The Economist Intelligence Unit

A paper by the Economist Intelligence Unit sponsored by CA, Inc.

IT operating models: weighing risks and rewardsAligning business and technology

© The Economist Intelligence Unit Limited 2008 3

IT operating models: weighing risks and rewards

IT operating models: weighing risks and rewards is an Economist Intelligence Unit briefing paper, sponsored by CA, Inc. The report is made available exclusively to readers by the CA Customer Alliance Program and the Economist Intelligence Unit. The Economist Intelligence Unit’s editorial team conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Shaun Young was the editor and project manager. Terry Ernest-Jones was the author of the report. Richard Zoehrer was responsible for the layout and design.

The paper is part of a research programme launched in early 2008 to study the alignment of business and technology. IT operating models: weighing risks and rewards is the second of three reports in a series on aligning business and technology. Our research drew on two main initiatives. We convened an advisory board of senior technology officers and specialists in New York City in March 2008. We also conducted in-depth interviews with chief information officers and senior technology executives. Our sincere thanks are due to the advisory board participants and interviewees for their time and insights.

May 2008

Preface

4 © The Economist Intelligence Unit Limited 2008


Executive summary

oday, companies depend on information technology (IT) to run the vast majority

of their core business processes, yet for many organisa-tions, the alignment of IT and business has not yet been accomplished. A recent survey1 carried out by one of the world’s largest organisations of senior IT executives finds that IT/business alignment emerges as one of the top two IT management concerns today. Although considerable progress has been made in recent years in harnessing IT to bring value to the business, the issue remains unresolved.

One key obstacle is the accelerating pace of change facing companies and the resulting urgency for busi-nesses to adapt continually to new conditions. Firms not only have to expand their global reach and meet the needs of increasingly demanding clients, but also leverage their capabilities and offerings across differ-ent technological platforms. Furthermore, greater col-laboration with third parties and faster innovation are required—not to mention attending to security threats and regulatory encumbrances. As organisations evolve, IT departments must estab-lish and maintain operating models for an increasingly

complex enterprise IT infrastructure. To keep ahead of competitors, executives must determine how best to manage and leverage IT operating frameworks to bring maximum value to the company. This may involve a re-evaluation of archaic practices, but, when successful, the rewards are substantial. As a result of restructuring its IT operation, UK-based Harrods department store’s customer loyalty programme has added 1-2% in annual revenue in its first year, according to chief information officer (CIO) David Llamas. “Today we have much better insight as to who our customers are”, he says. “Now business insight, which governs the loyalty programme, is one of the three main streams of our IT operation.” The other two main areas of Harrods’ IT operation are technology infrastructure and business processes. Companies’ IT systems need to be able to respond to market changes. In Harrods’ case, key drivers were thinner margins, the growth in online shopping and the challenge of retaining loyal customers. A company may need to reinvent and transform itself periodically to prosper—or survive. The IT infra-structure must be versatile enough to respond: a system is required that is flexible enough to support continuing business evolution. The ability to get the right information to the right place at the right time is paramount to the alignment of business and tech-nology. Here are some key steps to consider:

n Determine how IT should support business goals versus its performance according to standards only relevant within IT. Examine the impact of IT on key busi-ness metrics: look beyond traditional measures such as project delivery times and cost per head.

T

To keep ahead of competitors, executives must determine how best to manage and leverage IT operating frameworks to bring maximum value to the company

1 Society for Information Management (SIM) 2007 Survey, October 2007



n Adjust your IT model to enable strategic objectives. If the two are out of sync, IT cannot be expected to grow company value. Understand your organisation’s atti-tude to IT.

n Avoid a model that clashes with company structure. If decision-making takes place at a departmental level, the IT structure should reflect that reporting line.

n Consider a hybrid model, rather than opting only for purely decentralised or centralised models. Although not appropriate in all cases, this is the direc-tion many forward-looking organisations are taking. Certain functions within the IT operation are likely to lend themselves more to one method than the other.

n Examine how a charge-back mechanism could be deployed to expose costs. Creating transparency with costs can lead to more rational decision-making when

selecting an appropriate operating model.

n Used with discrimination, best practices such as Information Technology Infrastructure Library2 (ITIL) can help sharpen IT delivery, and prevent wasteful trial and error.

n Inevitably, as an organisation evolves, the pen-dulum will swing between centralised and decentral-ised models. Current demands may require a slight leaning to one side or the other. The challenge is to manage the tilt.

