, multi-tasking is ok provided you deliver on your priorities.  So IT professionals need to know the executives top priority, deliver to it, not be surprised when the downgrade things to get to #1 and

5)   Know the business need(s) you are addressing in your project, your operational responsibilities, your service etc.  A business need defines why you are doing something.  A need can be a problem or an opportunity that defines the value you are delivering.  If you do not know the need then you are working at a task rather than creating results.

6)   Know the way things get done in the enterprise, the social systems and influence networks that define where attention goes and action comes from.  As they say, you can’t know the game until you know the players.  This factor increases in importance the higher up the organization you go.

7)   Remember what defines success in the enterprise.  There are many ways to define, declare and measure success.  Knowing what success looks like from a business, technical, process; financial and social perspective is the first step in building success.

8)   Realize that when executives can’t see value, the only thing they can manage is cost.  Business leaders drive much of their cost based discussions about IT because they cannot see the value.  So when IT presents the business with a ‘bill’ for service they naturally ask, what did I get for it?  If you are good at item #5 you can describe the value.  If you cannot then there is nothing else to talk about but why it is so expensive.

9)   Realize that when you talk of the ‘Business and IT’ you divide the enterprise and puts IT in a pejorative position.  Language is important.  The word ‘and’ is normally inclusive connecting two different groups ala peas and carrots, soap and water.  However when IT uses ‘and’ the emphasis is on placing the word between itself and the rest of the enterprise separating the two as if they are not part of the same system.   IT and the business = us and them.

10)  Admit to the fact that there are still IT projects.  IT professionals like to say that ‘there are no IT projects, only business projects’, but that is not always the case.  There are many IT projects that have limited or low business value.  That is ok, don’t try to puff these projects up into something they are not – it damages your credibility.  Rather recognize the IT projects and execute them as quickly and cheaply as possible.

11) Consider that when you tout the hero you tell others that your organization is a zero.  IT is complex.  Stress levels soar when IT does not work.  This creates an environment that rewards the hero who saves the day.  Recognize that heroes are fine for telling stories.  But if you need them to operate, then you do not have a sustainable organization and therefore the business or anyone else cannot rely on you or your team.

12) Have confidence in IT’s contribution to enterprise performance.  The notion that IT is a commodity gets plenty of attention and a self-fulfilling prophecy as soon as you believe it.  If my organization knows the other 11 things in this list and uses them every day to focus on value, create success and delivering results you are contributing rather than commoditizing.

Know the business so you can know your role and contribution.  While there are more than 12 specific things you need to know, this list provides a start for building the core of your personal and organizational knowledge.  These things should serve as a reminder as I am sure that many of you already know the enterprise.  If you are lacking in a particular area, that is ok because I am sure that there will be someone in the business who will be glad to offer their insight and or opinion.

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.

About this time, a business executive will chime in that the IT/Car would only carry about 10 – 30% of its passenger capacity, would take forever to start up, and go about a thousand miles before it a better model comes along that the company just has to buy in order to stay relevant.  Finally as you sign the papers for the car another dealer is telling of a new model that will render the one you just purchased irrelevant.

This is the tension behind item number 11 – IT requires ongoing investment in its core.  The technologist sees investment as progress, adopting new technologies with new levels of performance and value.  The business thinks of IT as an asset that once purchased operates, depreciates and needs to be replaced when it has ended its useful life.  The point is that for most capital equipment the useful life ends when the equipment breaks down or the cost of operations and maintenance becomes prohibitive.  This is easy to see for most capital equipment, it is a challenge to see it in IT capital equipment.  Here are two reasons why. 

First IT capital equipment is not really maintained or repaired as much as it’s replaced.  Second IT capital equipment has about the fastest level of planned obsolescence in the economy.  Business executives need to be aware of both of these factors to recognize the need for consistent investment in IT capital assets.

IT capital equipment is replaced more often than it is repaired.

