Corporate IT is a business toll; how your firm uses it alone differentiates whether it is a competitive weapon or the costly obstacle that it usually is. The true quality of corporate IT is how well it advances your firm’s strategy, not how well it is constructed.
Red Queen competition – from Lewis Caroll’s Through the Looking Glass is a metaphor for need to run as twice as fast to get somewhere, if you only run that will only keep you in the same place. In today’s world running faster will only keep you in the race. Changes that are influencing today’s IT influenced business world are called trifecta – digitalization, infusion of software into everything nontechnology firms make and do, and ubiquitous connectivity.
Argument that IT is becoming commodity misunderstands what corporate IT really is. IT is just a tool, how it is used matters. The firm that best uses it wins. Corporate IT does not exist in a vacuum; 100 percent of its strategic value comes from its connections to your firm’s business strategy. Three IT assets are:
- IT infrastructure
- IT apps
IT apps are enablers of business innovation and infrastructure is a target for fiscal stinginess.
IT infrastructure is never a source of competitive advantage, but good enough infrastructure is a necessary foundation to run apps. It is firm-wide technology foundation. It includes firm’s digital plumbing that moves data (network connectivity) and stores data and a firm’s support (IT operations, maintenance and support). Hardware and networks, the most visible parts of IT infrastructure are commodities that your rivals can also buy. It must be:
Economies of scale, bullet-proof reliability and security are therefore critical in provisioning IT infrastructure.
Apps consume only about 20% of corporate IT budgets but generate almost all the competitive differentiation from IT investment. Apps draw primarily on business know-how of line functions’ activities, business processes and problems. We have operational and strategic apps. Operational supports a firm’s core business processes and transactions and can crosscut line functions. They either automate tasks or facilitate collaboration. They can be inward or outward facing. Although operational apps often are commodities, some can be expensive. Operational apps are competitive necessities. Strategic app attempts to create a competitive advantage by doing something valuable that your archrivals cannot do. They either introduce new ways for outsiders to interact with your company, expand into new lines of business or exploit proprietary data in new ways to help your company, customers or business partners make better decisions. A big part of IT strategy is about making your value producing IT apps harder to copy.
Most data in firms is collected either by transaction processing systems or firm-wide enterprise systems. It is apps and data together that together can help create a competitive advantage.
The four epoch of IT business are:
- Data-processing epoch that focused on efficiency
- PC epoch that focused on productivity
- Internet epoch that focused on collaboration and was already in information abundance environment
- Cyborg epoch that is focusing on capability.
When we talk about Trifecta, we mean:
- Digitalization – that represent digitalization of a product, service or activity that was previously physical and erase geographical constraints.
- Infusion – baking software into a product, service or business activity, that enable products to become services.
- Ubiquity – omnipresence of cheap Internet connectivity, that helped costless communication to occur at the speed of light.
Talking about digitalization, delivering any market offering has three dimensions: the offering itself, how it is purchased and how it is delivered. Based on that we have offering digitalization, purchase process digitalization or delivery digitalization. Digitization dematerializes atoms into bits. We are experiencing near-zero reproduction and transportation costs. Digitalization is therefore enabling new business models. Digitalization raises an entire industry’s bar for operational efficiency.
Infusion means baking software into products and services. IoT is accelerating that driver. Consequences of software infusion is that companies are becoming more like software business. They are moving into services business that has greater long-term revenue potential. Creating ongoing revenue stream, pricing is driven by value and companies have potential to lock in customers.
Ubiquity refers to the proliferation of cheap and fast internet connectivity anywhere and everywhere. It makes new business models based on services possible.
IT is not a functional department; it is more of a glue that binds modern firms. It also connects your firm to your business partners. It is increasingly impossible to execute your firm’s strategy without synchronizing your IT strategy to it. Ideally business processes and IT apps must be designed concurrently. This however requires firms to custom build their own apps instead of buying them. That is singly the costliest, riskiest and most time-consuming way to acquire an IT app. IT strategy gets its vision from non-IT managers and capability from the IT unit. All strategy begins with two questions: who (mass market or market segment) will you target and how (low cost or differentiation)? When you look at your firm’s strategic aspiration it can either be low-cost player or a purveyor of a unique offering in your target market. Low cost is about operational effectiveness. The other strategy is differentiation, but it only works as long as your archrivals cannot copy you.