Ultimately, “the IT unit has to be an integral part of the business”, says Robert Shoenfelt, CIO of Celina Insurance Group, based in Ohio, USA. “Its role is to serve and move the business forward.”

Sizing up the right model

xecutives are faced with a range of options when it comes to the crucial

choice of the IT operating model which will bring most value to the company. For instance, in light of such challenges as vendor consolidation and outsourcing, is it preferable to operate with a centralised global IT team that provides standardised IT services across the enterprise, bearing in mind the cost of implement-ing a centralised model? Or is it better to establish smaller, semi-autonomous teams located regionally with the attendant risk of highly customised but non-standardised applications? Alternatively, is it possible

to create a hybrid model to attain the best of both approaches? Executives face a bewildering range of options. Answers are rarely simple and are driven by differing business needs. As a starting point, David Johnson, global infor-mation officer for a US real-estate firm, Jones Lang LaSalle, believes that it is important to understand “what the organisation thinks about technology and how it assimilates IT”. His company operates in 60 countries, so getting the model right has been essential for co-ordinating the structure. “There are four main ways to go”, he says. “Localised,

1 ITIL is a framework which draws on best practice internationally and defines how IT resources can be organised to deliver business value.

E



iscussion among executives has continued for some time over the

fundamental question of the value of centralising IT services. But the debate has sharpened today with the demands of globalisation and faster innovation. There is a growing need for better control over an increasingly diverse operation, staying connected to multiple partners and being flexible and responsive as a company to changes in the market. Some say that many IT managers’ attitudes have not changed since the mainframe era, when a decentralised, or “federated”, computing environment was regarded as a recipe for anarchy. In fact, even in the 1990s when client/server technology created environ-ments in which independence and decentralisa-tion flourished, ultimately IT recentralised many

operations. This “centralised” mindset is unlikely to be helpful in supporting the business needs of individual departments and units. However, it may allow for easier adherence to standards and policies, better hardware and software procurement deals, and a more unified vision. By contrast, the ideal of the responsive, de-centralised IT unit promises better alignment to specific business goals. Although generally accepted as useful for supporting both first-to-market and innovation needs, the downsides are often duplica-tion of effort across the enterprise, a lack of sharing valuable information and localised self-interest, leading to an uncoordinated operation. Decentral-ised environments generally perform well when it comes to internal customer service, being closer to

Responding to market forces

D

regional, global and hybrid.” The firm has opted for a hybrid model, with a small staff at headquarters in Chicago and a higher head-count at the regional level (USA, Europe and Asia). The regional IT heads have a “solid” line of reporting to Mr Johnson and a “dotted” line to the regional chief operating officer (COO). In addition, a global IT infrastructure manager reports directly to Mr Johnson. Recruitment is carried out at the regional level; local branches are treated as customers. By implementing a hybrid model, Mr Johnson is able to be “centralised” for global projects such as implementing a single cross-enterprise accounting or ERP system, but flex-ible enough to cater to local needs. He believes that the present structure has cut the number of different

systems by 30-40% giving “a lot more functionality for less expense”. He notes, “The IT managers needed controls—but they didn’t know it.” Before the hybrid model was implemented, when the systems were overly decentralised, Mr Johnson found that there were a lot of redundant systems. “No-one talked to each other”, he says, “and everyone liked their own system.” Although certainly gaining in popularity today, the hybrid model itself may not always be appropri-ate. Firms need to exercise flexibility over whether a hybrid model is relevant to the business’s needs. Some top CIOs found that in the case of highly centralised structures for some banks, a hybrid model may not adequately serve enterprise-wide priorities such as governance and data centre management.



