Enterprise IT Management Perspectives

Economies of scale

Because the line-of-business CIOs work directly with the business unit head, they can gather the requirements of the business unit and then work with central corporate IT to look at getting some economies of scale when they’re building out systems or purchasing systems. Because they’re familiar with the business unit’s priorities, they can make the cases for potentially having a system that’s not quite to the standard operating environment or the strategic architecture and negotiate how it would plug in. This provides the benefits of both centralized and decentralized organizations, with the ability to compromise and get the best results for the business.  Macroeconomic alignment is fairly high (perhaps not as high as with a centralized model, but not as low as with a decentralized model) and Microeconomic alignment is also fairly high.

Standards

Typically there is a standard operating environment and standard architecture, and possibly some non-standard systems that are specifically configured for the business unit’s priorities, but because the line-of-business CIOs have direct lines of communication to both the business unit head and the central IT organization, compatibility with standards can be closely monitored. Again, macroeconomic and microeconomic alignment is fairly high.

In addition to the central CIO and the line-of-business CIOs, there is also typically a Project Management Office (PMO) that is central to the organization. The PMO is essentially a pool of expert resources that will work with individual business units to drive projects, help each of the individual business units succeed in its projects and also ensure that the projects are compatible to internal standards. When they’re finished with the project, they go back into the central pool. The PMO has standards for running projects as well as project directors and project managers, and they manage projects to their completion. They don’t specifically have skills in a particular technology; rather their expertise is in knowing how to drive projects to success and to company standards.  Overall time to market is faster and both microeconomic and macroeconomic alignment is high.

IT investment decisions

A Cautionary Tale

(Check back soon for a post on how to get aligned and maintain alignment throughout every phase of a project through to production.)

In my last post, I discussed how a fully decentralized model affects views on alignment, so now let's take a look at how a fully centralized model affects alignment.

In a fully centralized organization, there is basically one central CIO with many direct lieutenants, and the whole IT organization is seen as a shared facility across all the lines of business. Requests come in from various business units that have different business initiatives and requirements. IT projects end up aligned with some business unit initiatives and not others.

Economies of scale
Typically, you can get good economies of scale as purchasing decisions can be centralized and there's a strategic architecture and a standard operating environment. This set’s a good environment to negotiate with smaller set of vendors and you can organize better buying agreements for hardware and software purchases. You're spending less and there's a centralized way of doing things. Macroeconomic alignment is high.

Standards
With a strategic architecture and standard operating environment for the whole business, you'll be able to buy the same type of equipment/software and your skill sets are more homogenous. You don't have as many integration issues across various lines of business so macroeconomic alignment is high. But each of the business units will have different business initiatives and requirements, and there may be specific software packages or applications out in the marketplace that suit their business unit a lot better, but since they don't conform to the central standard, they can't be used. Some business units will believe they're not getting exactly what they want because they have conform to draconian standards. Microeconomic alignment is low.

Time to Market
Since IT is a shared facility across the lines of business, all of those lines of business go to that central body and say "these are my business initiatives, this is what I need to get achieved" and they basically compete for IT funds. And because the business has to adhere to centralized standards as well as determine which business unit's initiatives will take precedence, things take longer, some business units need to wait as their projects are of lower priority…..  Overall time to market is slower.  Microeconomic alignment is low.

IT investment decisions
In large organizations, there are different sizes of business units: typically two or three very large ones, several medium size ones and some small ones. Big ones are typically bringing in the revenue today, have very strong political ties to the organization (especially at the CEO level) and they've usually got a larger voice. If you look at markets, these big units are in are quite mature, they're competing against other mature businesses and they bring in the money today. Then you've got the middle ones that are up and coming and they've got reasonable revenue streams coming in and they're going be requesting budget for IT projects as well. They might be second tier, but they could represent high growth areas for the company. And lastly the small ones are probably the new upstarts. They could be gone the next week if their markets dry up, or they could the next big star, but because they're so small, they have little voice in the organization. 

