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Gartner Executive Programs

CIOs Should Follow the Money to Succeed in Digital Business

2015 REPORT NO.8

2 CIOs Should Follow the Money to Succeed in Digital Business

XX

Table of Contents

Executive Summary 5

1. Every budget is an IT budget 10

2. Technology-driven innovation usually starts with non-IT professionals 15

3. Develop the skills necessary to support digital business 21

Appendix: Case Studies 29

Further Reading 37

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3Foreword

Michael Smith Sanil Solanki Paul Proctor

ForewordDigital business is the next in a series of decade-long waves of

technology-driven innovation. Analysis of the previous waves

indicates that non-IT professionals initially drive these

transformations to the point of disillusionment due to a lack of

awareness of the complexities involved with the development

of sustainable solutions. The disillusionment is followed by a

transition of responsibility to the CIO and the IT organization for

managing the complexity and reducing the cost of the solutions.

This report addresses the question: How should budgeting for digital business be distributed to ensure that the goals and objectives of the enterprise are achieved?

“CIOs Should Follow the Money to Succeed in Digital Business” was written by members of the CIO & executive leadership research group, led by Michael Smith (vice president and Distinguished Analyst), assisted by Sanil Solanki (director) and Paul Proctor (vice president and Distinguished Analyst).


AcknowledgmentsWe would like to thank the many organizations and individuals that generously contributed their insights and experiences to the research, including:

– The contributors to our interviews and case studies: Jamie Rees, Government of New Brunswick (Canada) and Marcus Shipley, Trinity Health (U.S.).

– Other Gartner colleagues: Ken Bergstrom, Jeffrey Cole, Peter Giuffrida, Sean Halligan, Irving Tyler and Bill Walton.

– Other members of the CIO & Executive leadership research group: Richard Hunter and Patrick Meehan.

5Executive Summary

Executive SummaryGartner predicts that by 2017, 50% of IT spending will be

outside of the CIO’s control. Much of this spending outside the

CIO’s budget will be on marketing and product development

connected to digital business. The unintended consequences

of this spending are that it will lead to a Trough of Disillusionment

(part of the Gartner Hype Cycle) and a shift in budget control to

the CIO, which we expect to start in 2018. CIOs need to

prepare now for this additional responsibility.

The CIOs interviewed for this report stated that their CEOs do not see becoming a digital business as a strategic goal for the enterprise. Rather, these CEOs see digital business as a collection of specific initiatives aimed at revenue growth. In turn, marketing and product development are driving the initiatives with the strategic goal of revenue growth, not digital business per se. Thus digital business is currently viewed as a means to an end, not an end in itself.

The key findings of the research are as follows:

1. Digital business is real, and it is being driven by consumers as they switch from traditional to social media for purchasing decisions.

2. The focus of digital business is on revenue generation through digital marketing and the Internet of Things (IoT).

3. Funding for digital business is coming primarily from a reduction in traditional marketing and product development.

4. For this reason, digital business is being driven by marketing and product development.


5. The marketing and product development areas do not consider digital business to be an IT issue.

6. A bimodal organizational structure is being used, where mode 1 (traditional IT) is led by the CIO, and mode 2 (digital business) is led by marketing and product development.

7. Enterprises are in the initial phases of the transformation to digital business, where spending is on new implementations, not ongoing maintenance and support.

8. The shift from traditional marketing and product development to digital business is happening so quickly (particularly in business-to-consumer, or B2C, companies) that there is little the CIO can do between now and 2017, other than educate the CFO.

9. Based on analysis of previous waves of technology-driven innovation, Gartner predicts that by 2018, the unintended negative consequences of treating digital business as a non-IT expense will be recognized and corrected, requiring new and broader leadership skills from the CIO.

10. CIOs must start now to develop the specific skills necessary to assume additional responsibility for digital business in 2018 and beyond.

7Executive Summary

Innovation Trigger

Peak of InflatedExpectations

Trough ofDisillusionment

Slope of Enlightenment

Plateau ofProductivity

Innovation Trigger





Innovation Trigger





Expected value

Expected value

Expected value

What are the lessons from previous periods of technology-driven innovation?

1980s:The adventof the PC

1990s:Client/servercomputing

2000s:E-business

• Waste occurs from the unintended consequences of all the change brought on by the transformation.

• Redundancy and incompatibility occur, along with ineffective solutions.

• Responsibility for ongoing support is transferred to the IT department at the Trough of Disillusionment.

Every budget is an IT budget

As information technology becomes ubiquitous, so should the involvement of all enterprise management in its identification, selection and use. But sourcing, securing, scaling and supporting information technology is complex, exposing the enterprise to new risks that are often unknown to non-IT professionals. Two major factors are at play:

– The definition of IT spending is expanding rapidly.

– Gartner predicts that CIOs will control only 50% of IT spending by 2017, with the new spending on IT happening under the radar of the CFO.

Technology-driven innovation usually starts with non-IT professionals

Previous periods of technology-driven innovation have followed similar patterns and are often introduced by non-IT professionals.

After an initial period in which expectations rise, their failure to materialize gives way to disillusionment. CIOs are then given responsibility for integrating the innovative technologies into a value-producing enterprise business arrangement (see Gartner Hype Cycles below).


Develop the skills necessary to support digital business

CIOs must use the lessons learned from previous periods of technology-driven innovation to develop and strengthen the skills necessary to source, secure, scale, sustain and otherwise support digital business. They should consider the following:

– CEOs want their CIOs to reduce cost and complexity throughout the enterprise.

– CIOs must start now to be ready in 2018.

– CIOs can use the digital services development matrix in section 3 to budget their IT spending in 2018.

– CIOs can use a bimodal approach to meet the urgency and the unknown aspects of investments in digital business.

CIOs have an important choice to make between the following two options:

Follow the money. Keep track of the technology investments occurring around the enterprise to understand both the desired outcomes and the potential unintended consequences. Do what you can now to educate the CEO and CFO, but if the response is negative, start developing the capabilities for additional responsibility once the Trough of Disillusionment is realized in 2018.

Timing is crucial. If the CEO and CFO are willing to listen now, and if you can outline a plan (using the tools mentioned in section 3 of this report) to show them how this can be done between now and 2018, then don’t wait! Gain competitive advantage by using the research in this report to educate the C-suite and flatten the Hype Cycle for digital business.