Pick up a wireless router feel how light it is.  Now turn your laptop computer, your cell phone, the technology at your fingertips is fairly lightweight.  Yet you use these assets constantly.  When they break its actually easier to replace the equipment rather than repair it. 

The reason I am brining this up is recently a company President asked why the company was paying to buy new routers in the factories less than a year after the plant went wireless.  When the CIO mentioned that a forklift truck ran into a support, bringing down a section of the ceiling and breaking the routers – his answer was “they are just a year old, you should be able to fix them, after all we have equipment that is in there working for more than 30 years.  That’s the problem with you IT people, always want to replace stuff, never want to fix anything.”  When the CIO brought in one of the smashed routers, a soldering iron and a motherboard from an old PC, the CFO understood.

IT capital assets are consumed more than they are depreciated or depleted.  The need to replace IT hardware is constant because IT does not run on shifts, it runs all the time without going down minutes a week for backup and minor maintenance.  The pace of modern business requires IT to operate at all times particularly for companies with global suppliers and customers.  Routers, storage, servers run 24×7 supporting thousands upon thousands of transactions generated by people working systems and increasingly from systems and devices transacting on their own.  You pick up a laptop take it home, to a customer, on the road, in a plane.  You drop it, others spill things on the keyboard, the person in the airplane seat in front of you reclines quickly catching the screen – you get the picture. 

Time erodes the value of IT equipment.

CFO’s and other business executives remind IT professionals of Moore’s Law and interpret that if computing power is doubling that means that the cost of IT must be declining all the time.  They are only partially right.  Yes the cost of computing declines more or less according to Moore’s law, but that lay only applies to hardware and the company has to purchase the new equipment to take advantage of the lower cost of computing.

Now consider how long that technology remains state of the art?  One year, two, most firms have a policy of replacing the laptop every three years.  Think of the last time you were at the end of the replacement cycle and it became time to turn in your ‘old’ PC.  What branch of the dinosaur family did you think it belonged to?  My bet was you saw it as a brontosaurus compared to your new computer – big, heavy, old and slow. The technology at your fingertips also becomes obsolete at rates that are a heartbeat compared to your company’s other capital assets.

So what?

How do you value a car that can go a million miles on a gallon of gas, last forever, but you only keep for two years and use less than 30% of its capacity?  Probably not the same way as a piece of capital equipment on the production line.  However, business executives and finance views these two things the same.  Personally I am waiting for people to subscribe to IT capital asset capability beyond outsourcing ITO that merely shifts assets across balance sheets. I am sure that is part of the promise of the “cloud” but that carries other interesting aspects to IT and its future, subject for a different post.

Executives should be aware of the realities of technology capital equipment and how they are different from other capital assets.  These differences need to be incorporated into capital planning processes and decisions.  Perhaps for some it may make more sense to expense IT equipment or at least a significant part of it to reflect the realities of IT capital asset consumption and depreciation.

What are your approaches?

How do you explain the differences between IT and other capital assets with executives?

Do you allocate IT capex the same as other capex?  If so why if they have such different realities?

For more than 30 years the fundamentals of IT finance have been about spending money.  IT financials have been based on making decisions about investment expenditures and operating budgets.  This expenditure-based view permeates executive impressions of IT “it costs too much, what are we getting for our money, how much should we spend on IT?”  These are all questions asked repeatedly in the last 12 -24 months as executives seek to understand IT. 

These questions ask half a question – the cost and spending little to no time on the other half – the return or value generated.  The observation that executives look at IT finances from one perspective indicates that IT financials require improvement.

Expenditure dominates IT management thinking.  CIOs admit that they look to fully fund their internal resources as they are creating their IT budget. They can think of generating value once they know their current resource base is secure. 

• IT project management is expenditure driven based on a concern for managing ‘on time, on budget, with quality.”  Going over budget is seen as a sign of bad management regardless of the value created.

