MIT Sloan Management Review
Summary by Ram Ramanathan
This article gives a new twist to the argument that IT should always strive to align itself with the core business. Alignment of IT to the underlying business is a good thing, but to what extent should one go to achieve this? The article starts of with the Charles Schwab case. Charles Schwab outperformed others in the marketplace because of its advanced IT strategies. IT was aligned to its business as much as it could be. However, IT itself became an ‘inhibitor’ for Schwab. IT projects were getting delayed, response times were longer and customers were not happy. The competition was catching up and overtaking Schwab. Schwab was spending 18% of revenue on IT while competitors were spending 13% or less.
A research was done on 452 companies and the results were tabulated in a quadrant format (Less Aligned, Highly Aligned, Less Effective, Highly Effective are the four characteristics). Most companies fell in Less Aligned-Less Effective quadrant. The companies in the Highly Aligned-Less Effective quadrant (aka Alignment Trap quadrant) were spending more money on IT but had the lowest sales growth among the four quadrants even worse than the Less Aligned-Less Effective quadrant companies. Companies with Less Aligned-Highly Effective IT organization had good sales growth and the least IT spending. Finally, companies with Highly Aligned-Highly Effective IT strategy had the best sales growth and reasonable IT spending. This shows that just having IT aligned to the business should not be only strategy. Having an effective IT plays a bigger role.
Companies in the “Less Aligned-Less Effective” and “Highly Aligned-Less Effective” quadrants should make a move toward higher effectiveness before moving towards higher alignment. The following strategies play a key role in making IT effective:
Simplicity: When projects are defined and executed, simplicity should be key. An example of De Beers company shows that having each mine implement its own applications was not effective even though each application was individually aligned to the respective mine’s business. Standardizing on the platform and applications saved quite a bit of IT budget for the company.
Right Sourcing: For every project, the business needs to ask itself a question – is this project strategic enough to be implemented by the in house IT. If it is a non core competency task, it would be cost effective to outsource the project. If a project is planned to be outsourced, it would help the company if IT/business has a deep understanding of the project so that the vendors could be held accountable for price and performance. This might involve doing the job in house for a while before outsourcing it.
End-to-End Accountability: IT and business functions should be held accountable for delivering projects on time and within budget. Businesses should be restructured to enable IT to work with business process groups and not with functional silos. All the stakeholders should be held accountable and management should be given the tools to measure progress and success.
Once IT is made effective, then the company needs to focus on the alignment strategy. The problem at Schwab was the complexity of IT systems. This was the result of aligning IT with each individual function silos which created overlapping IT systems. No one was looking at the business as a whole. Schwab tooks steps to make IT more effective by reducing the complexity of IT systems. New applications were developed on a new platform rather than being overlaid on the existing legacy mainframe. After the new changes, the cost per trade decreased 50% and the transaction time went down by 80%.
A good indicator that IT needs to be simplified is the ratio of spending on maintenance projects (“keeping the lights on”) to the spending on strategic new product development. If this ratio creeps up, the business needs to go for a round of simplification. This is an ongoing process to be monitored for the life of the business.
Avoiding the Alignment Trap in IT
MIT Sloan Management ReviewSummary by Ram Ramanathan
This article gives a new twist to the argument that IT should always strive to align itself with the core business. Alignment of IT to the underlying business is a good thing, but to what extent should one go to achieve this? The article starts of with the Charles Schwab case. Charles Schwab outperformed others in the marketplace because of its advanced IT strategies. IT was aligned to its business as much as it could be. However, IT itself became an ‘inhibitor’ for Schwab. IT projects were getting delayed, response times were longer and customers were not happy. The competition was catching up and overtaking Schwab. Schwab was spending 18% of revenue on IT while competitors were spending 13% or less.
A research was done on 452 companies and the results were tabulated in a quadrant format (Less Aligned, Highly Aligned, Less Effective, Highly Effective are the four characteristics). Most companies fell in Less Aligned-Less Effective quadrant. The companies in the Highly Aligned-Less Effective quadrant (aka Alignment Trap quadrant) were spending more money on IT but had the lowest sales growth among the four quadrants even worse than the Less Aligned-Less Effective quadrant companies. Companies with Less Aligned-Highly Effective IT organization had good sales growth and the least IT spending. Finally, companies with Highly Aligned-Highly Effective IT strategy had the best sales growth and reasonable IT spending. This shows that just having IT aligned to the business should not be only strategy. Having an effective IT plays a bigger role.
Companies in the “Less Aligned-Less Effective” and “Highly Aligned-Less Effective” quadrants should make a move toward higher effectiveness before moving towards higher alignment. The following strategies play a key role in making IT effective:
Once IT is made effective, then the company needs to focus on the alignment strategy. The problem at Schwab was the complexity of IT systems. This was the result of aligning IT with each individual function silos which created overlapping IT systems. No one was looking at the business as a whole. Schwab tooks steps to make IT more effective by reducing the complexity of IT systems. New applications were developed on a new platform rather than being overlaid on the existing legacy mainframe. After the new changes, the cost per trade decreased 50% and the transaction time went down by 80%.
A good indicator that IT needs to be simplified is the ratio of spending on maintenance projects (“keeping the lights on”) to the spending on strategic new product development. If this ratio creeps up, the business needs to go for a round of simplification. This is an ongoing process to be monitored for the life of the business.