9Executive Summary

Innovation Trigger

2015 2018 2020





Expected value

Framework: Navigating the digital business Hype Cycle

CIOs should educate other C-level executives on the IT capabilities necessary to source, secure, scale, sustain and otherwise support digital business.

Competitive advantageCritical

engagementbetween CDO,CMO and CIO

Business transfersbudget to IT


The definition of IT spending is expanding rapidly

As new forms of technology spread across the enterprise, they provide new ways to capture and communicate information and generate new revenue streams. These technologies are rapidly expanding the definition of “IT.”

1. Every budget is an IT budgetAs information technology becomes ubiquitous, so should the

involvement of all enterprise management in its identification,

selection and use. But sourcing, securing, scaling and

supporting information technology is complex and exposes

the enterprise to new risks that are often not understood by

non-IT professionals.

Businesscapabilities

IT capabilities

Digital marketingtechnology

• Customerexperience

• Customerintimacy

Common to all these technologies

• Information security

• Information integration

• Information quality

• Information sourcing

Internet of Things

• New information sources

• Extended capabilities

Operational technology

• Shop floor controls

• Data acquisition

Informationtechnology

• Enterprise applications

• ERP, CRM, administrative apps

• Life cycle management

The new forms of information technology

111. Every budget is an IT budget

Gartner research has developed the following definitions for all forms of IT:

Digital marketing technology: A set of integrated techniques, technologies and information that enables marketing to create new products and services, enter new markets, improve the processes needed to engage in a dynamic conversation with people who are influencers and buyers, and ultimately target, acquire and retain customers.

Internet of Things (IoT): The network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment. The information contained in these objects must be controlled and accessible by the enterprise deploying it. Instead of humans serving on their behalf, “things” will now be able to procure services such as maintenance, cleaning, repair, and even replacement, on their own.

Operational technology (OT): Hardware and software that detect or cause a change of state in enterprise equipment (for example, industrial control and sensing technology). OT systems were previously hard-wired systems, electromechanical systems, and proprietary single-purpose or stand-alone systems, but are now being replaced by more-complex OT software and firmware products, creating a more complex digital business for those affected. As OT products change and take on more commercial software infrastructure and underpinnings, the governance of the OT portfolio becomes more complex and presents software management challenges.

Information technology: Traditional transactional, analytical, management and communication systems used to automate and manage frequently performed administrative business activities. These systems are managed by the IT organization.

The bottom rectangle in the figure opposite shows why these new forms of technology are IT. As a group, marketing and product development managers are unaware of the associated risks, and they do not understand the complexities of managing information-based technologies. Their lack of awareness will lead to the Trough of Disillusionment with digital business starting in 2018 (as discussed in section 2).

Gartner predicts that CIOs will control only 50% of IT spending by 2017

This prediction does not mean that the CIO’s budget will be cut in half by 2017; it means that spending on IT, by the expanded definition of IT, will double by 2017, and that the CIO will control only half of what the new definition includes. Some will argue that the new definition is not IT at all but simply new channels for marketing to customers, and new features and functions for product development, which is why spending in these areas should be controlled by marketing and product development. This is the fundamental mistake that will lead to the Trough of


Disillusionment with digital business, which we predict will start in 2018 (see section 2 for details of Gartner’s digital business Hype Cycle).

This report explains how CIOs can prepare now for the additional responsibility they will be asked to assume once the unintended consequences of all the new investments in digital business become known. The following provides the numbers that explain why the CIO will control only 50% of IT spending by 2017:

– CIOs currently control traditional IT spending, which focuses on back-office functions such as automating business transactions, and reporting and decision support systems. According to the 1Q15 Gartner Worldwide IT Spending Forecast, this spending will increase only 2% over the next three years.

– Spending on digital marketing comprises technologies such as mobile applications, analytics for context-aware communication, and social media development (that is, monitoring and messaging, not advertising). This spending is forecasted to increase 50% in 2015, reaching 2.3% of total enterprise revenue in business-to-consumer (B2C) companies in 2015, according to the Gartner Digital Marketing Spending Survey, 2014. In the companies surveyed, this spending is in the budgets controlled by the marketing departments.

– IoT spending is on chips embedded in automobiles, credit cards and many other products. These sensors often provide the ability to offer new products and services. According to Gartner’s “Forecast: IoT Endpoints — Sensing, Processing and Communications Semiconductors, Worldwide, 2013-2020,” this spending, in the budgets of product development departments, is forecasted to be nearly $20 billion in 2017 and $43 billion in 2020.

With spending on digital marketing and the IoT expected to equal spending on traditional IT by 2017, CIOs will control only half of IT spending at that point.

The new spending on IT will be under the radar of the CFO

The new categories of IT spending are happening under the radar of the CFO because they are coming from a reduction in spending in traditional media (print, broadcast radio and TV) and a reduction of traditional product development spending (investments in non-IT-related features and functions).

The consumer is driving digital business. The key consumer demographic of 18- to 54-year-olds no longer uses print and broadcast media as its primary sources of information to make purchasing decisions. This group is rapidly switching to mobile access of social media, not only for guidance on products and services but also for actual purchases. With consumers fueling 70% of modern economies, as consumers change, so do businesses, particularly B2C businesses. This explains the huge increase in spending on digital marketing.

131. Every budget is an IT budget

Marketing departments would argue that they are simply following the consumer. As consumers switch from newspapers, magazines, and broadcast radio and TV, to using their smartphones to access mobile apps and social media for information on products and services, businesses must follow. These new forms of communication to prospects and customers are simply a new channel to the market, and as such they do not require the involvement of the CIO and IT department. So Web developers are being hired, servers are being installed, analytic software is being implemented, and outside service providers are being contracted with — all in response to changes in consumer behavior. These investments are, in a sense, simply the modern tools of marketing.

Two of our case studies, companies that wish to remain anonymous, highlight some of the issues enterprises and their CIOs face transitioning to digital business. A global consumer products company (GCPCo) hired a new chief digital officer (CDO) to jump-start the transformation to digital business. The CEO asked the CIO to continue to focus on enterprise cost optimization using traditional IT, and not to become involved with digital business. The CDO is working with the chief marketing officer (CMO) to develop a digital business strategy to accelerate revenue growth (see case study in the Appendix).