• IT portfolio management that categorizes IT spends as either strategic, managerial, transaction or infrastructure.  The stability of the spend per category illustrates the limitations of expenditure based finance.  Because while these ratios remain remarkably stable over the past 10 years, IT has transformed the business through the Internet, Y2K, Monetary unification, ERP, etc.

• CIOs implement various ‘chargeback’ mechanisms in an attempt to manage demand for IT services and solutions by making the cost of IT more visible to business executives.  The track record of chargeback is mixed at best, with executives responding predictably when they see IT costs – “what am I paying for?  How can I pay less?” 

• CIOs and IT executives bemoan the fact that the average IT budget spends 2/3^rd of its resource on current operations.  They believe that the IT budget should spend more on transformation when their counterparts in the business have 90+% of their budgets dedicated to operations.

Look at the terms used in these cases; they are expenditure based with little to say regarding the return the CIO is expected to gain from these investments. 

Now before we take the CIO to task, its important to remember executives responsible for other business groups are not immune to this view.  They too, tend to separate the budgets they manage from the revenues they generate.  The only difference with IT is that it does not have a revenue side making it expenditure dominated making it a cost center that is minimized rather than a resource that is leveraged.

I am not suggesting that we return to the idea that “IT is a revenue center,” or “Running IT as a business.”  These approaches have had even less success than ‘chargeback’ in most circumstances.  But its clear that executives need to know that judging IT by its finances tells only part of the story and often the least interesting part.

So What?

Rather than giving IT a dubious revenue stream, executives should know that IT financials tell only half the story – the expenditure half.  Executives, including the CIO will need to work to re-formulate IT finance as current models and obsessions place an unbalanced emphasis on expenditure that limits both the enterprise and the IT organization. 

CIOs are fond of saying that “There are not IT projects, only business projects.”  That is true, but when it comes to a financial view of those projects too often it looks like IT is spending the money rather than being jointly responsible to achieve the business results.

Executives should take a broader view of IT than what can be communicated via IT financials. Such a view extends IT’s contribution to the results, outcomes and impact of the expenditures rather than the expenditures themselves.  For example do your executives or yourselves know the answers to the following questions:

• What is the total business value of IT investment projects for the current year?  What are the major balance sheet and performance measures that are expected to change in the year based on these investments?

• What is the net present value of these benefits streams?  How will that value come online by month, by quarter?  How does this year’s value stream match to last year’s value stream?

• What are the operational, management and other structural changes required to achieve that value stream, beyond IT? 

• How is IT investing in its own operations to lower the cost of computing, storage and communications while raising its capacity, quality and reach?

Executives need ways of thinking about IT’s contribution in leveraging operational resources and enterprise performance.  Operational leverage can be measured in many ways including the number of accounts, products, customers, revenues etc.  These are good places to start because IT creates leverage in these areas. 

IT leverage is best illustrated over time and in response to changes in business volumes.  So the answers to the questions below are often expressed in per unit measures with a trend line over time.  In that way, executives can see how enterprise performance changes over time and ratios improve.  Executives can better understand those sources of leverage by asking the following questions:

• What is the ratio of personnel to revenue over the last five years?  How has that ratio changed?  What about the ratio of customers to personnel?

• How much working capital is required to support a million dollars of sales growth? or how much capital is locked up in the balance sheet when sales drop by a million dollars?

• How many products are you supporting in the marketplace and what is their revenue trend?  What systems are required to support those products?

• How many channels do we use to market, sell and serve customers?  What is the sales volume in these channels, the average cost to serve and how are these figures trending?

• What is the relationship of IT spend to transaction volumes? 

IT financials require improvement as they only tell half the story.  While CIOs have demonstrated the ability to manage cost, they are doing so at the expense of business innovation, transformation and making deep changes in the way the enterprise works.  Executives who often want more from IT can get that ‘more’ in part by changing the way they think of IT finances and measure IT success and performance.

