September 22, 1997

MIT ANALYSIS: Breaking Boundaries What makes one IT manager succeed where another may not? It starts with how they think By Erik Brynjolfsson and Lorin Hitt nformation technology managers are facing enormous pressure to take business-process transformation to a new level. Our analysis of survey data gathered for this special issue of InformationWeek indicates that getting all the traditional components of IT to work harmoniously is no longer enough. Managers we interviewed at productive companies in the IW 500 are combining technology management with new ways of organizing work to pump up revenue growth, increase customer satisfaction, and fine-tune the supply chain. In essence, IT managers at these highly productive companies are making their information systems more extroverted: Improving communication with customers and suppliers has emerged as a top priority, and customer satisfaction is the main justification of new IT investments. Even as these shops work on integrating information systems across enterprise boundaries, the same companies are also dissolving even more impervious boundaries-the ones that separate IT from the rest of the business. At these extroverted companies, managers say leveraging IT is a key part of their business strategy, the IS department is working to support business-process redesign, and there are fewer reporting steps between the CIOs and CEOs than exist elsewhere. These findings emerged from a study we recently conducted of 175 CIOs at IW 500 companies. We matched this information with data on the companies' past technology investments, labor and capital costs, revenue, and other metrics. This allowed us to construct a productivity measure for each company as well as measures of each company's strategy and structure. The Customer Is Still King The companies in this year's sample clustered into two basic categories in their reasons for investing in IT: They were either extroverts or introverts. The statistical pattern was very similar to the one that emerged in the survey we conducted last year, although a different set of companies was interviewed. The extroverts viewed IT primarily as a tool for increasing revenue by improving customer satisfaction; identifying and gaining new customers; enhancing the quality of the company's products and services; and competing on speed by increasing the company's responsiveness. In contrast, the introverts put more weight on some of the traditional goals of IS departments such as improving top management control and information systems and saving labor costs. The extroverted companies used IT to improve the coordination of customers and suppliers, and as a tool for enabling the redesign of business processes, while the introverted strategies tended to be associated with little organizational change. (See the chart " Why Companies Invest In IT "). Which companies did better? In our sample, companies with an extroverted IT strategy had 3% higher productivity when compared with the introverted companies. Productivity was growing faster in these companies as well. (See the chart " Extroverted Companies Are More Productive .") What else did the extroverts do differently? As might be expected, they were much more likely to use the Internet to conduct electronic commerce with their customers (online sales) and their suppliers (online purchases). They were communications-intensive in other ways as well. They were more likely to network their computers extensively and reported heavier use of E-mail, especially among their professional workers. (See the chart " Extroverted Companies Communicate More ".) Interestingly, compared with their competitors, these companies were more likely to report that IT was perceived as being core to their business. They were more willing to incur training costs to help their line workers use the technology effectively. Finally, they were also more likely to use open systems and had a slightly greater tendency to decentralize IT spending. (See the chart " Extroverted Companies Focus On Business Issues .") Putting these characteristics of the extroverts together, the data paints a picture of a business strategy that not only links IT closely to the rest of the business but also seeks to transcend the company's boundaries. The use of the Internet, E-mail, networking, and open systems are important parts of this strategy. In addition, the shorter distance between the CIO and CEO suggests that they are better at creating a two-way dialogue on the interactions of business and technology groups. Too Much Information The extroverted strategy of using IT to support customer service, develop new customers, and increase information sharing with suppliers can be very information-intensive, potentially leading to data overload. As Nobel Prize winner in economics Herbert Simon, now professor of psychology and computer science at Carnegie Mellon University in Pittsburgh, has observed, information is useful only when an organization can attend to it. However, attention grows ever scarcer near the top of the management hierarchy. One way to mitigate the problem of data overload and attention scarcity is to decentralize decision making and encourage workers to communicate laterally instead of routing all decision-making information up and down the hierarchy. This is consistent with the fact that the extroverted companies emphasized information sharing among workers instead of using IS mainly to support data processing and management con trol. If the extroverted companies have higher productivity