A multibillion-dollar insurance company is pursuing a similar strategy. The CEO brought in change agents to spearhead the transformation to digital business in the front office and made it quite clear to the CIO that his responsibility should be on the back office. In a sense, this is a variation of bimodal IT (see “Predicts 2015: Bimodal IT Is a Critical Capability for CIOs” in Further Reading), but at the CEO level. The CEO has tasked the CIO with managing mode 1 while bringing in change agents to manage mode 2 (see the InsCo case study in the Appendix). The figure below shows how change agent roles have influenced IT decision making in the past, and how, according to Gartner predictions, they will influence IT in the near future.

1995

Level of influence

2000 2005 2010 2015 2020 2025

Changing roles that influence IT

Head ofe-business

CIO

Chief digitalofficer (strategy)

Support skills• Source• Secure• Scale• Sustain

Chief dataofficer


Both of these cases are consistent with a larger issue. The primary focus of digital business is on revenue generation. Revenue generation is one of the most conspicuous, rigorously challenged and incentivized responsibilities of any enterprise. CEOs are very careful when assigning this responsibility to avoid any ambiguity regarding accountability for hitting revenue targets. At this stage in the transformation to digital business, both of the case studies described above are consistent with the CEO’s need for clear accountability. Unless the enterprise has a business unit that provides IT services to external customers or develops an IT-based product that it will introduce to the marketplace, we do not see the CEO giving the CIO revenue responsibility for non-IT products or services (now or in the future). That responsibility will remain with the front-office functions such as marketing, sales and product development.

The problem with pursuing this strategy in both of these cases is that it is unsustainable. The CEOs may know this and have plans to address the need for adjusting responsibility when the timing is right. However, inherent to digital business are risks and complexities that front-office executives have no knowledge of, no interest in mastering and no time to focus on. These risks and complexities include cybersecurity, information integration and information quality among others.

A CEO may know that the transformation to digital business will occur in stages, and that the specific skills necessary to succeed will change at each stage. Initially, the “what” needs to be defined: What will we offer the marketplace and why? What consumers are we targeting and why? What competitors will we have, and what will our pricing and margins look like? These are questions that only the people with responsibility and experience in these areas can answer. Marketing, sales and product development have this responsibility and experience, so they need to be accountable.

Next, the “how” must be answered: How will the enterprise source, secure, scale, sustain and otherwise support its new offerings? Because digital business runs on IT, the “how” questions, too, must be answered by those who are responsible and experienced. The CIO and the IT management team have this responsibility and experience, so they need to be accountable in this area.

The shift from traditional marketing and product development to digital business — essentially the “what” stage — is happening so quickly, particularly in B2C companies, that CIOs can do little more between now and 2017 than to educate their CFOs on the “how.” In other words, CIOs need to start preparing now for the skills that will be needed to source, secure, scale, sustain and otherwise support digital business in 2018 and beyond.

152. Technology-driven innovation usually starts with non-IT professionals

Non-IT professionals bring disruptive technology into the enterprise

Significant periods of technology-driven innovation occur about every 10 years or so. In the 1980s, it was the introduction of the personal computer to the business environment. In the 1990s, it was the transformation to client/server computing for enterprise applications. The early 2000s spawned the Internet and e-business.

These periods have followed the type of Gartner Hype Cycle depicted in the figure on page 16. In every Hype Cycle, the X-axis shows the phases that innovations and innovative periods go through, starting with an Innovation Trigger such as IBM announcing the PC for business professionals; enterprise application providers offering multitasking, graphical interfaces for ERP and CRM solutions; or new businesses (or business models) delivering new products and services based in new ways. This is followed by a reaction from the marketplace in which rapid acceptance of the concept takes place among both consumers and providers of the innovation. This phase is characterized by overinvesting by non-IT professionals because of inflated expectations of the value the innovation will bring.

2. Technology-driven innovation usually starts with non-IT professionalsPrevious periods of technology-driven innovation followed

similar patterns and were often introduced by non-IT

people. After the period in which expectations rise, the

unintended consequences of the complexity brought on

by the change give way to disillusionment. CIOs are then

given responsibility for reducing the complexity, developing

sustainable solutions and reshaping collaborative relationships

with the rest of the business.


The unintended negative consequences of all the change brought on by the innovation soon become apparent, leading to a Trough of Disillusionment. Responsibility for the technology-driven innovation transfers to the IT department, which faces the challenge of mitigating the unintended consequences so that the real value of the innovation can be realized. This results in a phase known as the Plateau of Productivity, during which both IT and the rest of the business truly understand what the innovation can do, and finally realize the benefits.

Expected value

Innovation Trigger





The digital business Hype Cycle

It is important to note that the first two phases of the Hype Cycle are driven by external service providers working with non-IT business professionals. Moreover, significant periods of technology-driven innovation usually follow economic recessions, such as those in 1980-81, 1990-91 and 2001. The desire to return to economic growth is certainly a factor among business executives during these first two phases, and this same motive is fueling their interest in digital business.


Lack of knowledge about underlying technology leads to disillusionment

Bearing in mind that if we don’t learn from the past, we are doomed to repeat it, lessons can be learned from the previous periods of technology-driven innovation. For some readers, this will be a trip down memory lane. For others, this is intended to establish a framework to help your enterprise gain competitive advantage.

Expected value

Innovation Trigger





1980s: The Hype Cycle for the PC

1980s:The adventof the PC

The advent of the PC

The introduction of the PC to the corporate world in the 1980s generated tremendous excitement because it empowered business professionals with their own computing capability. “Empowerment” and “enablement” were the words most frequently used to describe what the innovation of the PC would do for enterprise employees. This was absolutely correct — the “what” of the innovation.

The problem was the “how.” Most of the world was just coming out of a nearly decade-long period of slow to no growth (1973-1981), and IT budgets (called “data processing” back then) had been reduced continuously throughout the period. Non-IT professionals, frustrated by the IT organization’s lack of responsiveness, jumped at the opportunity to control their own computing capability. Prices were such that they could find money in their budgets to acquire PC hardware and software. When the unintended consequences arrived, they included redundant word processing; spreadsheet and graphic solutions that didn’t communicate with each other; multiple LANs that failed to share common resources like printers; and mass storage that lacked maturity in protecting the operating system, leading to frequent crashes.


