Why General Managers
Need to Understand Information Technology
General managers need to be involved in information
technology (IT)--the amalgamation of hardware, software, data, people, and
procedures--because:
- The sheer magnitude
of the dollars spent on IT must be managed to ensure business-value.
·
Research has
consistently shown that when general managers are involved in IT, IT enables a
number of business initiatives, such as gaining a competitive advantage,
improving business processes, expanding globally, and even starting new
businesses. Senior managers must also
understand how IT innovations may alter industry structures, such as IT’s
impact on the music industry.[i]
·
Research has
consistently shown that when general managers are not involved in IT, systems
fail, dollars are wasted--or at the extreme, companies can fail as a result of
poorly managed IT[ii].
Thus,
IT enables or inhibits business objectives depending on management’s
involvement in IT. The big challenge IT managers face is: how do we get general
managers involved? Research has shown that involvement is highly correlated
with personal experience with IT and with IT education, including university
classes and IT executive seminars. Once general managers understand IT through
experience and education, they are more likely to be involved in IT, and more
likely to lead their organizations in achieving business success through IT.
I. MAGNITUTE OF DOLLARS SPENT ON IT
- On average,
companies’ annual IT budgets represent about 3% to 5% of revenues[iii].
- IT capital
investments represent 20% to 40% of most large companies’ capital
expenditures[iv]
- The information
technology and telecommunications markets represent over $1 trillion of
the US’s Gross Domestic Product (GDP)[v].
- Global IT spend is
over $3 trillion[vi]
General managers must manage these IT expenditures to
ensure they are getting value for money. In particular, general managers must
develop the following IT competencies:
- align their IT
strategy with a business strategy to ensure that current investments lead
to business-value
- retain core
IT-capabilities in house
- develop a sourcing
strategy to minimize production and transaction costs while still
maintaining excellent service levels.
- develop processes for
scanning the environment for new technologies to ensure that future
investments add to business-value
- set IT priorities
(this is critical because user requests for new systems can have backlogs
of up to 4 years)
- operate IT as a
business within a business by negotiating service level agreements and
chargeback to business units.
However, many senior executives fail to develop these
IT competencies. Instead, they typically set the IT budget based on either
historical trends (such as increasing last year’s IT budget by 2%), or by
simply matching the IT budgets of competitors. But these methods are totally
ineffective at ensuring that IT expenditures lead to business-value--they focus
on cost rather than value.
II. GENERAL MANAGEMENT’S INVOLVEMENT LEADS
TO IT-ENABLED BUSINESS SUCCESS.
A
large body of research has found that general management’s involvement in IT
leads to IT-enabled business success in terms of organizational competitive advantage, organizational
effectiveness, and organizational efficiency[vii].
As an enabler of competitive
advantage, IT can differentiate a company’s products, services, and
prices from its competitors by improving product quality, shortening product
development or delivery time, creating new IT-based products and services,
improving customer service before, during, and after the sale.
IT contributes to organizational
effectiveness by providing business intelligence and decision support at
every managerial level through the development of executive information
systems, decision support systems for both individuals and groups, and expert
systems for domain-specific tasks.
IT contributes to organizational
efficiency by lowering internal costs through shared services, Green IT,
automation, downsizing, task support, and communication support.
Some
examples of IT-enabled business success include:
IT enables new business processes
Companies use IT to enable new business processes.
Wal-Mart and Ford provide two classic examples. Wal-Mart, for example,
re-engineered inventory management by giving suppliers access to its inventory
system. Suppliers monitor the database and automatically send another shipment
when stocks are low, thus eliminating the need for purchase orders which speeds
delivery time, lowers Wal-Mart’s inventory carrying costs and stock out
costs. Wal-Mart continues to use IT to
re-invent its processes to continually keep costs low and thus beat their
competitors. Ford automated its accounts payable function by electronically
matching receipts with purchase orders, thus eliminating the need for invoices.
The accounts payable staff was reduced from 500 to 200.
The
main IT competency general managers need in order to use IT as a business
process enabler is the ability to think inductively--that is, to the ability to
recognize IT as a powerful solution.
“The fundamental error that most
companies commit when they look at technology is to view it through the lens of
their existing processes. They ask, ‘How can we use these new technological
capabilities to enhance or streamline or improve what we are already doing?’