growth, shouldn't all companies be striving to emulate them? Shouldn't CIOs at least change those aspects of their IS shops that they have control over? The answers are "no" and "not so fast." While we found that the most productive companies in our sample tended to use the technology differently from their competitors, it is unlikely that simply mimicking these companies will lead to commensurate success. They undoubtedly differ from their competitors in many other ways. Like computer systems, business systems involve a whole collection of subtle interactions, and it's not always obvious which ones are critical. One CEO in a particularly complex industry noted, "Our manufacturing process involves 1,000 different steps. If we do just 999 of them correctly, we fail." As a result, the sensible strategy is sometimes to stay with an old, but working, system until the whole organization is ready and willing to change. To understand the ri sks of trying to adopt a new work system, one needs to look behind the statistical results and examine the relationships between technological and organizational change. The experience of one large consumer-products company provides an instructive example. Top management sought to use IT to drive a revolution in its manufacturing processes. Accordingly, the company specified a detailed plan for changing business practices in several areas, including supplier relations, product variety, inventory policy, job responsibilities, management systems, and incentives. After investing millions of dollars in highly flexible, computerized equipment, the company was stunned to find that its productivity actually fell while it made no real gains in flexibility or responsiveness. What went wrong? Close examination of the way workers were actually using the equipment revealed they had only made surface-level changes in their factory's business processes. Many had decades of deeply rooted experience with older technology and systems, and they found it all too easy to slip into their past routines. For instance, with the old equipment, productivity depended on minimizing time-consuming changeovers from one product line to another, and large work-in-process inventories were routinely built up to minimize stock-outs. With the new equipment, however, changeovers could be done in minutes, and the management plan called for squeezing out inventories. Good Intentions, Bad Results Nonetheless, a lot of well-meaning factory workers continued to avoid changeovers because they assumed that always keeping the production line humming was the key to higher productivity. Ironically, with a little tinkering, they found that the new equipment was so flexible that it could be used just like the old machines! This may have made it easy to avoid changing their tried-and-true work habits, but the net result was that none of the anticipated improvements in flexibility, responsiveness, or inventories were realized. The basic pr oblem with many business-process redesign efforts is that the new system's various components must interact with one another. As a result, they often cannot be implemented in isolation. In fact, at the consumer-products company, about two dozen distinct practices were involved in both the old and new work systems. IT directly changed only one of them. But indirectly, it required a much more complex collection of supporting changes. Our story has a happy ending. By increasing the communication level among the affected parties, IS workers better understood the importance of aligning business practices with new technology. Within two years, performance soared at the company's factories. The difficulties many companies have had in successfully using IT to initiate a change in their revenue models and business processes suggests that the road to success is not a smooth one. Indeed, most of the companies in our sample did not rate business-process redesign as an important consideration in their tech nology strategies. This may reflect a backlash against the reengineering movement created when some of the early adopters found that it's not always possible to succeed with a clean-slate approach to redesigning business processes. However, the fact remains that one of the biggest opportunities for IT to create value is in transforming business processes, reporting relationships, management controls, and even the boundaries of the company. In earlier work, we found that companies that used IT to change business processes were significantly more productive than their competitors, on average. Though this overall positive relationship reflected the fact that some companies were extremely successful while others failed miserably, it contradicted the notion that business redesign is simply a cover for downsizing by companies facing tough times. In seeking business value from their IT investments, many organizations have traditionally looked to labor cost savings made possible by newer generations of techno logy. In our analysis, we found that the potential of technology to transform the organization requires a deeper understanding of organizational change than has traditionally been necessary for success as an IT manager. The lesson for CIOs is to think beyond hardware and software when designing information systems. The architecture of a company's business processes, job responsibilities, and customer and supplier relations are essential components of a successful information system. Back to the IW500 Menu Send Us Your Feedback Top of the Page

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