The first two phases of the Hype Cycle for the PC caused a Trough of Disillusionment that led business executives to transfer responsibility for all distributed computing to the IT department. Standards were defined, and software applications such as word processing, spreadsheets and graphics were consolidated. LAN solutions matured, with protected operating systems instituted. When security became an issue, policies were developed. Essentially, the “how” was defined, allowing enterprises to realize the benefits of this truly game-changing innovation. Thanks to IT professionals, non-IT professionals were empowered and enabled with secure, scalable and sustainable solutions.

Client/server computing

The transformation to client/server computing in the 1990s had similarities to the advent of the PC. Many readers will remember the green-screen dumb terminals that filled accounting, logistics and customer support departments — inflexible and single-task-oriented enterprise applications that ran on character-based user interfaces. Once non-IT professionals were exposed to the multitasking, graphical user interface of Windows that was used for office automation tools like word processing, spread sheeting and graphics, they wanted the same look and feel with enterprise applications like ERP and CRM. Enterprise solution providers responded. The upgrades that non-IT professionals demanded during the first two phases of the Hype Cycle for client/server computing defined the “what” for this innovation. In this case, IT controlled the budget for these applications, but the unbudgeted upgrades were very expensive, not only for the enterprise application software, but also for the hardware they ran on (a dumb terminal was about one-quarter the cost of a PC in the 1990s).

Expected value

Innovation Trigger





1990s: The Hype Cycle for client/server computing

1990s:Client/servercomputing


During this period, Gartner research on the total cost of ownership helped CIOs explain to their CFOs and CEOs the unintended consequences of the high-expense client/server computing and why additional funding would be necessary. IT management explored other options, such as eliminating many data entry applications through the use of EDI, which reduced the need for workstations. Once again, the “how” was developed by IT management over a period of several years.

Expected value

Innovation Trigger





2000s: The Hype Cycle for e-business

2000s:E-business

E-business

In the early 2000s, e-business was the disruptive innovation. Suddenly commerce was going to shift to the Internet, and brick-and-mortar retail establishments would no longer exist (e.g., retail banking would not need branch offices). On the NYSE, stocks for dot-com startups lacking business plans and profits were worth billions of dollars. In 2000, the “what” was defined as the Web.

In 2001, we entered the Trough of Disillusionment because consumer behavior did not change as quickly as expected. Buyers wanted to see and touch the products before purchasing. Returns and exchanges were difficult to impossible. Over the next 10 years, however, IT management worked with the rest of the business to realize the potential of e-business. Brick-and-mortar establishments did not go away, but over this period, e-business grew faster than brick-and-mortar business. In fact, with the help of IT management in securing, scaling and sustaining e-business solutions, the stage was set for digital business.


The responsibility for managing the new technology for digital business will eventually transfer to IT

In the previous generations of technology-driven innovation, the CEO, CFO and other business executives did not transfer responsibility to IT because they believed that non-IT professionals had failed. They did so because it became clear that the competencies necessary to manage the innovation and realize its benefits did not exist in marketing, sales, customer service or finance. However, these competencies did exist in IT. In this generation of technology-driven innovation, as in all the previous ones, securing the information, integrating the technologies and the data, standardizing on reliable and efficient solutions, ensuring continuity and managing the technology life cycle constitute IT competencies.

For their part, non-IT professionals must be accountable for the identification and application of technology relating to the business performance for which they are responsible. They have no interest in securing, scaling, supporting or sustaining technology once it has been implemented — they expect IT to assume that responsibility, as was the case during the Trough of Disillusionment in each of the three previous generations. When the trough in digital business comes, there should be no argument: Non-IT professionals will be happy to turn over responsibility for maintaining and supporting digital business solutions — in fact, they will insist on it. CIOs will be asked yet again to secure and improve efficiency through integration and standardization, ensure continuity and manage the life cycle of the technology.

But digital business will require more from the CIO and IT management team than the previous transformational periods. Digital business is blurring the distinction between IT and non-IT professionals. Most of the technology to support digital business will be sourced from external service providers. IT professionals will therefore become business professionals who architect and manage multisourced technology environments as they communicate the capabilities to other business professionals in non-IT functions, using language appropriate to each function. For IT to meet the digital business challenges it will face in 2018 (for B2C enterprises) or about a year later (for business-to-business, or B2B, enterprises), planning for this new skill set must start now.

213. Develop the skills necessary to support digital business

CEOs want CIOs to reduce cost and complexity throughout the enterprise

CEOs are like the coaches of sports teams. Coaches have players and positions, and they know that if the players do not understand, or choose not to play, their positions, then the performance of the team suffers. So it is with the CEO and his or her management team, especially in the initial phases of digital business.

Keep in mind that the CIOs interviewed for this report stated that their CEOs do not see becoming a digital business as a strategic goal for the enterprise. Rather, these CEOs view digital business as a collection of specific initiatives aimed at revenue growth, and these initiatives are being driven by marketing and product development. So the strategic goal is revenue growth, not digital business. Digital business is viewed as the current means to an end, not an end unto itself.

3. Develop the skills necessary to support digital businessUse the lessons learned from previous periods of technology-

driven innovation, and consider the new requirements of this

period, to develop and strengthen skills in sourcing, securing,

scaling, sustaining and otherwise supporting digital business.


This is an important distinction because if the goal were to become a “digital business,” similar to becoming ISO 9001-certified or winning the Malcolm Baldrige Award, the CEO would assign leadership responsibility differently. Clearly, the CIO should lead in this instance, because the criteria for success would be based in technology. But if becoming a digital business concerns revenue growth, CEOs already have members of their management team that own leadership roles for that responsibility.

As noted in section 1, revenue generation is one of the most conspicuous, rigorously challenged and incentivized responsibilities in any enterprise. Just like a coach, CEOs are very clear and unambiguous about accountability for hitting revenue targets. They will not assign revenue responsibility to the CIO, now or in the future, for non-IT products or services — unless there is a business unit providing IT services to external customers or developing an IT-based product.

CEOs still want their CIOs to reduce cost and risk throughout the enterprise. Like a coach who expects each player to perform his or her role consistently, the CEO expects the CIO to play the proper role (see case example below).