the targets. In fact, some executives note that when centralising operations, the same, if not better cus-tomer service must be provided. When IT organisa-tions are over-centralised, business units sometimes compete for IT resources no matter how urgent their requirements. By contrast, there are instances where a move to create a company-wide enterprise resource planning (ERP) system has helped to bring dispersed, decentralised company “silos” together. Organisations must pick and choose the model according to the characteristics that best address organisational priorities. Yet despite these differences, both centralised and decentralised IT operating models must respond to the key needs of the business. “A lot depends on the structure of the organisation and what it needs from IT”, says Bob Keefe, chief executive of the Society for Information Management (SIM), a CIO organisation that has more than 3,000 members. “What is the business trying to achieve? The CIO needs to work to the same business goals as other business executives.” For instance, he says that if the goal is enabling business transformation, the structure will be different from a company wanting to make incremental growth. In the case of a com-pany such as New York-based Leviton Manufactur-ing, the model may even have to adapt to different stages of the product lifecycles, as Bob MacTaggart, vice-president of information management, says. If a product is at the “incubator” stage IT has to be able to be “faster, more dynamic and less control-led”, he says. Speed is of the essence. When prod-ucts are “steady” and mature, though—as applies to many of the products at Leviton—then the IT that supports them has to become more cost-effective. “You have to be flexible and mould [the operat-ing model] to support the business objective”, Mr MacTaggart says. Moreover, IT operating models must not only re-spond to the current needs of the business, but also

its strategies for growth. “Alignment of the IT op-erating model has to do with IT understanding the business’s growth plans and implementation strate-gies”, says Susan Hwee, executive vice president of IT at the Singapore-based United Overseas Bank

(UOB). For instance, is the organisation growing by organic means or through mergers and acquisi-tions (M&A)? “The IT infrastructure and application architecture needs to accommodate sudden growth spurts if the growth is via M&A”, she adds. The IT structure will inevitably reflect the exist-ing culture: it will be different for companies in which primarily business units make decisions, com-pared with those with strong centralised decision-making. There is no reason why the IT structure should differ. But to reposition IT to add value, radi-cal moves may be necessary. “Don’t underestimate change management,” warns Mr Llamas of Harrods, adding “Unless senior executives are in line there’s very little you can do. A cultural change is needed.”

“A lot depends on the structure of the organisation and what it needs from IT. What is the business trying to achieve? The CIO needs to work to the same business goals as other executives.Bob Keefe, CEO, Society for Information Managment



r Keefe points out that certain industry or functional

characteristics will always steer the organisation in the direction of a centralised IT model, especially when it comes to reporting on company data to fulfil regulatory demands. “Interoperability is the key if you want effective IT governance”, he says. The heavily

regulated financial services industry tends towards the centralised model. But regardless of a company’s IT operating model, in Mr Keefe’s view, there is a need to stay flexible. For instance, he has found that providing in-country IT support is usually better, as is a system that allows considerable flexibility for local units to work differently depending on the culture. “Companies that impose their national model in other countries have not learned lessons”, he warns. “They haven’t hit the wall. You need to understand the local way of doing things before making synergies.” He adds that there is currently a trend towards “leaving IT teams where they are” rather than moving them to a central location.

Companies such United Overseas Bank have tried to accommodate local cultural variations by using a hybrid model. The bank has centralised management of functions such as global networks, data centres and back-office work for economies of scale, while allowing greater freedom with a decentralised model for applications covering specific customer and sales applications to allow for innovation. Ms Hwee of UOB says, “IT executives should use best practices as a base and adapt them to the needs of the organisation to accommodate the maturity of the IT organisation and management philosophy, to meet a certain set of business objectives.” A US pharmaceutical company, Pfizer, is adopting a similar philosophy in an effort to streamline the way it does business, according to Imran Haque, director of the company’s international IT portfolio (which excludes the US). Pfizer is moving towards a federated model for its international operations, as already established in the US. Around half of IT decision-making will take place at the regional level where staff are “closer to the customer, and know the market, language and culture”. At the same time, there will be shared services especially for maintenance and support, which are organised centrally. “At the end of the day we want to encourage innovation at the local level, but also create efficiencies”, says Mr Haque. Duplication will be reduced while scalability and an exchange of “best of breed” systems within the organisation will be encouraged. Pfizer is setting up IT governance to include the involvement of business managers, senior regional IT staff and representatives from smaller markets. “The idea is

MStay flexible

“The idea is to rationalise where we should be spending and the ways we could do better. Cost is a driver for the model, but the key element is providing the right data to the right people.”

