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Bain’s Brains | Avoid the IT alignment trap

Bain’s Brains | Avoid the IT alignment trap
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First Published: Mon, Dec 17 2007. 12 49 AM IST
Most companies have absorbed the axiom that IT goals must be aligned with business goals to create value. Yet, far fewer understand that alignment alone doesn’t guarantee business growth. In fact, it can be a trap.
Charles Schwab & Co., one of the US’ leading brokerage firms, for instance, gained prominence through its mastery of IT, first as a discount broker, then as a leader in online trading. By the early 2000s, however, IT had actually become a detriment—a patchwork of custom systems was snarling operations and new IT-based products were delayed. Worse, Schwab was spending 18% of its revenue on IT, while three of its leading competitors spent 13% or less, an annual disadvantage of hundreds of millions of dollars.
That tech-savvy Schwab found itself in this predicament is instructive, for Indian companies as well as global firms that seek to use IT as a lever for growth. Schwab’s quandary signals a growing realization that the usual diagnoses—and fixes—of IT troubles are often misguided. Indeed, the work by Bain & Co. on other business executives shows that even at companies focused on alignment, business performance dependent on IT sometimes goes sideways, or even declines.
To improve alignment, IT organizations develop best-of-breed solutions designed to serve each business’ unique needs. They hold off standardization and upgrading of legacy systems. They overlay complexity on old systems, postponing infrastructure improvements and leaving significant scale benefits untapped. Costs rise; delays mount; and fragmentation undercuts coordination across business units.
This kind of focus hurts units instead of helping them. Defining the alignment trap, Richard F. Connell, senior executive vice-president and CIO of the New Jersey-based Selective Insurance Group, says, “Aligning a poorly performing IT organization to theright business objectives still won’t get the objectives accomplished.”
Another warning emerged when we surveyed more than 500 executives: Few of them rated their companies’ IT capabilities highly. We found that they fell into four camps.
In the first, nearly three quarters believed their IT capability was neither highly aligned with their business goals nor highly effective. These companies occupy what we call the maintenance zone. Minimal budgets keep systems running but IT doesn’t offer added value and, often, isn’t expected to. Such companies recorded a slower rate of growth—2% below the three-year average in the survey—while spending the same as the average every year on IT.
More troubling was the second camp. Here, 11% of companies had IT highly aligned, but not highly effective. Surprisingly, these companies fared even worse. While IT spending was 13% higher than average, their three-year growth rates were 14% lower than average. These were in the “alignment trap”.
Only 15% believed IT was highly effective and delivered projects with promised functionality, timing and cost. These we categorized as “well-oiled IT organizations”.
Significantly, effectiveness on its own made a substantial economic difference. Even companies that didn’t consider their IT organizations highly aligned were spending 15% less than average, and their growth rates were 11% higher.
The final camp was the rarest breed: both highly aligned and highly effective. Such “IT-enabled” organizations amounted to only 7%. But they recorded a compound three-year growth rate 35% higher than the survey average. Moreover, they spent 6% less on IT than other respondents.
These findings make it clear that getting IT right is critical, and offer important opportunities for Indian IT firms keen to expand their global client base. For the majority of companies, the single most important task is to forget about enhancing alignment for the moment, and to focus first on increasing the effectiveness of the IT organization. In order for IT to enable growth, that first move is critical—and it’s the one that companies often get wrong.
Three key principles are useful in moving organizations to high effectiveness:
• Simplify: Raising effectiveness usually involves simplifying the IT function. Thatmay mean delaying some of the division-specific applications that have been custom-tailored on legacy systems. Such an approach requires a greater investment of time and money upfront, but will lead to lower costs later.
• Rightsource capabilities: Effective IT requires capabilities ranging from managing help desks efficiently to creating innovative business applications. Today, nearly all these are available from IT specialists in India and elsewhere. A useful way to make sourcing choices is to decide what needs to be proprietary. In-house development makes sense for applications that are strategic, or critical to competitive differentiation.
• Focus on value delivery: To be highly effective, IT must complete projects on time, on budget, and with IT functionality that delivers what was requested by the business (with agreed upon modifications). To meet these challenges, IT must be equipped with the right objectives, skills, processes, and resources. For example, without a business case and key performance indicators for IT projects, it is difficult to measure and improve the value delivered by IT.
Schwab proves the value of attaining both IT strategy alignment and effectiveness. Indeed, it quickly re-established these tandem goals and is getting results: Per trade costs have decreased more than 50%, while average time taken to execute trades at peak times has fallen 80%.
Best of all, as Schwab climbs out of the alignment trap, clients are rewarding it with increasing trades and assets. In other words, IT is once again igniting Schwab’s growth. It could do the same for you.
Steve Berez is a Bain Co. partner in Boston. Vivek Gambhir is a partner in India. Both are members of the firm’s technology practice. Amit Sinha is a manager at theIndia office.
Send your comments to bainsbrains@livemint.com
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First Published: Mon, Dec 17 2007. 12 49 AM IST