CASE EXAMPLE

Trinity Health is a national, not-for-profit, Catholic health system based in Michigan, USA, operating 86 hospitals in 21 states. Its 89,000 employees include 3,600 physicians. In response to the CEO’s interest in cost optimization, CIO Marcus Shipley has developed an IT cost management program that is used to determine the optimal level of IT spending throughout the enterprise. The program offers the same cost-accounting techniques that businesses in many industries use to cost their products and services. Trinity Health exemplifies what most CEOs expect from their CIOs. By implementing the cost management program, Shipley has elevated the status of the IT organization, since cost management is strategic to all enterprises (see the full Trinity Health case study in the Appendix).


CIOs must start now to be ready by 2018

CIOs need to educate the C-suite on the risks and inefficiencies inherent to any new wave of technology-driven innovation. New governance around budgeting for digital business should ensure that the IT organization gets involved with initial technology investment decisions (capital expenditure, or capex) and owns operational expenditure (opex) for digital business once new solutions are implemented. The figure below depicts the opportunity an enterprise has to shorten the first two phases of the Hype Cycle, thereby beating the competition to the phases where real value is delivered.

Innovation Trigger

2015 2018 2020





Expected value

Framework: Navigating the digital business Hype Cycle

CIOs should educate other C-level executives on the IT capabilities necessary to source, secure, scale, sustain and otherwise support digital business.

Competitive advantageCritical

engagementbetween CDO,CMO and CIO

Business transfersbudget to IT

The consumer is driving the transformation to digital business. Consumers are changing the sources of information used to make purchasing decisions, from print and broadcast media to mobile applications and social media, and increasingly choosing to use products with embedded technology. Businesses are responding. The shift from traditional marketing and product development to digital marketing and the IoT is happening so quickly (particularly in B2C companies) that there is little the CIO can do between now and 2018, when we enter the Trough of Disillusionment, than to educate the C-suite.

CIOs should share the technology definitions shown in the figure on page 10 and explain why digital marketing and the IoT are not simply new forms of marketing and product development. Because all of these technologies are based on capturing and communicating information, they bring with them new risks and dependencies that require management skills known only to IT professionals. CIOs should also use the figures on pages 17 to 19 to explain the previous periods of technology-driven innovation and the opportunity to gain competitive advantage by flattening their pattern.


Securing, scaling and sustaining digital services are critical success factors in realizing the main strategy goal for digital business: revenue growth. Gartner has developed a methodology called risk-adjusted value management (RVM) to measure and manage the risk inherent to new investments (see “Using Risk-Adjusted Value Management to Close the Strategy Gap and Gain Competitive Advantage” in Further Reading). The following case example shows how CIOs should prepare for digital business.

CASE EXAMPLE

Some 30 agency departments in the Government of New Brunswick (a province on Canada’s east coast with a population of over 750,000) could neither calculate and report an accurate total risk posture nor demonstrate how the province could reduce systemic risk. In 2012, CISO Jamie Rees shifted the IT security approach toward information assurance, using risk-adjusted value management (RVM) as a central method in the transition.

The program has been so successful that Rees and his team were given expanded duties. They are now using the RVM approach to help track and report on province-wide IT risks beyond security, including risks of procurement, contracts and talent management. As part of this effort, the team has created a risk-adjusted IT budget. “The overall goal is the translation of technical metrics into reporting metrics,” says Rees.

He adds that the outcomes of an RVM approach to IT security and risk governance have been meaningful to the province as a whole, moving it away from technology siloes and incentivizing substantial departmental savings. For example, the agency has been reaping big savings by reducing repetitious infrastructure and licensing costs (see the full Government of New Brunswick case study in the Appendix).

Use the digital services development matrix to budget IT spending in 2018 and beyond

Critical interactions between the CIO and those responsible for revenue are necessary to achieve strategic enterprise goals. The first step is to define the roles of the players and the rules of the game. To do so, first separate responsibilities for the “what” from those of the “how” and then describe how they work together. Bear in mind that for digital business, the “what” is owned by (and budgeted by) the departments with revenue responsibility. The IT department owns (and budgets for) the “how.”

Facilitating this process necessitates defining what digital business investments produce that will increase revenue — so that the teams (i.e., those responsible for revenue and those responsible for IT) can logically apply their skills and capabilities toward developing and maintaining what is produced. Digital services are what is produced by investments in business.


DEFINITION

A digital service is a capability that combines digital marketing with the Internet of Things in a unique business model to provide a valuable, monetized service to a customer.

Non-IT professionals who have core business-revenue-generating responsibility define the digital services unique to an enterprise (see definition above). The figure below lists the capabilities required by these professionals for revenue generation.

Opportunity Business outcome*

Brand development — through mobile, context-aware computing

Market research — targeted product offerings utilizing big data

Product development — innovative new offerings through crowdsourcing

Customer experience — driven by social media and Web analytics

Customer support — expanded through digital product support

*Source: “The Gartner Business Value Model” (March 2013).

Customer retention

Sales close index

Time to market

Net promoter score

Customer interaction index

The “what”: The CDO and CMO determine the opportunities provided by digital business

Sourcing, securing, scaling and sustaining delivery require IT professionals — again, the “how” for developing digital services. The IT capabilities required by these professionals include those listed in the figure below.

The “how”: The CIO and other IT leaders determine how to bring digital business to life

These are the critical skills that CEOs will look for in their CIOs by 2018.

1. Information security

2. Information integration

3. Information quality

4. Information sourcing

5. Life cycle management


Though separating the “what” from the “how” is a high-level concept, it helps the CEO better understand the players needed to win at digital business. The competencies required for the “what” and “how” are distinct but allow for collaboration. Using the definitions in this report, both non-IT and IT professionals can gravitate to the roles they are most comfortable with, and they can collaborate on the development of digital services. Once the CEO and the rest of the C-suite understand the distinction between the “what” and the “how,” collaborative teams must be put together using a conceptual framework (see figure below).

Governance for budgeting the initial investments and for ongoing support of digital services needs to be based on the matrix. The budgeting process for initial investments resembles current best practices for funding IT-enabled business initiatives (see “Implement Business Outcome Monetization as a Process for Increasing Project Success” in Further Reading). The business process owner — the department with revenue responsibility for a specific initiative — must also take responsibility for the benefits (increased revenue) that will come from the initiative (the “what”). IT takes responsibility for the time, cost and quality of the project implementation, and for the estimated post-implementation annual costs of operating the digital services (the “how”).