The IT that is outside of their immediate world is generic to them — its all the same.

Executives intellectually understand that IT plays different roles in different industries, but emotionally and financially they behave as if IT were an ‘it’ – generic non-descript think, devoid of personality or gender.  They express this sentiment when they ask the following types of questions about IT:

• What is IT spend as a percentage of company revenue and w in the company and how does that compare with others in the industry?

• Who else in my industry is using a particular solution and what results are they getting?

• What do I actually get from IT?

• How does IT contribute to competitive advantage, how is it strategic?

When executives reduce IT down to a set of budget figure, expenditure, a basis for comparison with others, those are signals that they are applying a generic framework to looking at IT and that is a warning sign. 

CIOs need to clearly connect the enterprise’s IT with the core of its operations, economic model, business model and financial structure.  These connections are not the normal “alignment” discussions, no these connections demonstrate two important things:

One, that modern business in its scope, scale, pace of change is impossible without IT and,

Two that the way your enterprise creates value – the way it makes money would be dramatically different with different types of IT.

The essence of these points is simple, IT is not the same company to company or even within an industry, rather that if the enterprise is unique, then its IT must also be unique, unique in some way that actually matters.

If IT is generic, if its used the same way as other companies, then its not IT that is the commodity, the company is the commodity.  Consider the dire warnings about how the implementation of the same ERP system across the major players in an industry was going to eliminate competition.  It did not happen, sure they gained benefits from standardization, greater collaboration, etc. but they did not surrender the competitive nature because they had the same IT.

So What?

IT being different in different companies and industries is critical for IT to delivering strategic value.  When CIOs and IT executives talk about standard solutions, how they are following proven practice, trying to do what others have done in their industry, they are undercutting IT’s strategic relevance. 

This is not a sermon, but rather it is a recognition that executives need to reposition information and technology needs to be repositioned in the enterprise.  CIOs and IT executives can do this through:

• Connect information and technology with the operations.  Start with a top-level view of your applications – the major ones that drive your budget.  Then walk through the major business processes in your company.  You can do this using PowerPoint.  Highlight how each of these major systems ‘light up’ across the major business processes.  The goal is to connect show how IT is integral to operations. 

Executives who understand the connection between business flows and technology flows are better able to see opportunities to do both differently.  Thanks to Ellen Berry at the Metropolitan Pier and Exposition Authority in Chicago for sharing this approach as a way to brief new executives.

• Ground technology in the economic model of the company by answering the question – how do we make money?  What are the decisions, actions and operations that determine your company’s margins?  What are the technologies behind those aspects of the company?  What would be possible if you applied information differently – how would it change your economic model?

An enterprise’s economic model arises from more than just product pricing and target margins.  Information flows, automation, complexity all supported by IT are significant factors in the way to you make money.  Applying IT the same as your industry peers unnecessarily levels the playing field for you and your competitors.

• Lead IT from the business model, as that is the context for positioning strategic resources.  We discussed IT in strategic planning in item #7 Executives misunderstand IT in strategy.  This is different, as the business model identifies the critical resources and the relationship between those resources required to deliver value.  How does IT contribute to the value proposition, target customer segments, communications and distribution channels, customer relationships, core capacities, the organization of processes, partners, cost and values and culture?

If your business model is unique, then that uniqueness should come through how you apply IT.  Tying IT to the business model is essential for getting the right IT as this relationship highlights that connection as well as the opportunity for extending the business model in the marketplace. 

The subject of Getting the Right IT Using Business Models is the topic of a Gartner Executive Programs report by Richard Hunter.

• Financial structure refers to the amount of resources required to produce revenue and profits.   CIOs and IT executives discuss the financial model in order to connect capital and information flows.  This builds on item #4 IT applies information to replace cash, capital and operations.  Look at the business from the perspective of the amount of cash and capital required for operations.  Chances are those are areas where information, collaboration and the like can create a unique financial advantage for the enterprise.