Your firm’s strategic aspiration, should drive both your firm’s operational strategy and its IT strategy. IT is the foundation for executing operational strategy. It is an integrated set of choices that define how your firm will use IT to outperform its archrivals. It is more about synchronization of operational and IT strategy then alignment. It is about overlapping what line functions want, what IT thinks they need and what is feasible.
Non-IT managers can contribute to IT strategy by:
- Competitively exploiting data assets using analytics
- Strategically choosing IT architecture
- Avoiding the Goldilocks trap, ensuring payoffs and investing under uncertainty
- Governing IT to simultaneously be strategic and frugal
- Ensuring that IT projects deliver tangible business benefits and are appropriately sourced
- Securing IT assets and ensuring resilience
- Monitoring emerging technologies to spot business opportunities
Predictions turned scientific only about three hundred years ago with the emergence of statistics in England. Humans are creatures of habit, so how they will behave will resemble how they have behaved.
Business analytics needs two things: sound data and sound reasoning. It is about data and models. Without business input, IT units get better at collecting more data but without a clear business purpose. Software apps transform data into business insight. Reasoning must come from non-IT managers. Sometimes you need data about data – metadata. Big data is emerging and that means that on top of data points, we now have streams of data, that have very short time span due to their volumes. Big data is replacing predictions with foresight and offering insight into what causes what (understanding causation).
When we looking at information and how it affects our industry, we can use three lenses:
- The five-forces lens – that zooms out to the level of industry and how IT is altering the rules of competition for every firm in that industry including your archrivals.
- The value-chain lens – magnifying glass, comparison to archrivals and how value is created.
- The litmus-test lens – microscope – looking at each IT asset, if it can bring competitive value.
Five-forces model is about: fierceness of competition, customer bargaining power, suppliers bargaining power, threat of substitutes and threat of new entrants. You can fight those forces with operational effectiveness or creating unconventional competitive barriers. The five forces matter because they shape an industry’s margin. Margins are your firm’s oxygen supply; it cannot survive without them. For nonprofits, better margins mean achieving more of their social goals per dollar spent. For government agencies, better margin means delivering more for its citizens’ tax dollars. Competition will make any company pass on any increase in their margin to consumers as lower prices or better products and services. All forces either influence how much customer will pay (substitutes, new entrants, customer power, competition) or how much it costs you (supplier power, competition). IT can influence competition by: increasing transparency, erasing geographical constraints, blur industry boundaries, enable legacy-free business models, increase operational effectiveness and enable unconventional competitive barriers.
A value chain is a series of linked activities that your firm performs, each of which ideally adds value that your customers are prepared to pay. The value chains of most firms with the same strategic aspiration in an industry have comparable structures. We have primary and secondary activities in value chain. IT was part of second but it should not be anymore. Value chain are information intensive. IT can alter value chain either as:
- Operational effectiveness
- Inbound logistic
- Outbound logistic
- Inbound logistic
- Outbound logistic
- Operational effectiveness
- Structural reconfiguration – disintermediation (bypassing firms in your value chain – Amazon brought authors directly to consumers in book industry).
- Among functions
- Substituting inventory with information
- Anticipating shifts in demand
Being competitive is one thing, but staying competitive is another. The competitive litmus test helps judge whether a discrete IT asset can produce a sustainable competitive advantage. An IT asset must be valuable and rare to create competitive advantage and inimitable and nonsubstitable to sustain it. Purchased app can create but rarely sustain a competitive advantage. The route to sustaining a competitive advantage is developing IT assets that your archrivals find difficult to imitate, which preserves their rarity. There are two ways to construct a more sustainable competitive advantage using and IT app: using it to create network effects or blending it with proprietary data to create an analytics-driven edge.
Four approaches to data-driven analytics are:
- Predictive modeling
- Pattern discovery
- Collaborative filtering
- Social network analysis
- Bayesian analysis
- Cluster analysis
- Data mining
- Model discovery
- Machine learning
- Neural networks
- Sentiment analysis
Architecture serves an identical purpose for IT projects as it does for homeowners: it translates between users and builders to get them on the same page. The translation is from the abstract vision of business users into concrete IT capabilities. Shortcuts in architectural decisions take on a technical sort of debt, whose interest firm pays in greater maintenance costs and poorer business agility. Architecture is the DNA of IT systems. Its strategic consequences manifest long after its immediate operational consequences. A firm can promote operational ideal systems and pay some real strategic costs later. Or it can promote flexible systems and pay some real operational costs today.