In a centralized model, the CIO is going to get many, many requests from all these business units and typically the number of business initiatives they want to drive is far greater than the allocated IT budget. But each of the business units has business initiatives that are deeply entrenched in the core of their individual business and each of them is going to make requests for new services (putting strategic demand on the central IT body) and say I've got 10, 15 or 20 projects I want to run. And the central CIO will get all of those requests from each of the line of business units, will have to look at his budget (because they're all chipping in for the IT budget) and he will have to determine the best course for investment.

Because the CIO is in a centralized role, he'll have to work with the business unit executives to determine where those funds go, but he has to do it without intimate knowledge of some of the business units because he's not a specialized CIO in a particular line of business. In determining which business unit initiatives to address, the CIO will have to consider whether he addresses the bigger business units that are screaming at him the loudest--and have the most political clout in the company--to the detriment of the medium and smaller business units who will then say they are not getting what they want from IT and that they're not getting their fair share of voice and share of budget partly because of where they are in the pecking order of an organization.

Part of the consideration will have to be based on how IT is paid for (if there are seven business units do they all chip in a seventh? Or do they pitch in based on the size of their business unit? Or do they pitch in by how much of IT they consume?).

In any case, each of the business units is going to have some projects that won't get off the ground because there aren't enough funds and there will be a level of unhappiness about this. Business units will feel that IT is not providing exactly what they want and that they're being hindered in doing their business as a result. So while the alignment issues at the macroeconomic level look good (because the company is spending less and there's a centralized way of doing things), at the microeconomic level alignment is poor since at least some of the line of business managers will believe that that they're not getting value from their investments in IT.

(Check back soon for a post on how a federal model affects alignment between the business and IT.)

To explore this topic further we need to look at the following dimensions

• How IT is organized within the business
• Economies of scale (e.g. Purchasing decisions)
• Standards (strategic architectures, standard operating environments and Best Practice adoption)
• Time to Market (Addressing/Responding to demand from the business)
•  How IT investment decisions are determined

Further,  it is necessary to review these dimensions at a macroeconomic (the whole business) and microeconomic (business unit) level. This is what I refer to as the Economics of IT.

As a prelude to that discussion, it’s important to understand how IT is generally organized within a business.  There are three prevalent organizational models today:

1. Fully centralized: The company basically has one CIO, everyone is in one IT organization.
2. Fully decentralized: There are many CIOs, one for each business unit. Each of the business units is a separate business from an IT perspective, so all the individual CIOs act on what their particular business unit wants and they basically develop or purchase systems specifically for their business unit.
3. Federal model: This is more popular today in terms of organizational theory. There’s a central organizational group (i.e., corporate IT) and the CIO for the whole company is in that organization. Then there are many individual CIOs within the business units and all the business unit CIOs report into the main corporate structure.

The attitudes around IT and business alignment typically vary depending on which organizational structure is in place. 

In this post, I’ll take a look at how a fully decentralized model affects views on alignment.

Fully decentralized, but aligned with whom?

In a fully decentralized IT organization, there is no central CIO; rather, each line of business unit has its own IT department, each with its own CIO. The CIOs don’t report in to one main corporate IT department—instead they work directly with the line of business manager for their business unit. IT projects typically are very aligned to the business unit initiatives and IT is very responsive to the business unit.

Economies of scale

Standards

So, for example, CIO from Line of Business 1 negotiates with CIO from Line of Business 2 that their two systems need to be integrated and they start working on an integration project that’s partially funded by each one. This could happen between so many business units that there’s an exponential explosion of these integration projects, which adds more cost for the business overall and will impact the time to market for cross business unit initiatives. Macroeconomic alignment is low.

