InformationWeek

September 7, 1998

http://www.informationweek.com/700/innovate.htm

Defining IT Innovation

The InformationWeek 500 all share a bold willingness to take fresh approaches to using IT

By Bob Violino

nnovation is all about reexamining old ways of thinking, embracing creativity, and, ultimately, creating new opportunities. All of the companies in our 10th annual InformationWeek 500 ranking are driving innovation through their bold use of information technology. These companies aren't just using IT to improve their standings in their traditional markets-they're leveraging IT to create new markets.

And while these 500 innovators compete in a variety of industries and take widely divergent approaches to making and selling their products and services, each drives change by incorporating newer technologies-or leveraging older ones with a new twist-that provide better service to customers, transfer knowledge to and from employees more quickly, and ease transactions with trading partners. These IT innovators are the kinds of enterprises that are quickly imitated by others in their industries-and even in unrelated sectors.

Organizations that fit this profile tend to approach their mission with a visionary zeal. "It's a matter of looking at what technology can do, rather than just looking at what has already been done," says Randy Mott, senior VP and CIO at retailer Wal-Mart Stores Inc. in Bentonville, Ark., and InformationWeek's 1997 Chief of the Year. "Rather than placing technology in a stereotype, you say, 'Here's a business process that we need to improve; how can we use IT to do this?' There's an infinite number of opportunities for using technology to your company's benefit."

The companies in this year's ranking are taking advantage of many of those opportunities. Each won placement on the list based on a rigorous questionnaire fielded this summer by InformationWeek Research (see "Where To Find Innovators,").

Each was evaluated in a variety of technology and business areas, including desktop computing and application development tools, the Internet and electronic business, networking and data access, knowledge management and data mining, the use of enterprise applications, and the effectiveness of the company's business processes.

The most startling result of our months-long project was our finding that the IT organizations within the InformationWeek 500 are contributing mightily to their companies' bottom lines.

IT organizations in eight of 10 InformationWeek 500 companies directly produce or sell products. Among those companies doing at least some business online, nearly one in four of their revenue dollars is related to electronic-business transactions.

Nearly all InformationWeek 500 companies run intranets. Most use them to support functions such as human resources and sales. Intranets are becoming the preferred method to execute full-text information searches, use decision-support systems, do online analytical processing or data mining, manage workflow processes, and provide access to video and audio archives.

Most of these companies operate-or are testing-IP-based virtual private networks that support remote access by mobile workers and distributed servers.

Many of these organizations have launched enterprise resource planning projects. Six of 10 have standardized on a single ERP platform or supply-chain product. In companies that have rolled out ERP projects, two of three users have access to at least one portion of the enterprise system.

But what are tomorrow's priorities among the InformationWeek 500? There's still much concern about leveraging past resources. In a July 1998 follow-up survey of 250 of the InformationWeek 500, 94% of executives cited year 2000 conversion as a major priority when it comes to supporting key business processes. The InformationWeek 500 will devote an average of 10% of their 1998 IT budgets to year 2000 efforts.

Joseph Smialowski, senior VP and CIO at $41.3 billion retailer Sears, Roebuck & Co., says year 2000 work is so important that if the retailer fell behind on its conversion efforts, he would have no choice but to suspend other IT-related projects. So far, however, conversion is on track. "We expect to get the bulk of the work done this year," Smialowski says. "We don't have to divert people from other projects."

"Both year 2000 code remediation and preparing for the euro (the new European monetary unit) have been a very high priority for us for the past year," says Mary Alice Taylor, corporate executive VP for global operations and technology at $34.7 billion financial services firm Citicorp in New York. "We had to [convert] 500 million lines of code, and the large majority is back in production. We're testing internal systems, as well as external systems, with our customers. We feel pretty good about where we are," she says.

While 94% of companies in the InformationWeek 500 mentioned year 2000 fixes as a key support function, nearly as many-92%-of IT managers mentioned E-commerce. Despite its hefty year 2000 efforts, Citicorp is still pushing forward with online ventures, including a joint effort with Netscape to provide a personal finance "channel" on Netscape's Netcenter Web site, due to be launched this fall.

Third on the list of key support functions in the survey is customer service. Many of the executives surveyed also chose establishing global architecture and standards, streamlining business processes, creating marketing advantages, and organizing and utilizing customer data to create new and better ways of serving customers.