Consequences of IT architecture:
- Scalability – cost effective in supporting growth needs.
- Evolvability – can it adapt to things that it was never designed to do.
- Fitness of purpose – how responsive is it (speed) and can you count on it (reliability).
- Maintainability – how cost effective is to make it run smoothly.
Architecture is the primary source of complexity in a firm’s IT portfolio. If a firm’s IT architecture is not a catalyst for business agility, it is an impediment. Most apps use data that originates in another app or send data to another app, so data must be able to move back in forth among them. A good enterprise architecture makes complexity manageable by: increasing the autonomy of IT assets and easing integration. We can break up IT portfolio into: IT infrastructure that is relatively stable and specialized business apps that can change much faster. Apps can use modular design approach. Also, if you use API (application programming interfaces) for your partners you can increase integration.
IT infrastructure consumes more than 50 percent of corporate IT budgets – must be reliable but economical. The key architectural choice is how much to decentralize IT infrastructure or how much to centralize it. Centralize are costlier to build but cheaper to run.
Any app consists of three building blocks of functionality: interaction functionality, app logic and data storage. An app’s architecture is simply how you choose to divide these three pieces between a centralized server and user devices. Their arrangement (the choice that the app’s designer makes) gives us three common app architectures: cloud architecture, client-server architecture and peer-to-peer architecture.
Cloud architecture puts all three pieces on a central server. It centralizes everything, that is its strength and weakness. Weakness since it increases its vulnerability and needs strong internet connectivity. Cloud architecture lowers up-front capital cost but will usually increase ongoing, variable operating costs. Cloud architectures are recommended as a capital-economizing approach for apps that do not differentiate your firm and for devices with miniscule computing prowess.
Client-server architecture locates the interaction and app logic functions on user devices and centralizes only data storage. Client-server is the single most common app architecture used for corporate IT apps. Strategically, custom developed client-server apps are competitively more valuable because reverse engineering can be costly. App development can cost between 15-40 USD, but maintenance is even more expensive, estimation is about 5-7 times of initial cost. Some variant of this architecture was influenced by cloud-architecture – like SOA (service-oriented architecture). Microservices are discrete generic services that can be purchased from many different firms to assemble the application logic of an app.
Peer-to-peer architecture takes the stand-alone architecture and then connects all user devices using the Internet. Peer-to-peer architecture is therefore recommended only for apps that require very high levels of scalability but demand absolutely no control by a firm over user devices.
No single architecture is optimal because every one of them involves trade-offs. The strength of client-server architecture is speed and reliability; cloud is the least expensive to maintain, and peer-to-peer is the most scalable.
When we think about data architecture, we should be careful about fragmentation of data across apps. Usually fragmented data silos are integrated using data warehouses. The access to firm-wide data that it provides is a stepping-stone to business processes innovation and business analytics initiatives.
Eight out of ten firms struggle to estimate the benefits of their IT investments. Sensitivity in IT investment boils down to four questions:
- How much does it cost and who foots the bill?
- Are we investing in the right places?
- Are we getting our money’s worth?
- How do we tread when the payoff is potentially huge but uncertain?
The IT payoff clock has those phases:
- Adoption – roll out and use.
- Business value creation – an IT system in full-fledged use can begin generating value by impacting – after the delay called Lagoperational.
- Payday – operational improvements should improve revenue or reduce costs, thus improving firm’s bottom-line margins.
IT investments differ from others in four ways: many of the benefits are intangible, their impact lags investment, it is difficult to be sure that they caused observed improvements and they can demand complementary investments to realize impact. Intangibility of benefits could be increased customer satisfaction, faster decision making, brand awareness or improved collaboration inside and outside your firm.
Firms often use too many metrics for IT, which drowns them in a sea of meaningless data. Simple is better. IT metrics should use those criteria: worth more than they cost, competitive insightful, objective (spanning the short and long term). When measuring things, we should be careful about Hawthorne effect. We should make sure that results are really connected with what conditions of change and not change itself.