Business capabilities(budgeted by BUs)

Digital services Information capabilities(budgeted by IT)

Digital companyinformation

Digital productinformation

Digital productdevelopment

Digital productmanufacturing/delivery

Digital productsupport

Information security

Information integration

Information quality

Information sourcing

Life cycle management

Brand development

Market research

Product development

Customer experience

Customer support

Collaboration, not competition

Distributed budgetary responsibility based on required capabilities

The digital services development matrix


Once the initiative is implemented, the cost for operating digital services is based on the capabilities shown in the figure opposite. Much of the post-implementation costs will be in IT. So that the “cost of goods sold” is properly calculated, Gartner recommends charging the IT costs for operating the digital services back to the revenue-generating department. (Remember that digital services produce revenue, and accounting requirements state that all direct costs must be accounted for in the “cost of goods sold,” to properly calculate the gross margin of these services.) This budgeting process is similar to, but not exactly the same as, current best practices, due to the urgency and unknown aspects of investments in digital business.

Use a bimodal approach to meet the urgency and unknown aspects of investments in digital business

Bimodal IT is a way of organizing the IT department into two separate operating modes. Mode 1 is sequential, emphasizing predictability and accuracy. Mode 2 is exploratory and nonlinear, emphasizing agility and managing uncertainty. Mode 1 is traditional IT, mode 2 the IT required for digital business. Each mode has specific requirements for people, resources, partners, structure, culture, methodologies, governance and metrics, as well as different attitudes toward value and risk.

New investments are deployed through one of the two modes, depending on the balance of business priorities. When the balance changes, investments and operations move seamlessly between modes as the situation dictates (see “Kick-Start Bimodal IT by Launching Mode 2” in Further Reading).


Conclusion

To succeed in digital business, CIOs must commit to two key principles:

Follow the money. Track technology investments arising across the enterprise to understand both the desired outcomes and the potential unintended consequences. Do what you can now to educate the CEO and CFO, but if they respond negatively, start developing the capabilities now for your additional responsibilities once the Trough of Disillusionment is realized in 2018.

Timing is crucial. If the CEO and CFO are willing to listen now, and if you can outline a plan (using the tools in section 3) to show them how to proceed between now and 2018, then don’t wait. Gain competitive advantage for the enterprise by using this report to educate the C-suite and flatten the Hype Cycle for digital business.

By taking the following steps now, CIOs will be prepared to assume budget responsibility for digital business in the near future:

– Use the technology definitions on pages 10 and 11 to assess where investments in digital business are occurring in your enterprise.

– Educate the CEO and the CFO on the critical success factors for digital business (i.e., information security, quality, integration, and life cycle management).

– Develop and strengthen the skills necessary to exploit the critical success factors in the IT department.

– Use a bimodal IT approach to managing the development of digital services.

– Use the frameworks and tools in this report to:

- Understand technology definitions (see figure on page 10)

- Be able to distinguish the capabilities required for defining the “what” and developing the “how” (see figures on page 25)

- Integrate the “what” and the “how” capabilities using the digital services development matrix (see figure on page 26)

So prepared, CIOs can address the budgetary control of digital business that will shift to them in 2018, reduce the complexities inherent to digital business, develop sustainable digital solutions, build collaborative relationships with the rest of the business and create value for the enterprise.

29Appendix: Case Studies

Separating digital business from IT to accelerate transformation at GCPCo

GCPCo is a global consumer products company that wishes to remain anonymous.

A bimodal IT strategy implemented by the CEO

Like many economists and business executives, the CEO of GCPCo sees consumers as driving 70% of economic activity, and when the consumer changes behavior, he wants the enterprise to act, particularly since his is a business-to-consumer (B2C) company. In 2013, as the Nexus of Forces (social, mobile, cloud and information) accelerated a shift in consumer behavior, the CEO saw the need for action since consumers were increasingly relying on social and mobile media as the primary sources of information for their purchasing decisions, rather than traditional print and broadcast media.

Appendix: Case Studies


Realizing this was not a simple shift for B2C companies, the CEO took action in 2014 to ensure that his business would not lose step with the consumer, and that it would learn new skills for communicating interactively, including knowledge of the context in which the consumer or prospect is functioning. The shift was happening so quickly, the CEO believed, that it was critical for GCPCo’s global orientation to bring in a new chief digital officer (CDO). Reporting directly to the CEO, the CDO would spearhead the transformation to digital business. At the same time, the CEO directed the CIO to focus on cost optimization.

A business strategy where timing is important

The CEO had determined that the CIO and IT organization would not be able to respond quickly enough to the dramatic shift in consumer behavior. As the change agent, the CDO would jump-start the transformation by developing the many new skills necessary for digital success. The strategy was to rely on outside providers for development of social media and mobile interactions, based on context-specific consumer analytics. (The CDO is currently working with the chief marketing officer [CMO] to develop a digital business strategy that accelerates revenue growth.)

The CIO was kept informed of the changes. According to the CIO, the CEO gave every indication that responsibility for the new solutions would eventually transfer to the CIO, partly because the CDO had no staff to speak of. The new solutions will become mission-critical for the company and a primary source of revenue. The CIO’s goal is to be positioned to accept responsibility for the new solutions within the next two years.

Based on an interview with, and material from, the CIO, GCPCo, January 2015.

Securing, scaling and sustaining digital services at the Government of New Brunswick

New Brunswick, the largest of Canada’s three Maritime Provinces, lies south of Quebec’s Gaspé Peninsula and east-northeast of the U.S. state of Maine. The Government of New Brunswick (GNB) aims to provide the province’s more than 750,000 residents with convenient access to programs and services, and information on departments, agencies, political bodies, courts, leaders and government-related current events.

Separating digital business from IT to accelerate transformation at GCPCo (continued)


According to CISO Jamie Rees, securing, scaling and sustaining digital services are critical success factors in realizing GNB’s strategic goals, where the digital business outcomes of 30 departments and agencies are meant to align with public-service delivery and the welfare of residents. Yet the office of the CIO (OCIO) could not accurately calculate and report a total risk posture, nor demonstrate how the province would reduce systemic risk in pursuit of these outcomes.

In response, GNB has shifted its IT security approach toward information assurance, using risk-adjusted value management (RVM), which helps the management team track and report on broader IT risks, including those associated with procurement, contracts and talent management. As part of this effort, IT has a risk-adjusted budget.