Sears touches many of these areas with its non-year 2000 work. According to Smialowski, efforts include a statistical modeling environment that uses a 14-terabyte data warehouse to forecast sales and determine merchandise placement in stores; geographic mapping, computerized routing, and interactive voice-response technologies to schedule merchandise delivery to customers' homes; and kiosks that use radio frequency and scanning devices to speed merchandise pickup in stores.

The focus on the customer is touching all industries. "Customer service and reliability are a big concern for us as we move into a deregulated environment and we no longer have captive customers," says Paul Anders, VP and CIO at Northern States Power Co., a $2.7 billion utility in Minneapolis.

In its effort to keep customers from defecting to other energy sources, Northern States has begun to install automated meter-reading systems for gas and electric service. The result: more-accurate records of customers' utility usage-especially during heavy snowstorms, when Northern States' meter readers can't travel. In addition, Anders says, "information we gather from automated meter reading will allow us to do proactive work, such as analyzing energy use and improving efficiency for customers."

Also high on Northern States' development list is converting the paper maps used by service personnel into geographic information systems, to speed response to power outages.

When the questionnaire turned from general priorities to strategic priorities for the next 12 months, continued development of Internet applications was the No. 1 priority cited. Nearly nine of 10 IT executives emphasized the important role the Internet and other Web technologies will play in future business dealings and employee-to-employee communications.

Other strategic technology priorities include tools, languages, and year 2000 issues, mentioned by 87% of respondents; building or refurbishing network infrastructures, cited by 84%; refining relational databases and data warehouses, chosen by 77% of survey respondents; and implementing enterprise software, cited by 71%.

But as much as InformationWeek 500 companies strive to implement new systems and provide new ways of generating revenue, keeping basic IT operations running smoothly around the clock is still of utmost importance to IT management. Asked about the key organizational challenges each IT management team will face this year, nearly nine in 10 executives cited providing adequate IT support. More than eight in 10 chose retaining staff members, keeping up with the pace of change, year 2000 conversions and testing, attracting new employees, and implementing E-commerce strategies.

Meeting organizational challenges is one step, but how do you measure success in these areas? Some 63% of the InformationWeek 500 managers benchmark against past performance, while 56% benchmark against third parties or competitors.

Citicorp employs both methods. "We benchmark both internally and externally against other similar industries," Taylor says. "We subscribe to all the research studies and benchmark ourselves on everything from check processing and clearing to cycle times for product development. We're using the Software Engineering Institute model for each software development organization and putting in place standards to audit for SEI ratings."

Close to six in 10 companies use formal return-on-investment models. Others also focus on improvements in customer satisfaction and repeat business due to IT enhancements, or informal payback scenarios. Many IT executives say measuring or estimating expected returns on projects is a critical step in the funding process.

"In order to start a project, we need to have a return-on-investment analysis," says Joe Durocher, CIO at $5.3 billion Hilton Hotels Corp. "Then we go back and verify that we're achieving our goals."

Adds Northern States' Anders, "We have to justify all of our expenditures on IT. If we can't convince [government] regulators that what we're doing will have a payback for our customers, they won't authorize rate increases. We can't spend frivolously."

IT executives say less-formal indicators of IT payback, such as winning contracts or getting customers to come back because of an IT initiative, help promote technology's place in their organizations. Hank Leingang, senior VP and CIO at Bechtel Group Inc. in San Francisco, says the use of databases that store information on building designs has helped the $11.3 billion construction and engineering company speed up the time it takes to prepare bids for new proposals.

In an industry where some bidding processes take years, any time edge helps Bechtel win proposals. Bechtel also uses traditional cost/ benefit analyses to measure returns on projects designed to improve most business processes.

Sometimes IT executives can link obvious marketplace advantages to the use of a specific technology. "We know data mining is paying off big because we can use it to find out who our readers are, then go to advertisers or potential advertisers and say, 'If you really want to hit your target market, go with us,'" says David Starr, CIO at newspaper publisher and new-media company Knight Ridder, the top-ranked company in this year's InformationWeek 500 (see "Technology Makes The Front Page,").

Where do the most effective ideas for innovative IT process improvements originate inside companies? Three of 10 respondents say it's with senior IS management, 25% say business line management, 21% say IT or business-project leaders, and 8% cite CEOs or other top management.

Sources Of Innovation
Still, many IT executives say they're getting more input than ever from business managers and users on creative ways to use technology. "Innovation is coming from the dialog between business and IT," says Yannick Le Coudic, VP of MIS at Lubrizol Corp. in Wickliffe, Ohio.