Investments are made out of capex and opex. And opex is usually much bigger part of it. So, we should look at TCO (total cost of ownership). Another approach for measuring the investment benefits is calculating NPV (net present value). NPV is a project’s benefits minus costs, accounting for the time value of money. Rule is that you need to pursue projects with positive NPV and if comparing two projects, choose the one with a higher profitability index. NPV works well where there is little uncertainty involved. Another approach is hurdle rate rule. This is when company establish its own hurdle rate and IRR (internal rate return) target for success of a project. ROI is return on investment, which is percentage return that your investment in a project pays back. It can also be calculated as time until project brings back investment. All those metrics are more about investment than business value projects are bringing.
When thinking about who foots the bill for IT, we can talk about: allocation, corporate funding or chargeback approach. All those approaches have two out of three features. Corporate funding is fair and simple. Allocation is simple and accurate. And chargeback is accurate and fair. Corporate is more appropriate for apps. And allocation and chargeback for infrastructure. Corporate is about fixed annual budget. Allocation is about users. Chargeback is about usage. Improvements in short-term operational metrics should lead to improvements in long-term financial metrics.
When using operational metrics, we need a frame of reference so that we can examine either change or compare them with competition. A good operational metric must explicitly articulate the following: the project promise, the measure or time to impact. Operational metrics is where IT strategy meets managerial accounting and operations management.
The bottom-line impact of IT on your firm’s performance is measured by changes in your firm-level financial metrics; this is where IT strategy meets corporate finance. One of the financial metrics is also ROIC – return on invested capital. Some forward-looking indicators are Tobin’s q and P/E ratio. Changes in Tobin’s q over time signal IT’s contribution to your firm’s performance potential.
Analyzing firm’s IT portfolio is key to understanding whether a firm is investing the right amounts in the right places. The ideal portfolio varies by industry. Split can be up to 70% into infrastructure, which is where companies are not making any competitive advantage. Total amount of money spend on IT as percentage of revenue also varies across industries. From 7% in financial services to 2 % in retail and manufacturing. Average was around 3,3 % in 2018.
Real options thinking is an IT investment mind-set for reducing the downside risk of such high-risk, high-return IT investment. Uncertainty in IT projects can be technical or market. A real option is the flexibility to do something in the future without being obligated to do it. It is calculated on top of NPV. NPV of options = NPV conventional + (value of all real options present in a project). Six types of real options can be presented in an IT project:
- Real options
The simplest way to apply real options thinking is therefore to increase the ration of may-do to must-do stages in an IT project.
Some of the projects with development of some of operational real options are SABRE project of American Airlines and Starbucks prepaid card that become platform for insights into customer behavior.
IT governance is about who decides what about IT. It is the pivotal determinant of the business value that your firm get from its IT assets. IT governance is what provides non-IT managers the mechanisms to influence their firm’s corporate IT decisions. IT governance is allocation of IT decision rights. We can either centralize them, decentralize them or federate them. Authority and accountability for IT decisions go hand in hand. Those who call the shots must also bear accountability for realizing its business impacts. If no non-IT managers is willing to bear responsibility for the business benefits of a particular IT investment, that alone is a red flag of its business value.
Every major IT decision encompasses two types of decisions: what IT should accomplish and how it should be accomplished. The what decisions are where non-IT managers’ contribution to IT strategy should concentrate. Centralization is good for management and integration, but can exclude line of business needs. Decentralization is strong in line of business support, but integration could be a problem. Federated IT governance struggles in practice.
IT infrastructure governance is best done centrally and should be under IT department. Non-IT contribution should be about how much reliability and responsiveness are a must for line functions to do their job. Higher reliability costs more.
IT apps governance refers to whether the line functions of IT unit decides what business objectives your IT apps mush accomplish. Usually the best approach is decentralization and in primarily responsibility of non-IT.
Data governance is about who – the IT unit or line functions – had the authority and accountability for decisions about what your firm’s data assets must accomplish. Data governance is about who decides how data will be organized. Non-IT managers can contribute in: what data is needed faster, about firm-wide versus local data and stewardship – who is a steward of data.
