[Chris Boyd co-authored this article]\nLeading digital transformations is the CEO’s top priority for CIOs, according to the 2020 IDG State of the CIO study. Doing so effectively requires an IT operating model that allows business and IT to work together to navigate a dynamic competitive landscape, a seemingly infinite set of digital tools and shifting stakeholder demands.\nIn our work with Fortune 500 companies, we have found IT organizations that use the traditional “plan, build, run” operating model struggle to conceptualize, launch and maintain momentum on digital transformations. To bolster their transformation capability, IT organizations across industries and geographies are shifting toward product-oriented operating models, or “product-based IT”. When done right, organizations experience increased agility, happier customers and more successful transformations.\nDefining product-based IT\nA product is a capability brought to life through technology, business process and customer experience that creates a continuous value stream. Examples of products are eCommerce, supply chain, or HR. An operating model defines how an organization positions its people, process and technology to deliver value to both internal and external customers.\nA product-oriented operating model, then, is one in which IT resources are organized around business capabilities or “products” instead of specific IT systems (e.g. SAP, CRM) or functions (QA, Engineering, Infrastructure). In this model, each product team works as if they are managing a market-facing product such as a consumer electronics device. They develop a product strategy and roadmap in lockstep with the business that clearly articulates how they will mature the product to better meet customer needs and optimize competitive positioning. Every feature on the roadmap is aligned with a measurable business outcome and goes through a rapid discovery phase to validate value, usability and feasibility before it is slotted in a sprint to achieve a minimum viable product.\nDrivers for the shift to product-based IT\nMost organizations have honed their ability to deliver when the scope and desired outcome are static, but struggle when next steps aren’t defined or are painted with a broad brush. Several leading IT organizations have turned to product-based IT to cut through this ambiguity and elevate their role from service provider to business partner.\nArt Hu, the global CIO of Lenovo, is one of the pioneers in the shift from project-to-product. He noted in a recent conversation that his organization grappled with the question of what to work on next after completing a series of legacy ERP integrations resulting from acquisitions. “The fundamental paradigm shift for us was that the level of uncertainty had changed when there was no longer one single imperative,” he said, referring to the ERP project. “When we took that away, it was a totally different world and traditional waterfall didn’t make sense anymore. Until we as an organization realized that, the business teams and my teams struggled.” Product-based organizations rely on continuous customer engagement to remove guesswork from the prioritization process, which often leads to better business outcomes and increased agility. \nProduct-based IT targets key behavioral changes\nCIOs have targeted key behavioral changes to jumpstart the shift to a product-based operating model:\nWork is value driven, not plan driven\nProject plans developed with fixed deliverables and timelines encourage predictability but rarely equate to business outcomes. This plan-driven work is increasingly yielding to continuous discovery and delivery, which seeks to answer two questions on a recurring basis: what should we build, and how should we build it? A discovery track intakes opportunities, ideas and problems to solve. Teams then engage with customers to validate that those ideas create value (desirability), will be used once released (usability) and are feasible in the current business model (feasibility\/viability).\n“Great companies that have built a product orientation start with desirability and leverage design thinking to have empathy-based conversations to get to the core of problems,” Srini Koushik, the CIO\/CTO of Magellan Health, said during a recent product management panel. Ideas that make it through discovery are added to a product backlog and are slotted into sprints for delivery based on relative business priority. Discovery and delivery tracks operate concurrently to ensure that a steady stream of validated ideas and a working product that drives business outcomes is delivered at the end of each sprint.\nTeams are dedicated and longstanding, not temporary or part time\nIn a recent strategic planning session, one CIO stated that “transformation is not a part time job,” noting that dedicated teams are critical for both digital transformation and building a product orientation in IT. Teams that are formed on a project-by-project basis spend valuable time ramping up subject matter expertise and building chemistry, but then are disbanded just when they start to hit their stride. Product-based IT organizations, on the other hand, favor dedicated teams that own a product from introduction until sunset, including the execution of discovery, delivery, testing and maintenance\/support. In this model, the dedicated teams become true experts on the domain and avoid pitfalls resulting from intraorganizational handoffs and revolving resources.\nCustomer feedback is gathered at every sprint, not just at the end of a project\nThe increased frequency and quality of customer interactions is a hallmark of product-based IT. Ideally, customers are engaged during the discovery phase to validate ideas and prototypes, and then provide feedback at regular intervals after the product is released. If your end customer is a business unit, you should strive to have even more interactions. Some organizations have business stakeholders participate in daily stand ups, and some may even have their product owners sourced directly from the business instead of IT.\nAtticus Tysen, the Chief Information Security, Anti-Fraud and Information Officer at Intuit, is another pioneer in the shift from project to product. At the 2019 Metis Strategy Summit, he emphasized that true product organizations reflect on key questions that demonstrate their strong relationships with customers. For example, do you really know who your customers are, and are you organized around serving them? Do you have metrics to measure customer happiness and show you are working with them in the correct way? “You have to have customers if you’re going to have a product organization,” Tysen said. “Product managers in a lot of ways are relationship managers.”\nTeams are perpetually funded, not on a project-by-project basis\nTo achieve the benefits of a product-centric operating model, the funding model must shift as well. Rather than funding a project for a specific amount of time based on estimated requirements, teams instead are funded on an annual basis. Also known as perpetual funding, this setup provides IT product teams with stable funding that can be reallocated as the needs of the business change. It also allows teams to spend time reducing technical debt or improving internal processes as they see fit, which can improve productivity and quality in the long run.