Imran Haque, director, IT Portfolio, Pfizer



op senior technology executives are increasingly realising the benefits

of not adhering rigidly either to a centralised or federated model, but drawing from the advantages of both models for different functions in the company. For instance, within a retailer’s IT operation, the group responsible for the website needs to be able to act fast and creatively with sufficient funds and resources to put new ideas into effect. For this function, the model draws from a decentralised approach but includes central monitoring to keep it within budgetary bounds and on-track. By contrast, there is little benefit in allowing functions such as network and infrastructure operations to be organised locally, nor in letting let local units become entrepreneurial about developing contact management systems. At Leviton Manufacturing website management is centralised when it comes to enabling a common “customer experience” across different parts of the business and leveraging new technology, but is decentralised under different marketing departments for content management. Drawing from the advantages of both centralised and decentralised models may only be apparent after transitioning between them. Usually in a centralised model all functions—including application development and planning, procurement, personnel

and budget—are under the control of the CIO or chief financial officer (CFO). The benefits of this model are economies of scale, minimal duplication of work and well-defined reporting lines. Often, a centralised model is used if lower costs are the company’s priority. But when centralising with a standardised infrastructure it may be appropriate to “decentralise” temporarily for the development of new applications by putting IT talent into a business unit. Once developed and standardised, the application then moves back to the centralised model for maintenance and operational efficiency. As a rule of thumb, top senior technology executives broadly agree that the IT operating model should not veer far from the overall organisational structure. Those firms run mainly by their business units need to make IT decisions also at this level, whereas those with strong central leanings should make decisions at the enterprise level. Accountability and structures should be aligned between IT and business. Many feel that it is more effective for leadership to communicate strategic goals to IT managers so that they can organise their operations to respond to key corporate priorities. “The key thing is that the IT plan flows directly from the business plan,” says Celina’s Mr Shoenfelt.

TTaking the middle road

to rationalise where we should be spending, and the ways we could do better”, says Mr Haque. “Cost is a driver for the model, but the key element is providing the right data to the right people”, he adds. He points out that once a pharmaceutical

product has been developed, most of the rest of the work involves information of some kind—either for marketing, usage, safety or regulatory purposes. “IT can provide real value here”, comments Mr Haque.



he hybrid model, set up to align closely with business requirements

and provide maximum value, makes considerable demands on the CIO’s skills. The executive needs to be attuned continuously to the changing require-ments of the business and to understand how IT can help fulfil goals, such as entering a new market. In many ways, the CIO needs also to be a hybrid, possessing both business and technical knowledge

to make the IT operation model work to the com-pany’s advantage. Expectations when hiring a CIO are now similar to the requirements considered when recruiting for any other frontline position. It is assumed that a top CIO will be able to craft the IT operating model based on a firm understanding of how the business operates, where it is going, and the market dynamics of the industry. The most sought-after recruits think first in terms of business and market, and second about IT delivery. In addition to understanding business needs and how they can be implemented through the model, the CIO needs the managerial and diplomatic skills to handle a diverse global operation. Jones Lang LaSalle’s Mr Johnson spends about 60% of his time travelling outside the US. As a company execu-tive, he is on the global operating committee, and reports to the board on a quarterly basis. It is little

wonder that the CIO who meets these requirements is getting harder to find—and more expensive. Ultimately, the role is essential to aligning business and technology, as the CIO has a comprehensive perspective on the organisation’s business proc-esses. Skills and experience beyond IT are becom-ing increasingly important for top CIOs. Not only do growing numbers of computer science degrees at universities now include business training, but many companies prefer CIOs that have experience running non-IT business units. Often management experience takes precedence over technology backgrounds. For more senior IT staff, organisations such as SIM are emphasising skills such as problem solving, communication (oral and written), collaboration ability, project leader-ship and business growth. In order to succeed, top CIOs need to do more than just manage an IT opera-tion. They must also thoroughly understand how a business operates and the market dynamics of their industry.