The ideal combination is line functions drive apps decisions and the IT unit drives IT infrastructure decisions. This result in a corporate IT portfolio that is simultaneously economical and synced.
IT colleagues can prevent IT projects from execution failure, non-IT managers can prevent their business failure. Most IT project failures are a combination of technology and business decisions, not just poor project management.
The best technology does not always win. It must outdo its real competition, which is not always obvious. Trying to integrate many unproven technologies and introducing it before the complements that make it attractive have arrived can also doom projects.
When working with specialist, do not try to micromanage them. It is important that you communicate clearly what is expected from them. Direct what they deliver, not how.
Three reasons why IT projects fail:
- Ambiguity of purpose – poor communication between business and IT that leads to building the wrong system. Majority of projects do not even define the criteria for judging their success. Even the most skillful IT project team cannot build what you cannot describe.
- Unnecessary complexity – the source of growing complexity is ballooning scope; one system tries to do too much. A project’s overall risk is a combination of its clarity of purpose and its complexity.
- Absence of and explicit choice of trade-offs – an IT project can be fast, cheap or good, but you can only pick two out of three. This is known as triple constraint model. Projects are usually constrained by time or money.
Non-IT managers must accept the project risks that they cannot change, change the ones they can and have a wisdom to know the difference. Two risks can be beyond their control: a project use of immature technology and underestimation of time and money. It is better to be roughly right than precisely wrong.
If we want to improve chances of success of IT projects we can:
- Make sure that we define purpose clearly. The waterfall approach –
gather requirements, design, code writing, test and roll out – assumes that
project team can identify business users’ latent needs. But because during
design, code writing, test phase, called also isolation phase, there is no
communication between business and project, a lot of projects can run on needs,
that during that time change or competitors alter their strategies, technologies
can evolve or regulatory agencies may impose new rules and that all can result
in project failure. Another approach instead of waterfall can be lean approach
with agile methodology. A project-s value in the lean approach is in the eyes
of its users; it is successful only if they find it useful. People come before
technology. The general rule of thumb is to prefer lean for projects where business
users’ needs would be hard to gather. In such projects, the solution is initially
unknown and requirements are likely to change. In contrast, the waterfall
approach is appropriate for projects with clearly definable, stable
requirements and proven technologies or in projects of large scale. Scrum, extreme
programming, pair programming or prototyping, they are all permutations of
- Active business participation – actively involving throughout the
project those who will use the new system. The business-side participants best
suited for inclusion in an IT project team have five characteristics (CRACK):
- Representative of users in their line function
- Authorized to make decisions
- Committed to delivering business value
- Knowledgeable of their line function’s operations and business processes
- Short iterations – do a project in a series of iterative sprints of two to six weeks. The time constraints of each iteration do not repress innovation; they direct it.
- Less code – reduce the amount of software code in a system. Historical data shows that an average programmer makes ten to fifteen errors in every one hundred lines of code. And testing usually only catch 50 % of them. And the cost of fixing an error is about one hundred times greater after the software has been deployed.
- Active business participation – actively involving throughout the project those who will use the new system. The business-side participants best suited for inclusion in an IT project team have five characteristics (CRACK):
- Curb scope – trying to cover 100 percent ground can mess up the 20
percent that matters most to your business. Non-IT managers can help identify the
20 percent by classifying each major project requirement into one of the following
four categories, called the MoSCoW classification:
- Must-have requirements
- Should-have requirements
- Could-have requirements, but not critical
- Won’t have this time, but maybe later.
- Accountability without micromanagement – a MOW (measurable organizational
value) statement for any IT project must have four elements:
- Intended impact
- Change metrics
- Time to impact
The overarching themes in these three antidotes to the business failure of IT projects are making projects smaller and actively involving business stakeholders. We have three potential roll outs strategies: direct cutover, parallel rollout and phased rollout.
IT sourcing broadly refers to where – in your own firm or outside – are your IT assets developed and maintained. IT outsourcing was for some companies’ one-way street that left them unable to bring it back in-house. Some nonstrategic IT-related decisions that do not require non-IT managers’ inputs in how they are sourced are: business processes enabled by IT, commodity IT infrastructure and services and commodity-packaged software. But for custom-built and embedded software non-IT managers’ inputs matter strategically. You can add to this also decisions about software that is embedded into firm’s products or services and one-off, nonrecurring IT tasks.
