Why General Managers Need
to Actively Participate in Information Technology Decisions
A perennial maxim about
information technology[1]
(IT) is that “IT has no inherent value”.[2] Simply owning IT assets does not generate
business value in terms of gaining a
competitive advantage, improving business processes, or reducing costs. Value from IT only occurs when key
stakeholders manage information technology to deliver business value. These
stakeholders include senior executives, members of the Board of Directors,
business unit managers, business users, IT managers, project managers, systems
analysts, programmers, architects, contractors, external supplier employees,
consultants, salespeople, public officials, and policy makers. These
stakeholders rarely share the same agendas, expectations, or perceptions of
IT. Thus, a persistent IT management
challenge has been to align the various stakeholders within and across
organizations to ensure value from IT investments.
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.[3]
·
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[4].
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 3.5% of revenues, but
different consulting firms and research organizations report different
numbers.[5]
- IT capital
investments represent 20% to 40% of most large companies’ capital
expenditures.[6]
- Global ICT spend is
over $3.75 trillion.[7]
- Global ICT represents about 6.4% of global GDP.[8]
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.[9]
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, and
improving customer service before, during, and after the sale.[10]
IT
contributes to organizational effectiveness
by providing business intelligence and decision support at every managerial
level and by removing constraints that prevent the organization from pursuing
opportunities (Peppard et al. 2007).[11]
IT contributes to organizational
efficiency by lowering internal costs through shared services,
automation, downsizing, task support, and communication support.
Current
thinking on the business value of IT investments advocates a portfolio approach—different IT investments
generate different business value. Lacity et al. (1996) created a business
contribution matrix to capture the business value of various IT activities with
an IT portfolio (see Table below).[12] The matrix comprises two axes--the
contribution that an IT activity makes to business operations and its impact on
competitive positioning. Although most
IT investments yield value based on effectiveness and efficiency, IT leaders
and researchers have been most interested in the differentiator quadrant.
|
|
Contribution to competitive positioning |
|
|
Contribution to business operations |
COMMODITY |
DIFFERENTIATOR |
|
CRITICAL TO BUSINESS
OPERATIONS |
Critical Commodities: IT-enabled organizational effectiveness |
Critical Differentiators: IT-enabled competitive advantage |
|
USEFUL TO BUSINESS OPERATIONS |
Useful Commodities: IT-enabled organizational efficiency |
Eliminate/Migrate: IT investment is differentiated (such as highly
customizing a software package) but is not providing business value |
IT-enabled Business Value
Overall,
researchers generally have found that few IT activities can provide a
sustainable competitive advantage.[13]
However, the few exemplars of organizations that have visibly used IT to
sustain a competitive advantage have fascinated us. Such exemplars include McKesson Drugs,
American Airlines, and Federal Express[14].
Many researchers have studied the factors for sustaining a competitive
advantage from IT investments. Porter and Millar (1985), for example, looked at
the ability of IT to erect barriers of entry from other competitors and the
ability to create high switching costs. The authors also argue that IT affects
competition in three ways by (1) changing industry structure, (2), creating
competitive advantages by lowering costs or enhancing differentiation, and (3)
spawning new businesses. Feeny and Ives (1990) argue that sustainability is a
function of generic lead time over competitive response, competitive asymmetry
(not all competitors will be able to respond), and pre-emption potential (not
all competitive responses will be effective).[15]
Clemons and Row (1991) examined the structural factors, such as collections of
resources, associated with sustainability. Dos
Measuring IT Business Value
Creating
business value from IT investments is one thing, but measuring its value is
quite another. The need for better
measures of IT business value became an IT management crisis when Nobel Prize winning economist Robert Solow found that "You can see the computer age everywhere but
in the productivity statistics."
Solow and other researchers could not find correlations between IT investments and increased productivity at a
macroeconomic level.[18] This phenomenon became known as “IT
Productivity Paradox”. IT scholars
offered many explanations for the paradox including poor measures, diffusion
delays (it can take decades for innovations to result in increased
productivity), and capital stock theory (although IT is 20 percent to 50
percent of capital spend, it is still a small percentage of capital stock.)
Since
the 1980s, IT researchers have found better ways to measure the value of IT
investments. Researchers have generally
agreed that business benefits should be measured at the firm level. At the firm level, IT investments do lead to business
value provided investments are managed well--the major theme of this
course. With better measures, IT
investments have indeed been correlated with business value.[19] For example, Brynjolfsson and Hilt (1996) found
evidence (based on over 100 observations) that IT investments lead to increased
productivity and other business benefits at a firm level.[20]
Another excellent paper by Quinn and Baily (1994) found that IT increases
productivity in service activities.[21]
IT Governance: Engaging Senior Managers
to Participate in IT Decisions
What
roles and responsibilities should senior managers have in IT decisions? Recent research has generally agreed that
senior managers have different roles to play depending on the type of IT
decision or type of organization (Brown, 1997; Sambamurthy and Zmud, 1999;
Weill and Ross, 2005; Huff et al. 2006).[22] For example, Nolan and McFarlan (2005)
prescribe how Board of Directors should oversee IT. They identify three
different governance practices for monitoring IT investments based on their
strategic grid: (1) defensive governance, (2) offensive governance, or (3)
administrative governance.[23]
Peter
Weill is one of the premier researchers on the role of senior management
participation in IT governance. His
research, based on hundreds of organizations, found that senior executives,
business unit managers, and IT managers participate in different ways depending
on the type of IT decision. His book
with Jeanne Ross[24]
provides detailed coverage and the selected reading for our course (Weill,
2004)[25]
provides an excellent encapsulation of their findings. Although this work was
only published a few years ago, it has already been cited over 100 times. In this paper, Weill describes five types of
governance structures (business monarchy, IT monarchy, feudal, federal, IT
duopoly) and five types of IT decisions (principles, infrastructure,
architecture, business applications, and investments). Based on four measures of business
performance, he identified the best ways in which senior executives should
participate in IT decisions to maximize business value.
Specific examples of IT-enabled
business process improvement
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[26]
Specific examples of IT-enabled 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[27]
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).
Specific examples of IT-enabled
organizational efficiency
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[28].
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.”[29] 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.”[30]
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.[31]
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
accessing 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. Insignificant
management attention to an ERP system directly contributed to the bankruptcy of
the
While these examples 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.