The most sought-after recruits think first in terms of business and market, and second about IT delivery

TReliance on a multi-faceted CIO



n considering various IT models, a CIO is consistently aware of cost and ac-

countability. The charge-back approach, in which individual business units pay IT for its services, is a controversial method that seeks to capture the performance and contribution of the IT function. Although some see it as a wasteful exercise of putting money “from one pocket into another”, the charge-back model for IT services does allow the company to monitor and measure the contributions of the IT department. When chargeback is working to its potential, the IT department can find itself competing with third-party suppliers in supplying services. A charge-back approach is often chal-lenging to administer. For example, the system can become complicated when it comes to working out how to charge other departments that request an application that was developed initially, and paid for, by a peer. “Charge-back can mean expending too much time and effort on administration”, says Mr Keefe. “But shared services should be metered by usage—like software sold on demand. Other systems should be determined on who’s reaping the benefit. Charging has to be consistent.” When implementing chargeback, the IT depart-ment can bill other departments for its services at the going market rate, or can charge them at cost instead of writing off its services to overhead. At the extreme end, the IT department becomes a profit centre in its own right, free to sell services to other organisations. Some are adamant that IT should be paid for. “IT should always charge back—absolute-ly”, says Egon Berghout, professor of business & ICT at the University of Groningen in The Netherlands.

“If not, the company doesn’t have a clue about the financial situation regarding IT”, he says. “I’m only aware of one organisation which has a problem with charging back.” IT spend has to be tracked closely—this is espe-cially true for a company such as Pfizer whose rev-enue reached US$48.6bn in 2007. “It is critical to have transparency of costs”, says Mr Haque. “Based on that information, the business can make rational decisions. The objective is understanding cost.”

For IT, factors such as management hierarchies and reporting structures for regional or “embedded” teams may help to define how the IT department jus-tifies its services and is accountable to the company. The methods by which IT accounts for its services influence all tiers of the company using its services. Some companies insist that profit and loss (P&L) responsibility should be brought to the local level, whereas others have had less success with a charge-back approach. In such cases, the companies have established IT as a cost centre that focuses solely on whether it meets the needs of the business. In addition to fundamental measures

IThe charge-back model

“IT should always charge back— absolutely. If not, the company doesn’t have a clue about the financial situation regarding IT.”Egon Berghout, professor of business, University of Groningen



Best practices and measuring the impact

pplying best practice techniques such as ITIL can be a useful way

for IT organisations to benefit from others’ experi-ence and insight about managing IT service mod-els. “Common sense is always best, though”, says Mr Johnson. “Best practice needs to be applied situationally.” In addition to its own methodology, his company uses Control Objectives for Informa-tion and related Technology (COBIT), systems development from PricewaterhouseCoopers, and PMI (Project Management Institute) standards. “There’s a difference between a US$20m project and a US$3,000 one. We apply best practices at dif-ferent levels—for larger projects they will be used in all parts.” Mr Berghout agrees: “Everyone should apply best practices where they’re worthwhile”, he says. “ITIL and Prince2 have been successful. They’re all very expensive to administer, though.” He adds that no-one follows all of the best practice techniques. Measuring the impact of different models and approaches to IT governance is not easy. Many CIOs go by metrics such as cost per head, customer satisfaction or whether a project is completed on time, but do not tend to calculate comparative costs of different models. The typical view is that a system fits if it is delivering on expectations set

by leadership. In these cases, the types of meas-urement are likely to revolve more around overall business results and trends. For example, why has an insurance company found that calls from agents have dropped by 20% owing to a new Web applica-tion, or that headcount has come down by 10%? Ultimately, the CIO will evaluate his department based on how he is measured. If the CIO’s compen-sation is based on the company’s overall financial performance, the executive will tend to evaluate his operations in the same way. Some, like Mr Berghout, are convinced that it is possible to establish meaningful metrics, but that “no-one is looking backward to measure value versus investment.” He adds, “IT people dislike looking back.” Thus one of the most important op-portunities for learning is lost and, consequently, every business case “feels like the first one”.

