Acquiring a taste for IT

In "IT Savvy", Peter Weill and Jeanne Ross, both from MIT’s Center for Information Systems Research (CISR), present the IT journey and highlight the role of digitized platforms on that path.

	Title:	IT Savvy
	Author:	Peter Weill and Jeanne Ross
	Pages:	182pages
	Publisher:	Harvard Business Press
	Price:	$29.95

For the authors of IT Savvy: What Top Executives Must Know to Go from Pain to Gain, an IT savvy firm is one that is able to use IT to consistently elevate firm performance. IT ceases to be an obstacle and becomes a strategic asset. The driving concept of the book is that of digitized platform defined as “an integrated set of electronic business processes and the technologies, applications and data supporting these processes.”

Aetna is the first example mentioned by the authors of an IT savvy firm. Starting in 2000, it has built an executive management information system (EMIS) consisting of a solid technology base which has enabled the digitization of the reliable, predictable business processes for daily transactions. A digitized platform such as Aetna’s does not seek to cover all business processes – remain outside its purview those processes that require human intervention as well as the processes that not directly related to the ones covered by the platform.

The implementation of digitized platforms allows firms to fight the proliferation of piecemeal systems. Acceptance of the piecemeal approach to IT organization results in isolated systems which fail to communicate well. Any attempt to change one system risks causing problems in the others. And trying to foresee the consequences and corrections across the isolated systems takes time. Such piecemeal systems ultimately lead to opacity and high maintenance costs. Firms that are not IT savvy will spend upwards of two thirds of their budget on operating and maintaining existing system. For IT-savvy firms that figures drops to 50%. Nearly half of an IT savvy firm’s budget can be devoted to the digitization of core processes.

IT savvy businesses are not all high-tech firms. While new e-businesses such as Amazon, eBay and Google make the list, so do traditional businesses such as Seven Eleven Japan, United Parcel Service and Procter&Gamble. For example, Procter&Gamble created a system baptized Global Business Services (GBS) to provide many of the firm’s common repetitive services. GBS provides seventy shared services ranging from e-mail to customer relationship management systems. Managers can then focus on brand management and on all the non-unique services that may entail.

Integration and coordination

A digitized platform can provide two benefits: integration and standardization. Integration provides data access across a business while standardization reduces variation in repetitive business processes so as to increase quality and efficiency. The mix of integration and standardization constitutes the firm’s IT operating model. The two variables, integration and standardization, each have two dimensions (high and low) resulting in four operating models (see chart).

The coordination model unites high integration and low standardization. Pepsi Americas used such an operating model to handle the increasing number of products and packaging options. Order and inventory data make up the core of the platform. Once that data platform was in place, PepsiAmericas was able to embark on a restructuring, moving it from a regional organization structure to a customer segment organization structure.

A second model, unification, brings together high integration and high standardization. This is appropriate for a single business with global process standards and global data. The authors cite Swiss Re as an example of an IT savvy firm using a unification model.

The diversification model combines comparatively low integration and low standardization. This model is appropriate for fairly autonomous business units. P & G is such a company and its Global Business Services system creates synergies among autonomous businesses, but does not attempt to provide maximal customer and product data across the entire business.

A fourth model, replication, marries low integration and high standardization. CEMEX is the authors’ example of a firm that has built a platform of standard technologies to serve independent but similar business units. High standardization in CEMEX’s case has resulted in global efficiency.

The IT journey

In 2007, MIT’s CISR (Center for Information Systems Research) did an IT survey of some 1500 firms (just over 50% based in the US). Drawing upon that study and their own experience, the authors see the IT savvy journey as a four stage process: localizing, standardizing, optimizing and reusing.

In the first stage, the firm’s priority is growth or expansion into new markets. The firm is building a value proposition and the systems that support that proposition. Around 25% of the firms in the CISR survey were in the stage 1 phase. But these one-off systems become a liability, once past the phase of business model experimentation and into the phase of consolidation.

Stage 2 involves more focus on cost and less on business model innovation. The CEO senses (through benchmarking or increasing IT budgets) that the firm is spending too much on IT. Other signs of need to move on to stage 2 are the increasing proportion of budget devoted to system maintenance or slow delivery on the part of IT. To avoid the anarchy of legacy systems, senior management commits to a shared infrastructure. 46% of the firms were in stage 2. The authors mention the example of Raytheon which implemented a standardization project allowing it to go from 150 payroll systems to 1, 28 e-mail systems to 1, and to reduce IT spending by 40%. Standardization increases security and delivery time; it also fosters professionalism of the IT staff.
 
In stage 3, optimizing, more emphasis is placed on business process changes. 27% of the CISR survey firms were in stage 3 and had IT operating budgets that were about 10% higher than stage 2 firms though still lower than that of stage 1 firms. The essence of the optimizing stage is to get the basic business operations digitized. The authors mention Southwest and Nestlé as companies that have embarked upon such optimization projects.

The focus on standardizing and integrating (stages 2 and 3) will have probably left less room for innovation.  Stage 4, baptized reusing by the authors, amounts to leveraging the platform for innovation by employees. Only 2% of firms in the CISR survey had reached stage 4. One was eBay which continually adds innovations to its auction platform.

The different stages have different effects on global agility and local flexibility. Local flexibility is maximal in stage 1, decreases in the stages 2 and 3 but then starts increasing in stage 4. In other words, stages 2 and particularly stage 3 will provoke resistance on the part of managers. It is only in stage 4 that local managers will start feeling empowered again. It is the need to increase global agility that triggers the move out of stage 1. It is only in the final stage of the journey that global agility and local flexibility are both on the rise.

Different parts of a firm can very well find themselves at different stages in the IT journey. Pepsi in America has built a stage 3 platform, but in Eastern Europe is in stage 1, experimenting with new business models.

Drive value

By business agility the authors mean the use of existing processes and IT capabilities to rapidly generate new business value, culminating in profit and growth. The purpose of a digitized platform is to create a set of reusable processes that knowledgeable people can deploy quickly. Such agility allows delivery on four types of opportunities: empower people with optimized processes and data; accelerate innovation; improve customer satisfaction; integrate acquisitions.

CampbellSoup for example designed a supply chain platform with a focus on total delivered cost (TDC) and trained the employees so that, as they come to understand the components of TDC, they accept ownership for generating benefits from their new systems. P&G implemented a shared services platform that takes much of the routine administrative burden away from brand managers so they can focus on innovation and customer responsiveness. The platform also delivers intelligence so that firm-wide expertise is leveraged and new products can be launched quickly and efficiently.

In general, one of the major benefits of a digitized platform is freeing up managers from the routine tasks so that they can concentrate more on the new or the strategic. The platform can also make reorganization easier. The authors cite the case of PepsiAmericas which used its platform to develop a new customer alignment strategy. They created three new customer segments and new management roles to focus individuals on the needs of the customer segments but they did not need to design new IT systems. The platform had created a data repository with the data necessary for these managers to tend to their segments. IT had become an enabler, not an obstacle.

Finally, as example of a platform facilitating acquisitions, the authors cite the case of cement giant, CEMEX. In 2000 CEMEX introduced an enterprise resource planning system that standardized eight key business processes. When CEMEX buys a new company it rips out the acquired firm’s systems and implements CEMEX’s platform. It is thanks to that digitized platform that CEMEX was able to embark on its ambitious acquisition campaign.

The authors note that for strategic experiments outside the core business, it does not make good sense to use the existing platform. The platform will constrain the vision of what’s possible. So an advanced IT savvy firm will be experimenting on the platform and off the platform – on-platform to develop the core business, off-platform to try to invent new businesses.

Published October 2009