The technology siloes of departments and agencies represented a tracking, reporting and management conundrum. Drawing on Gartner’s methodology for measuring and managing the risk inherent to new investments (see the research report, “Using Risk-Adjusted Value Management to Close the Strategy Gap and Gain Competitive Advantage”), the province needed to answer the following questions:

– How can we deliver a new service or roll out a mandate while complying with national or locally established security and risk requirements?

– How can we measure and control information technology costs?

– How can we establish reporting that resonates with decision makers at all departments and agencies in directing and monitoring budgets and investments?

Establishing a risk-adjusted IT budget based on business outcomes

The management team synthesizes a risk index (see figure on page 32) from multiple data sources, such as threat and risk assessments, health checks, vulnerability assessments, real-time events, penetration testing results and auditor general findings. Through a calculation, the elements are weighted and combined to create a normalized index. Though the index changes daily, the management team has smoothed out the impacts of certain events to maintain a good general representation of the risk posture of the organization. Fundamentally, the index is a leading indicator of risk that has been successfully tied to many business outcomes of the government and influenced many of its decisions.


According to Rees, establishing the risk index required several meetings with stakeholders throughout the organization, following the guidance outlined in Gartner’s RVM workshop Toolkit (see “Toolkit: Risk-Adjusted Value Management Workshop” in Further Reading):

Step 1: Establish risks to business outcomes. The information assurance team met a dozen times with some 60 CIOs, directors and deputy ministers. About 20% of these stakeholders were non-IT executives.

Step 2: Establish critical business processes linked to risk. The information assurance team created models that demonstrated how the index could show how the most critical business processes (as defined by the team) could be impacted. This resulted in a high-level mapping of the systems to process and sent a strong message that IT dependencies could lead to real-world service failure.

Step 3: Report and influence decision making. Creating a common IT risk index influenced decision making in two primary applications. In the first, the index was applied directly to the IT budget, showing how failure to address risk created a more expensive budget. GNB calls this risk-adjusted budget the total cost of IT (TCIT), and it is used directly in budgeting exercises. In 2014, the management team was able to show a $5 million delta (overall change in value) in TCIT based on the risk (from $204 million to $209 million). Rees could essentially show the direct

Example:If OCIO has set a goal to report TCIT at 204 million dollars and has agreed to the following impacts from the below KRIs, the actual risk-adjusted forecast incorporates into the index impact, raising the number accordingly. The question posed to stakeholders is “Are you comfortable with risk as is?”

Source: Government of New Brunswick (2015).

Key indicator

Total cost of IT

KRI

Information security

IT management risk

Strategic alignment risk

Contract/sourcing risk

Risk-adjusted total impact on stated outcome

Index score

55%

25%

10%

5%

–

Agreed impact

3% (~$6 million)

2% (~$4 million)

3% (~$6 million)

2% (~$4 million)

Up to $20 million

Calculatedimpact perindex

$3,366,000

$1,020,000

$612,000

$204,000

Targetforecast

$204,000,000

Risk-adjusted forecast

$207,366,000

$208,386,000

$208,988,000

$209,202,000

$204,000,000becomesforecast as $209,202,000due to riskadjustments

Risk-adjusted KPIs at GNB

Securing, scaling and sustaining digital services at the Government of New Brunswick (continued)


financial impact of risk — something the province had not been able to capture prior to this exercise. A good example was aging systems that supported key government services. While there were plans to update these systems, many of the projects continued to suffer delays due to shifting priorities. The management team could now show executives how these IT dependencies and delays were increasing risks in real-world services, such as payroll and water testing. Rees notes that the potential failure to pay people and the increased risk of residents becoming ill from tap water really caught the attention of executive decision makers.

“Our goals are to adopt practices and tools to achieve greater trust in, and value from, GNB’s information systems,” says Rees. “The management team will provide the CIO council membership with an opportunity for input and report its findings to the executive committee of the deputy minister.”

Rees adds that the outcomes of RVM have been meaningful to GNB, moving it away from technology siloes and leading to centralized services that incentivize substantial departmental savings. For example, the province is reaping big savings from a reduction in repetitious infrastructure and licensing costs. In addition, by adopting a service model, the province has netted savings across FTE costs, avoided costs from major security flaws and unpatched systems, and cleaned up misused network resources.

Based on an interview with, and material from, Jamie Rees, CISO; and the office of the CIO, Government of New Brunswick, March 2015.

The CEO of InsCo assigns responsibility for digital business based on existing accountability

InsCo is a multibillion-dollar insurance company that wishes to remain anonymous.

An IT cost management program

InsCo is pursuing a digital business strategy, initially by separating digital business from IT. The CEO hired change agents to transform the front office and asked the CIO to focus on the back-office responsibility of cost optimization. As for the executive management team, the CEO wanted it to stay focused on the issues it was best suited to accomplish. With digital business all about revenue retention and growth, he assigned revenue responsibility to the marketing and sales executives, since they were already accountable for all acquisition and retention analysis, communications, and engagement solutions relating to customers. Likewise, because IT management was already accountable for securing, scaling and optimizing business processes, the CEO made the CIO and IT management team responsible for optimizing existing business processes.


The CEO of InsCo assigns responsibility for digital business based on existing accountability (continued)

With maturity, the transformation will evolve

IT’s separation from digital business will be only temporary. Within two years, digital business processes will join the processes that IT needs to optimize. This is because no one in the InsCo C-suite envisions marketing and sales as capable of securing, scaling and optimizing digital business processes once the initial implementation of these processes is completed.

As marketing and sales remain responsible for digital revenue retention and growth, the CIO and IT management team will gradually assume new front-office responsibilities, remaining focused on continuous improvement through cost and quality optimization, which includes security. The CIO wants to improve his team’s skill in cost optimization — for example, he is particularly interested in benchmarking digital business processes to establish realistic performance expectations among members of the executive team. The CIO is also looking at new sources for delivering digital business solutions and services so that IT is prepared for the new responsibilities arriving in a couple of years.

The CEO likens InsCo’s digital business transformation to a two-stage rocket. The first stage, led by marketing and sales, will get things off the ground quickly. The second stage will move InsCo into the digital age with secure, scalable and optimized solutions and services. An analogy the CIO makes is that marketing, sales and IT are members of the same team, led by a coach — the CEO — who knows the ability of his players.