When thinking about IT insourcing, advantages are: natural alignment of interests, retaining of skills inside the firm, better protection of intellectual property. Disadvantages on the other hand are: you may not have all the skills and costs of doing it inside could be higher.
We can structure IT sourcing in this way:
- IT sourcing
- IT unit
- Concurrent sourcing
- Cloud source
- Tapered outsourcing
- Open source
- Crowd source
- Concurrent sourcing
Two perpetual problems make it harder to realize business value from outsourced IT projects: integration costs and receiving the wrong system.
Firms can use two strategies to lower integration costs in IT outsourcing: concurrent IT sourcing and adopting a verify-then-trust approach toward vendors. Concurrent IT sourcing is the practice of simultaneously insourcing and outsourcing the same sort of IT projects. Boeing Dreamliner project offers three lessons for IT outsourcing decisions: do not underestimate integration costs, do not outsource design and do not outsource what you have never done yourself.
When you receive a technically sound system that fails to serve its intended business purpose. Projects with poorly specifiable requirements should not be outsourced at all. Strategies to lower this risk are two. One tapered outsourcing, where firm control through design and they handoff project to a vendor much later, usually in coding stage. This is known for Japanese companies. Second approach is structuring flexibility into contract. You can have fixed-price contracts and time-and-material contracts.
When thinking about decision to insource or outsource, have in mind two dimensions, how mission critical task is and does it bring any competitive differentiation. If it does not bring any competitive advantage and it is not mission critical outsource it. Ideal profile for outsourcing is that project is: precise, stable requirements and labor intense.
The chain of responsibility in outsourcing projects is from vendor to IT unit to business unit. We should be clear about control mechanism in a project and about capability of vendors. Five things to consider if projects are placed offshore: time zone, skill set, profile, culture and legal sophistication. Outsourcing lengthens the chain of responsibility.
Security and business continuity
How firms secure their IT assets is usually not strategic challenge, but if you don’t do it right, its failings can threaten firm’s survival. Internet original intent was connectivity, not security. Not every IT asset is equally important. IT infrastructure is mainly technical domain, so no big non-IT input is needed. IT apps can be attacked through hacker’s direct attack or by attaining security credentials from employees with diversion. Non-IT primary contribution to their firms’ IT security decisions are data related.
You can use three things to secure any IT systems: something you know, something you have and something you are. Skilled hackers prefer social engineering over brute force. IT security failures occur in spite of technical safeguards for five reasons: firms view IT security as technical problem, they overlook the insider threat, the weakest link in a permeable boundary with other firms creates vulnerabilities, non-IT managers don’t explicitly make a trade-off between security and convenience and the IoT.
Practices that can strengthen the protection of data assets against insider threats are: you can monitor employees, encrypt sensitive data, wall off systems with sensitive data, unlink sensitive data from other data, anonymize sensitive data if you only need aggregates for analytics initiatives and refrain from collecting excessive data.
If the breach really happens, it is important that you react correctly. You can do that by: advanced preparation, fast reaction and focus on long term.
Business continuity planning is the tactical plan for quickly resuming your firm’s business operations after a catastrophe. Disaster recovery is a subset focused on getting IT operations back up and running after a disaster. We can talk about cold site, warm site and hot site. Non-IT managers can contribute to business continuity planning in three areas: identification of critical IT assets, recovery time objective and recovery point objective
Predicting is easy, being right is hard. Firms struggle against newbies with disruptive IT-enabled business models for three reasons: they overinvest or underinvest in emerging technologies because they cannot separate signal from noise, they forget that solely their application begets value and their timing is off.
When estimating if we are facing disruption from technology, we should check if technology: alter some aspect of the digitalization cube, alter the balance of power among customers, suppliers, substitutes and new entrants in your industry, help create a new business model by altering your firm’s value stream or create a sustainable competitive advantage or merely raise the floor for remaining in your industry.
New technologies often start out as solutions searching for problems to solve. Some early IT investments fail because the complementary technologies that would make them worthwhile have not yet arrived.
Coming changes can be classified into:
- Coming waves
- Transcend physical-digital
- 3-D printing
- Overlay physical on digital
- Augmented reality
- Transform scale
- Transcend physical-digital