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The Need To Change Corporate Mind-sets

Why is it so hard to use IT as a competitive weapon? Ranjit Tinaikar, IT strategy practice leader at McKinsey & Co., along with his co-leader David Craig, is researching the relationship between companies that change the game in their markets and how IT is managed at a strategic level. Tinaikar recently discussed his findings and thoughts with Optimize executive editor Paula Klein.
Q: So what is the CEO's specific role in leveraging IT for competitive advantage?

A: At one financial-services provider, the new CEO concluded that he needed to do two key things. One was to build a channel for high net-worth customers, and the other was to build an open and flexible record-keeping platform for improving customer offerings and speed-to-market of new products. That became the central focus of the overall strategy, and the CEO could direct IT investments to a few measured bets even in an industry with significant cost pressures.

Only the CEO can make that cross-enterprise prioritization decision. When it comes to management across multiple lines of business, only a CEO or a COO can achieve that. And when you're figuring out the right balance of investments—not just IT investment, but the business investment portfolio of which IT may be a piece—that particular view can happen only at the CEO level.

Q: Can you give an example of a business getting it right?

A: We don't talk about specific clients, but there are a number of public examples of this thinking and they all share several attributes stemming from the mind-set one adopts to leverage IT solutions. First, they don't make a formal distinction between technology management and business management. Technology solutions often come from having an integrated view across IT and business. Next, the technology solutions aren't always leading-edge or emerging technology. It's the end solution that creates the advantage. Third, they have process and governance in place to best use and refine these technologies as measured bets.

Q: How does the CEO typically drive this?

A: IT-enabled competitive advantage can, of course, come from outside the senior executive team. However, to have an institutionalized and repeatable capability for doing this successfully usually requires the CEO and the executive management team to play a strong role in nurturing such efforts and promoting and selling them.

Q: Does a CEO necessarily need to have a technology background?

A: What you need is the right awareness of the business environment. At one company, the CEO knew what was happening in the business, but he also knew enough about the technology to know how it could be leveraged. He didn't have to be a technical expert or go through the ranks of being a database engineer to think of this idea. But he needed to know the potential of this technology.

Q: Would that indicate that the CIO should report directly to the CEO, or does that not matter?

A: Once you adopt a health-oriented technology mind-set, you start getting out of all these standard questions about should the CIO report to the CEO or not. Asking that is symbolic of the standard logic of alignment—that the business is on one side and IT is on the other side, and there's a single person responsible for managing IT. If you think that way, you return to using technology capability as a cost of service, the traditional CIO function.

If I'm changing the game and have to take some measured bets, [no one] sits within any of the business functions. It's more like a corporate-capital group or a business-development group that scans the environment, figures out what the right bets should be, and makes those bets for the organization. At that level, you don't need the distinction between IT and business. So depending on which capability you want to focus on, you would structure it differently.

For example, a global consumer-goods manufacturer decided to pull out the commoditized, "stay-in-the-race" IT functions—such as infrastructure operations and corporate apps—as part of its shared-services business unit. At the same time, the manufacturing company has a CIO for each of the business units that uses technology strategically for the business. So there are different CIOs doing different things in the same organization.

Another model was employed at a leading brokerage firm that had two different CIOs. One ran the day-to-day technology organization, and there was also an IT strategy CIO. Increasingly, you're seeing specialization of the IT function. The IT-management function is slowly permeating the entire organization.

Q: It sounds as if IT is being embraced more broadly throughout the organization. Is that the goal?

A: Yes. This is more about increasing what I call the IT IQ of the business, and less about a role. The CIO traditionally would be the primary owner of that capability. But as people become more sophisticated users of IT, what you find is that the particular role may manifest itself in different parts of the organization.

Q: Are certain verticals performing better than others?

A: I don't know if vertical sectors is a predictor. A more likely predictor is the mind-set of the CEO and the executive team and how technology is being managed. You see examples of that at UPS, whose management decided that having a database that allows them to track and control parcels across the world is critical to their competitive position.

If there's a CEO mind-set that technology is going to make a big difference, it will. To be clear, I think CEOs for the most part do care about IT, but often as a cost center or a service-delivery unit.

Q: Are new-business model companies better able to thrive because of their technology orientation? How can older businesses compete?

A: New businesses do have a lot less to undo in terms of legacy IT architecture and therefore have more flexibility. That's the logic in favor of a few companies like Yahoo that are more nimble, and there's definitely value to that. At the same time, we see that large, established companies have something that newer companies don't—the ability to sustain a large IT investment program and the ability to wait for it to pay off for two, three, or four years if indeed they have the conviction to make it work. The incumbents have the capital, the extra talent, and competence that very often smaller players don't.

Q: Where does innovation come into play, and should IT be driving innovation?

A: It's sort of a moot question when you think about it from a health approach that says IT should be managed by the entire organization. Some parts of IT may be managed within the traditional IT function, and other parts may be managed better outside of it. Innovation could come through any of these functions. For instance, the IT organization could think of a way to use next-generation networks to reduce communication costs, which may be a huge deal for a company where a significant portion of costs is for call centers or other telecommunications. Innovation is possible in any part of the organization. So the question isn't whether the IT group itself should drive innovation, it's about what kind of innovation can be driven by different parts of the organization.

Q: What will be the impact on CIOs?

A: Most people think of their CIO as the primary owner of all IT capabilities. And so to make that shift for [IT to permeate] an organization is a big difference. IT can be smarter about business. Many times a businessperson says, "I don't know anything about IT, just deliver it to me," while the IT guy is saying, "But I need to know what you want."

I suspect it reflects a maturation of the profession itself. In the old days, the CIO used to run some data-processing shop and would report into the CFO. Increasingly, it's common to see the CIO reporting to the CEO. Often you see CEOs and COOs of fairly large companies who are ex-CIOs. As the technology itself evolves, you can do more with it. As you start doing more with it, you realize that the traditional CIO organizational model becomes very constraining in the ability to make effective decisions and use technology effectively for competitive advantage.

Tell us how your CEO is actively promoting IT initiatives, or comment on this topic in our blog.

See Related Articles:
A Better Metric For IT Efficiency, May 2006
The CIO's First 100 Days, March 2006