Based on an interview with, and material from, the CIO, InsCo, January 2015.

Trinity Health is preparing for technology-driven changes with an IT expense optimization program

Trinity Health is one of the largest multi-institutional Catholic healthcare delivery systems in the U.S., serving communities in 21 states with 86 hospitals, 39 home health and hospice agencies, 14 PACE center locations (PACE = Program of All Inclusive Care for the Elderly) and 62 continuing-care facilities. Twenty-seven accountable-care organizations in 20 markets enable Trinity’s population health management capabilities.

Formed in 2013 from the merger of Trinity Health and Catholic Health East (CHE), and based in Livonia, Michigan, Trinity Health employs 89,000, including 3,600 physicians, and had FY2014 revenue of $13.6 billion. As a nonprofit, Trinity Health returns more than $900 million to its communities annually in the form of charity care and other community benefit programs.


With information technology becoming an increasingly important part of healthcare, enabling the organizational strategy requires the IT organization to operate with as much business rigor as any other business function. Transforming IT operations requires Trinity Health to run IT as a business, providing transparency and a fact base to make informed decisions about IT operations.

Transforming operations to support people-centered care

Three years ago, new CIO Marcus Shipley began to focus on the financial transparency of IT. Trinity Information Services (TIS) is a shared service at Trinity Health, with Shipley responsible for both the central IT organization and the decentralized portions of IT serving regional health systems in 21 states. Creating this transparency for a complex organization required a different approach. Though the general ledger is traditionally how IT finances are viewed, aligning IT expenses with the business services actually used by the customer was seen as a much more useful context for making decisions that impact IT operations as well as the business.

A business services view allowed the IT leadership team to align IT expenses with how the organization consumed them. This services approach provided the foundation for an expense optimization program.

An IT expense optimization program

To create a baseline before making expense optimization improvements, the IT leadership team looked at where every dollar was being spent, both centrally and in the field. A year-long study provided a foundation for determining the optimal level of IT spending throughout the enterprise. The team looked at unit costs for labor and infrastructure, along with how the applications and business services consumed these units. This allowed the team to see how consumption drove the demand for IT services and helped provide a better explanation of the general- ledger view.

The baseline was then used to identify opportunities to improve efficiency and reduce expenses. This was done by benchmarking unit costs and finding where IT resources were inefficiently consumed. Classic benchmarking looks at an organization’s IT expense in an industry context; the TIS leadership team looked at unit costs within categories of IT (i.e., network, storage, platforms) and benchmarked against other companies (often outside of healthcare) and industries that were best-in-class in delivering the categories.


Trinity Health is preparing for technology-driven changes with an IT expense optimization program (continued)

The benchmarks identified specific parts of the organization needing attention and informed different tactics to reduce unit costs. The net result was a 10% reduction in IT operating expenses.

Inefficient consumption of IT resources shows up in the context of the business services, such as acute services, ambulatory services, imaging and billing. TIS built a cost transparency model to align 100% of the unit costs with these services, including the cost of software, infrastructure, networking and support. The model provided a full view of what it cost to deliver a comprehensive business service to a hospital, outpatient facility, etc.

This approach identified eight to 10 core services and uncovered that 25% of IT expense was not aligned to the core services; instead it was consumed by noncore ancillary services. This demand-side view provides the bigger cost optimization lever — highlighting the IT expense implications of variation, redundancy and unnecessary complexity. Such transparency helped Trinity Health’s business partners see how business consumption drives IT expenses.

In turn, Trinity Health leadership appreciates how enterprise and business unit decisions impact overall IT expenses. Now, new requests for IT capital projects are evaluated based on the impact of additional IT operating expenses compared to the clinical or business value the project will create. An enterprisewide emphasis is placed on reducing variation and complexity to increase leverage of the IT investment and reduce inefficient consumption.

A tool for the merger

This business services model proved a valuable tool when Trinity Health merged with Catholic Health East in May of 2013. While there was much in common between the two organizations, they had different operating models. Trinity Health functioned as an operating company, and CHE was largely a holding company.

The business services model provides a tool to identify duplications and redundancies between the two organizations. Using this baseline, the leadership team was able to combine the two IT organizations, maintain services and significantly reduce spending. Within a year, the merged IT organizations were operating as a single organization.

Based on an interview with, and material from, Marcus Shipley, CIO, Trinity Health, June 2015.

37Further Reading

Core research

“Kick-Start Bimodal IT by Launching Mode 2,” 2 April 2015, G00273955; Mesaglio, M., Adnams, S. and Mingay, S.

“Predicts 2015: Bimodal IT Is a Critical Capability for CIOs,” 18 November 2014, G00271840; Mingay, S. and Mesaglio, M.

“Every Budget Is an IT Budget,” 12 September 2014, G00263281; Smith, M.

“Every Budget Is an IT Budget, but What About the Public Sector?” 12 September 2014, G00263532; Mechling, J. and Smith, M.

“How CIOs Influence Decisions When Every Budget Is an IT Budget,” 12 September 2014, G00263529; Dreyfuss, C. and Smith, M.

“Digital Technology Budgeting From the Marketing Perspective,” 11 September 2014, G00263530; McLellan, L. and Smith, M.

Further Reading


“Define Digital Technologies to Decide Who Budgets for Them,” 10 September 2014, G00263525; McGittigan, J. and Smith, M.

“The Importance of Operational Technology in Budgeting for the Digital Business,” 10 September 2014, G00263531; Steenstrup, K.

“Opportunities and Threats When Every Budget Is an IT Budget,” 22 August 2014, G00264010; Potter, K. and Hunter, R.

“The Four Futures of IT When Digital Business Makes Every Budget an IT Budget,” 14 August 2014, G00263528; Swanton, B. and Smith, M.

“CIOs Should Let IT Asset Managers Win Them More Budget Until Digital-Business Governance Improves,” 9 May 2014, G00262147; Buchanan, S. and Smith, M.

“Toolkit: Risk-Adjusted Value Management Workshop,” 31 July 2013, G00247503; Smith, M. and Proctor, P.

“Implement Business Outcome Monetization as a Process for Increasing Project Success,” 22 May 2013, G00249950; Smith, M. and Proctor, P.

“Using Risk-Adjusted Value Management to Close the Strategy Gap and Gain Competitive Advantage,” 10 November 2011, G00225727; Smith, M. and Proctor, P.

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