IT has largely been driven based on its ability to change the Income Statement (the P&L) as projects concentrate on reducing costs, generating demand etc.  Information and communications have the potential to restructure a company’s balance sheet and free cash flow generation through unique combinations rather than commodity applications.

IT plays different roles in different industries and different companies when executives and IT professionals lose sight of this, then both the company and the technology are commodities.

Executives need to recognize that IT evolves faster than management thinking in order to invest properly to realize and sustain benefits.

The pace of technical innovation is legendary.  Consider the PC that has more computing power than two-ton mainframes of just three decades ago.  That computing power, coupled with the Internet has transformed business operations creating new processes, products, companies and industries.  During all of that technical change, management practices at many companies have barely budged beyond using the web for back office processes.

The pace of management innovation is measured.  Gary Hamel, the author of the book The Future of Management, points out that the next wave of breakthrough performance will likely come from management innovation.  At the Gartner 2008 Symposium, Dr. Hamel spoke to more than 800 CIOs about the topic pointing out that management innovation is the next frontier for technology.

How do you address the different rates of change between IT and management innovation?

Addressing this issue starts by recognizing that management, technology, process, etc are not separate and distinct parts of a company.  They are all part of the capabilities that executives lead to create value.  (See #3 – IT is part of a capability)  They all have to work together, so a change in one needs to be accompanied by an appropriate change in the other components.  Those changes reflect a balance in the different ways we think, model, manage and work in our organizations.

The balance between these different ways, shown in the figure below, is natural and will happen whether we like it or not.  You see it in the ‘resistance to change’ associated with a major IT project, the changes in behavior and collaboration when new management metrics are created of the disruption of a management or organizational shake-up.  Companies are complex systems and they will an equilibrium – however its not always the equilibrium you wanted.

Management connects the way we work with the results we create. 

The way of working describes how the company uses its capabilities and the elements within those capabilities to create results.  Executives often think of this as the exclusive domain of IT.  They invest in new systems, processes, technologies all the time to change what people do and how they do it.

Executives often ignore changes to the way they manage.  This is in the believe that the ways of managing are stable and do not change how we organize, engage, monitor and direct the performance of the various ways the company works.  “Workers get new tools, managers get new targets” was the way it was explained to me once.

Technology changes both ways of managing and ways of working.  This is the rub.

Technology advances that change the way we work can and often do move faster than the ways of management or even the way the company thinks about itself and its roles.  This creates tension between the technologist who sees the operational potential of new technologies and the executive operating with rules of management and finance.  That tension has led to technology adoption in waves from data processing, to online systems, client/server and the web.  These technology waves are often accompanied by a ‘management revolution’ that seeks to take advantage of them.  For example, client/server coupled with business process re-engineering.

Studies by Erik Brynjolfsson and others indicate that it may take management more than a decade to understand and take advantage of new technologies.  While many attribute that rate of adoption to generational changes in management, clearly executives need to break through and change both the way we work and the way we manage.

So what?

Executives raise performance by changing both the way they work and the way they manage.  This means giving managers new capabilities, information, skills and guidance to match the new tools, techniques and processes provided to their teams.  Here are some ideas for how you know:

• Look for changes in management tools as part of the scope of an IT change
• Require the business case to define the new metrics, targets, and information managers will use to achieve and sustain performance
• Push back when someone says that there is ‘no change in management’ because all we are doing is giving them new tools
• Require managers be a target of deployment processes and transformation efforts.  They can be coaches, but they also need to change as well.

Technologies must ponder the same questions and ask what changes about the way we work and the way we manage.  If you are not changing management capability, metrics, targets or the priorities for managers, then the business value potential of your solution is limited to incremental improvement.

Executives recognize that new tools require upgrading management capability will be better prepared to manage for results.  Managers who are ignorant of this connection will continue to see operational improvement as independent of manager ability to manage and suffer the consequences.