The $1.7 billion chemicals company implemented a new ERP project, an intranet for product development and marketing, largely because of requests from business managers. "The business people more than ever are coming to us with their needs," Le Coudic says. "They're much more aware of the possibilities technology brings."

Top IT executives shouldn't assume that marketing, sales, and other business executives will always know about the latest and greatest in IT, says David Billings, senior VP of information and technology systems at Airborne Express, the shipping unit of $2.9 billion Airborne Freight Corp. in Seattle. "If we're doing our jobs properly in IT, we're making people on the business side aware of some of the possibilities," Billings says.

Nonetheless, the actual impetus for moving ahead with a project comes from the business side, he says. "They make the demands," Billings says. "We have to provide adequate supply and make the decisions on which projects should go ahead and which get deferred."

Airborne is rolling out Call Center Automation, a major upgrade of its 10 customer-service call centers. The project will integrate voice-response units, local servers and workstations, and mainframes to provide a graphical customer-service application that will ease the process of locating packages and placing orders. The company is also using digital imaging to speed its handling of domestic airbills and to cut costs.

Some IT executives say they need to rely on the entire company for good ideas on how best to use information and knowledge. "Everyone is being challenged to stay innovative, so the ideas have to come from everyone within the organization, not just IT," says Hilton's Durocher. "The organization has to be set up so that communication of ideas is easy."

Top Hilton projects include combining data warehousing with a central-reservation system to give reservation clerks access to historical data when booking rooms for customers; smart-card technology to ease check-ins; and Web sites for online bookings.

Sears' Smialowski, who considers IT innovation "the lifeblood of the retail industry," says his company has created seven "learning stores," where it experiments with new technologies and approaches to merchandising and retail-store formats. "We test things to see how customers react. We use the learning stores as a hotbed to develop new ideas," he explains.

Speed Doesn't Always Pay
While many IT managers look to business partners for more ideas, one in five sees the greatest challenge to future innovation coming from the lack of IT knowledge among senior managers and business leaders. Some 16% say budget limitations are the biggest challenge, and 14% remain concerned that senior management views IT as a cost center.

IT leaders among the InformationWeek 500 don't necessarily equate innovation with early adoption. Asked to rate the importance of early adoption in determining the ultimate level of financial payoff for a typical enterprise application, only 18% said "very important," while more than two in three said "somewhat important."

"Early adoption is not always a good idea," says Hilton's Durocher. "The ideal place to be is right behind the first adopters. On occasion, you want to be the first to do something because there are specific tangible [marketing] reasons for it. But in general, we think it's wise to stay just behind."

Innovation, of course, comes with substantial risk. Nearly nine in 10 top IT executives at InformationWeek 500 companies equate innovation with risk-taking. Asked what level of risks their organizations accept when it comes to innovation, three of four say "moderate risk," while 12% say "high risk." More than two-thirds of IT executives say their organizations are more likely to take risks with new technology investments than in the past. And of the IT chiefs at companies more likely to take risks, three of four say it's to increase competitiveness.

For those less willing to take risks, the most common reason cited is the failure of past IT projects. Other reasons include funding constraints, the tendency of senior management to avoid IT risk, the company's broad strategic direction, and personnel resources constraints. One in five IT executives blames the year 2000 problem for making risk taking less likely.

For many top IT executives within InformationWeek 500 companies, risk and uncertainty are givens when it comes to innovation. "Any time you're on the cutting edge, there's risk," says Citicorp's Taylor. "In many respects, you enter gently and look at beta-testing opportunities to see if you've hit the mark from a customer perspective. That's really what should be driving many IT projects. To minimize risk, we look for strongly accepted software or hardware with capabilities that have multiple uses."

Adds Bechtel's Leingang, "You have to take some risks to set yourself apart in the marketplace." Leaders such as Leingang and Taylor might argue that you can't innovate without risk and you can't successfully take risks without a culture of innovation.

Standing apart and ahead in the marketplace is a major goal of all companies in the InformationWeek 500. Each uses IT aggressively and effectively in order to innovate. Advanced technology and forward-thinking business processes give enterprises the edge they need to improve performance and quality for customers, suppliers, and employees.

Innovation is a necessary component of success. The average one-year revenue gain among the InformationWeek 500 in the most recent fiscal year was 16.5%, nearly double the average 8.7% rise for the Fortune 500.

Many of the business leaders at the InformationWeek 500 companies will say that IT innovation has a lot to do with that growth.

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