A

such as on-time delivery of projects, success is viewed in terms of the level of satisfaction among customers in different business units, how new IT projects have added to profitability, and whether IT is enabling secure, global expansion at the re-

quired pace. “Business people have to take owner-ship”, says Mr MacTaggart. “We supply the services and tools to augment business processes. We drive ownership back to the business—senior manage-ment is on board with that.”



Overcoming the business/IT “language barrier”

lthough helpful, structural models and best practices have their

limitations. Nothing in an organisation will replace effective communication between IT leadership and the rest of the business in bringing better align-ment. There are still significant communication ob-stacles in many companies, which explains the high number of new applications that fail to deliver on promise: for the majority of firms, about half of IT projects fail to deliver positive business outcomes. Poor project management and inadequate busi-ness requirement definitions are usually the other main reasons why IT initiatives fall short. “Business people don’t explain what’s required of IT, and the IT staff is overly technology-focused, asking, ‘What can we do with this?’ They’re too insular”, says Mr Berghout. No model will overcome this gridlock: a shift in company culture is required. As one risk expert puts it, there is a tendency for executives to lob an idea over the wall, and expect IT to use osmosis to understand it. Al-though communication is improving, the language barrier remains. The CIO is taking a far larger role in overall company management. In some com-panies, Mr Berghout has found an unconstructive attitude prevailing amongst senior management: “We’ve hired an expensive CIO; we don’t want to hear any more about IT.” These companies are less successful as a result. Even the best IT operating model will flounder under these circumstances. In efforts to bridge the gap between IT and the rest of the business, some companies have placed a busi-ness analyst in the IT department who can act as a liaison with strategic planning, sales, marketing

and other functions. Celina’s CIO Mr Shoenfelt believes that, regard-less of the IT operating model, IT can only help move the business forward if there is change of mindset among IT staff. “We’re not designing systems—we’re designing business solutions”, he says. “Business knowledge is critical for IT peo-ple.” They need to be trained in business issues,

and know the many dimensions of a business problem. “Some get the concept, some don’t”, says Mr Shoenfelt. “Those that don’t aren’t here any more.” Moreover, he indicates that the attitude of just doing what one is told simply doesn’t work anymore. The culture and structure must be in place for IT staff to be motivated to explore and innovate—for example how to adapt Web 2.0 and social networking to tap expertise for the benefit of the business. “The challenge is building the con-fidence of IT staff and getting trust from the user community”, says Mr Shoenfelt.

A“We’re not designing systems—we’re designing business solutions. Business knowledge is critical for IT people.”

Robert Shoenfelt, CIO, Celina



Conclusion

n most organisations, IT has moved a long way from its role as a utility and

businesses have gradually come to recognise its importance. “The business perception of IT has changed entirely from ‘black hole’ to ‘vital part’,” says Mr Shoenfelt. “But we still have to push forward.” IT now has the potential to transform the business. It can make vital customer and market intelligence more accessible, connect sources of talent and skills in niches around the world, and create a supply chain driven by data captured directly at checkout points. Gains are to be made by orienting IT to increase value and competitive advantage, but to make that happen, the right operating model and organisational infrastructure must be established. Essential to success is an understanding on the part of business executives of what IT can achieve, and by senior IT staff of the company’s key business objectives.

Ultimately, no-one can dictate a model that works for every organisation across its geographic presence, business units or organisational devel-opment. However, to support business aims, most organisations are striving to incorporate advan-tages offered by different models depending on the priorities and expectations of both the chief execu-tive officer (CEO) and the CIO. The choice of model is a crucial one, with support for the company’s business model as the top priority. A firm’s success today depends on how well its business leader-ship and its information systems perform and are aligned.

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