Instead they should be asking, ‘How can we use technology to allow us to do
things that we are not already doing?”--Hammer
& Champy[viii]
IT enables global expansion
“Firms operating in new world markets will
increasingly be at a serious disadvantage if they are unable to firmly control
their worldwide operations and manage them in a globally co-ordinated manner. Investments
in information technology can give firms a basis for increased coordination and
control or can provide direct competitive advantage in world markets.” Ives & Jarvenpaa[ix]
Global information systems--which directly support
global business strategies--are used to:
- coordinate operations
via enterprise resource planning (ERP) packages
- service customers via
customer relationship management (CRM) systems
- support global
product design, sourcing, production, and distribution through the supply
chain management (SCM) systems
- create centers of
core competency (computer chips may be designed in
- create flexible
manufacturing operations (the ability to move production between
facilities)
- share resources (petroleum
companies share tankers)
- reduce risks
associated with currency conversions (investment bankers can trade in
several global markets, 24 hours a day).
IT enables shared services
Back office functions such as human resources,
indirect procurement, finance, and accounting are often perceived as costing
too much, providing too little, and responding too slowly. Dysfunctional back
offices often occur because large companies grow through mergers and
acquisitions, dragging along and neglecting the back office step-children. This
neglect results in over-staffed, idiosyncratic, duplicate, and incompatible
back offices across business units. Brave senior executives are not satisfied
with incremental improvements to a few processes. They want organizational reformation
and cultural revolution in back office functions[x].
Shared services is one popular solution. According to
Accenture, shared services is defined
as “the consolidation and redesign of business processes into a standalone
service.”[xi] Organizations create shared services
to dramatically reduce costs, improve service, and even increase revenues. The practices to achieve these results
normally include centralization, standardization, re-orientation of staff, and
process redesign. IT is a critical enabler
of shared services by implementing a standard system to support standard
services.
At one global Financial Information Services firm, IT
was seen as the critical enabler for creating shared financial services for
business units in over 90 countries.
This company’s shared services organization has won many service awards
for their shared services. Senior finance managers discovered that their best
initial investment was a global, single-instance ERP system. As one informant said, “This is worth investing in before anything else.”[xii]
III.
LACK OF GENERAL MANAGEMENT INVOLVEMENT CAN LEAD TO BUSINESS FAILURE.
Despite the previous evidence and arguments outlined
above, many general managers still question why they need to bother to
understand IT. Senior executives often misperceive IT as is merely a
utility--much like electricity. This old
argument was recently resurrected with Carr's famous article in the Harvard Business Review, "Why IT
Doesn't Matter." But IT is distinctive from “utilities” because information
systems are not homogeneous, but require customization. The problem with the
“utility” metaphor is that it ignores the idiosyncratic nature of an
organization’s information needs. Close communication between the business
units and IT must occur to accurately meet requirements. As utility users, we
typically do not call the power company to communicate our complicated changing
business needs. As IT users, we do[xiii].
Treating IT as a utility--something than can be
plugged and unplugged--can lead to business failure. For example, Banca di
Roma’s disastrous merger was largely blamed on management’s failure to plan for
integrating IT systems from the three merged banks. Senior executives who made
the deal assumed that the systems could merely be unplugged from one bank and
plugged into another. Branson Airlines outsourced its airline reservation
system to British Airways because they considered this a “utility”. After
mysteriously losing millions of dollars worth of sales, Branson discovered that
BA was assessing their data and offering their customers a lower ticket price
is they would cancel their Branson reservation and book with BA. This has lead
to a billion dollar lawsuit.
While Banca di Roma and Branson highlight the extreme
consequences of management’s ignorance of IT, less severe--but far more
frequent--are the dollars wasted on systems development. Research has shown
that up to 80% of system development efforts fail to deliver promised
functionality--not because the technology failed, but because the system
development process was poorly managed. General managers need to develop the
following competencies:
- Develop a process for
evaluating the feasibility of IT projects
- Implement system
development methodologies based on the nature of the system
- Develop IT project
management skills, including user participation, approval methods, Six
Sigma, etc.
- Provide significant
resources and attention to change management
IV.
SUMMARY
General
managers need to understand the actual--as well as the potential--role that IT
assumes within organizations. General
managers must partner with IT managers to use IT to enable business
objectives—IT managers cannot succeed on their own.