\nSmart first steps to begin the shift to product-based IT\nHere are a few key steps to begin the journey…\nIdentify targeted metrics and establish a baseline\nOrganizations should first and foremost target business impact when shifting to product-based IT. For example, one Fortune 500 client chose to measure Net Promotor Score to assess business satisfaction, product team velocity to assess speed to market and the number of critical defects per product to assess quality. It is also prudent to create metrics that track the adoption of key aspects of the working model. For example, you may track the percentage of product teams that have developed strategic roadmaps, or survey product teams on a regular basis to see how many feel like they have the skills needed to succeed in the product-based operating model.\nDefine your products using a value chain approach\nStart by identifying the highest-level customer-facing and internal capabilities in the organization, such as Product Development, Sales, Marketing, Supply Chain, HR and Finance. At the highest level, these are your Product Groups, or “Level 1.” If your organization is smaller and has a relatively simple technical estate, you may not need to break this down any further.\nHowever, we have found most enterprises with multiple business units and geographies need to do so. Inside the Sales group at a SaaS company, business processes would likely include steps such as Discovery, Lead to Cash and Customer Success (which includes activation, adoption, expansion and renewals). These may become your product groups since each of these steps involves different business stakeholders, targeted KPIs and technology components. However, the way you design your product teams will ultimately depend on the intricacies of your organization.\nAbsent a one-size-fits-all approach, we suggest the following guiding principles:\n\nEstablish clear ownership: The top priority should be to carve out product teams in a way that allows them to truly own and feel empowered to make the changes necessary to mature their product\nAlign with architecture: As much as possible, product teams should be able to own their architectural roadmaps and not have significant dependencies on other teams\nBuild teams around similar process and technology: If work is unique and utilizes different data, processes and technology, create another team\nKeep it small: A product team should aim have no more than 10 people\nBe strategic: Ensure your product teams cover the various business stakeholders and strategic goals\nContinuously evolve: Strategic goals and business priorities shift often, leading to shifts in the product team landscape. Assign someone in your organization to review product team composition on a regular basis to assess the need to develop new products, modify existing products or sunset products that no longer align with strategic goals.\n\nDefine the roles\/responsibilities for each product team\nA key to product-based IT is building cross-functional teams that have the business and technical skills needed to accomplish most tasks inside their teams. The most important role in your product team will be the Product Owner (or Product Manager). Referred to as unicorns by some, these individuals possess the unique blend of business (strategy, competitive analysis), technical (architectural vision, technical project management) and leadership (decision-making, stakeholder management) skills and are responsible for driving the product vision and strategy and leading execution.\nTo fill this role, many organizations will conduct a skill assessment with their organizations to determine the skills needed to be successful, gather an inventory of available skill sets and shape a training program to fill gaps. As you structure the rest of the product team, think about how the skills of other team members can complement the product owner skill set so you are creating a strong blend of business, technical and leadership skills in the team. Beyond the Product Owner, you may have a Business Analyst that serves as a Junior Product Owner and supports detailed data and process analysis. A Scrum Master would drive Agile ceremonies, a Technical Lead would create a solution architecture and orchestrate technical activities, and an Engineering\/QA team would ensure delivery of a high-quality product.\nDefine shared services to create scale\nThink about IT services that are BU agnostic, needed across all product teams and in demand only on a part-time basis by the product group. These are your Shared Services. Shared Services cut horizontally across the product groups and teams. Just like products, these specialized groups endeavor to mature and develop new capabilities and empower their customers (in this case the product teams themselves).\nTypical Shared Service groups include Enterprise Architecture, Infrastructure & Cloud, Security, DevOps, Customer\/User Experience, Data & Analytics, Integration, Program\/Vendor Management and IT Operations\/Support. The Office of the CIO is an increasingly prevalent Shared Service that is responsible for defining the enterprise IT strategy, setting metrics and measuring success. Each Shared Service should publish a service catalog detailing their offerings and processes for engagement with a bias towards self-service (where possible). Shared service resources can be “loaned” to product teams if there is demand for an extended period.\nCommon false starts\n\nAssuming everything must be product-based. When shifting to a product-based operating model, there will still be some cases where traditional, project-based teams and waterfall delivery are appropriate. Large-scale ERP migrations, for example, may continue in a waterfall fashion, or your CFO may not be comfortable with a product team making changes to the general ledger platform every two weeks. Each application of product-based IT is a unique situation and should be assessed before force-fitting a new operating model.\nConfusing product-based IT with Agile. Many organizations will be quick to claim victory or assume they are “already product-based” because they are executing in two-week sprints. In reality, a team could be sprinting every two weeks and producing outputs that do not drive targeted business outcomes. The spirit of product-based IT lies in the continuous engagement with the customer, using agile as a mechanism to pivot quickly to meet the ever-changing customer needs.\nLacking product management muscles in IT. Challenges often emerge when IT starts increasing its role in setting product strategy and defining product roadmaps. Effective product managers have a pulse on external market forces and the competitive landscape. These are not skills that have traditionally lived in the IT organization. Cultivating new skills through a rigorous training program for product managers is often necessary to build brand permission with the business.\n\nNot changing the lens on business conversations\nIT often starts with feasibility and viability, approaching desirability only if the former two boxes are checked. Product managers need to start with desirability and build the ability to adapt their storyline based on the audience. Avoiding technical speak and endless strings of three letter acronyms will also go far in building this rapport.\nShifting to product-based IT is a major cultural and operational change. When done well, it can result in better relationships with customers and business partners, increased agility and improved business outcomes.