The connection between managing/working and technology are critical as the new waves of technology innovation such as web 2.0 and the technologies we cannot even imagine will test us all.

Strategists are concerned with issues of gaining and holding advantage over your competitors in your market.  Models like, Porter’s Four Forces, revolve around making decisions about what is the company’s advantage, where we choose to compete, how we use that advantage and why the company will grow.  These issues are important to making sound decisions. 

Strategists can easily view IT as not strategic.  They view strategic resources as those that supply competitive advantage.  Strategists require a source of advantage to be unique, not easy to duplicate, and not readily substitutable by customers or competitors.  Strategists apply these three conditions in determining sorting out strategic vs. tactical resources.  Applying these conditions strategists find IT to be a tactical resource because there are market available solutions, those solutions are readily repeatable by others and customers or competitors can substitute their technology for yours.

Strategists take a narrow view of IT in strategic deliberations.  Information technology for many strategists is the network, datacenter, personal computers and package applications such as ERP.  Taking this view its easy to see that people can believe “IT Does Not Matter” as the definition of IT concentrates on the generic stuff and there is little generic solutions can do on their one to contribute to competitive advantage which is the only thing that matters to a strategies.

That view is reflected in the sample strategy map shown in the figure below.  Here IT, HR and the organization are seen as remove from customer value.  They are part of the company to be sure, but they are low-level building blocks.  The issue is how can executives take advantage of the strategic potential of IT?

IT will be tactical as long as executives think of it as the individual parts, the projects they fund, the assets that IT manages.  Executives need an approach for connecting IT as an integral part of the company strategy and resources that contribute to competitive advantage. CIOs facing this challenge report that this comes through connecting IT to customer and financial performance — most often through IT’s relationship with Business processes.

Recognizing that IT is part of a capability helps.  It also helps to connect IT to enterprise business processes that define the way the enterprise works.  This connection makes IT integral to the activities that support competitive advantage and value delivery.  Managing IT assets is a tactical endeavor concentrating on enabling the business.  Managing value creation process is strategic and properly recognizes IT’s strategy contribution.

Another approach is to view information and technology as one of the critical resources available to the enterprise.  This Resource Based View of the Firm, then focuses strategy on how best to apply these resources to win in the marketplace.  The figure below represents such a model developed by Tom Coleman at Sloan Valve Company.  While the model is generic, the implications are clear in terms of strategy’s role as the direction and glue that connects enterprise resources.

So What?

A narrow definition of what is strategic produces a narrow strategy creating unnecessary execution and market vulnerabilities.  These can be seen in companies that chase multiple and potentially conflicting initiatives all in the name of strategy.  Remember if everything is strategic than nothing is strategic.  That pitfall is possible when you do not have a good definition and filter on the things that are really important — defining how you win in the marketplace and separate those things from what you need to play the game well.

IT is strategic because it delivers the deep changes and operational capabilities needed to win every day and in multiple ways.  Sure much of IT is concentrated on current operations and seems to be less strategic, but that does not mean that all of IT should be relegated to the ‘tactical’ pile.  That is what executives and industry pundits do when they say that IT does not Matter, or that you do not need to consider information, automation, technology in determining how you compete and win.

CIOs and IT executives need to recognize that not everything, nor everything that takes a lot of time or costs a lot of money in IT is strategic.  The parts of IT that directly connect, create or open the door for new ways to win — new sources of advantage are the strategic parts.  The rest is more than important enough in terms of delivering operations, cost savings and customer service.  Recognize those things for what they are and the strategic aspects as being a part, but something slightly different.

Executives misunderstand IT in strategy when they either negate the role of information and technology in competitive advantage or they tune-out IT executives who insist that everything is strategic.  Executives how look at the enterprise and how their execution capabilities define and deliver their sources of competitive advantage know the criticality of information, insight, technology and automation.  Taking that view removes a blind spot for IT and for enterprise strategy.