The business unit CIOs in decentralized models are tightly linked to the line of business manager and a lot of business unit CIOs I’ve spoken to strongly believe that they are fully aligned with their line of business manager, because they are part and parcel of that business unit. They have a direct line of report to their line of business manager and intimate knowledge of that line of business, they believe that they have a full handle on all of the projects, initiatives and business objectives of the business unit. The perception from each CIO is that he is very tightly aligned with his manager and that the question of misalignment doesn’t exist. They are more agile and can generally respond faster to the business unit; not being constrained by corporate rules also allows larger freedom of choice of solution acquisitions. Overall time to market is faster.

Because they’re tightly aligned and they understand the line of business, there’s a secondary benefit: The individual CIOs can actually contribute ideas and concepts where IT can be a competitive advantage for that specific line of business, because they understand that line of business really well.   Microeconomic alignment is high.

IT investment decisions - The Economics of IT (Strategic Demand and Supply)

At a macroeconomic level - How does the business decide who will get the funds? The biggest business units? The ones with that have good political alignment with corporate? The ones who scream the loudest? And who evaluates the relative value to the overall business of each of the services provided across all the business units (complete portfolio approach)?

There might be tight alignment between the individual business unit CIO and his line of business manager, but what’s it like for the whole company? Is IT in this decentralized model actually achieving the best result for the company?

 (Check back soon for a post on how a fully centralized model affects alignment between the business and IT)

Aligning IT with the Business
In the past 10 years of CIO surveys that I've seen, “align IT with the business” has been the number one challenge for IT. In a 2007 IDG survey of IT management at companies with an annual revenue of $250 million or more, 87 percent of U.S. respondents (75 percent globally) ranked “Aligning IT with business priorities” as the top IT priority for their organization in the next 12 months.

The question arises, does aligning IT with the business continue to be a challenge because it’s difficult to solve, or is it an issue of perception rather than an actual problem?  Here are two opposing viewpoints:

The first view
The business has certain demands placed on it (by its shareholders, its directors, its board) and there are pressures put on it (competitive pressures, market pressures). And as a result they create a corporate strategy and a set of business objectives and business strategies that make them competitive in the marketplace. Those business objectives and business strategies will eventually become business initiatives. In today’s world, many of these business initiatives are going to be supported by IT.

Larger companies will have a number of business units, each of which will have multiple business initiatives of its own. The problem for IT is that all of them want all of their business initiatives addressed at the same time. And since IT has a limited budget, it must examine all these business initiatives and determine which ones to work on first. Instead of taking its lead from who is screaming loudest (or which business unit has more political clout in the organization), proponents of this view would use a collaborative process to look at all those business initiatives as a portfolio of initiatives and then prioritize and select which ones to invest in within IT, based on their business priority and the positive impact to the overall business. That process of IT portfolio management is the first step of aligning IT with the business--being able to set the IT strategic compass pointing in the same direction as the business strategic compass.

The opposite view
Proponents of this view are essentially saying “I am the CIO and I am intimately involved with the business and am part of the formulation of these business strategies, so by definition, I’m aligned already. And as a result, I already know the priorities based on the fact that I’m intimately part of the business, so there’s no need for me to take steps to align IT with the business.” This argument might be made by a CIO of a business unit in a federated model for IT (a CIO that’s responsible for a specific business unit), who believes that he has one master and that master is the business unit (or the line of business unit head), and because he’s directly aligned with everything that the line of business unit person does, there is no misalignment issue.  Furthermore, many business unit CIOs report up to a central CIO who ultimately owns all of these budgets, who is probably on the board (or at least part of the executive leadership team) so in theory he should be aware of the business strategies and therefore there’s no misalignment issue.

I’ll be diving deeper into each of these viewpoints in subsequent posts.  I encourage you to leave a comment with your own viewpoint!

Enterprise IT Management Perspectives: A 360° View

Welcome to the EITM Perspectives blog. It’s fairly obvious from the title what this blog is meant to discuss. The perspectives relate to four major imperatives for EITM:

Align IT with the business

Stay tuned as I delve into both sides of this issue.