by Hakan Altintepe

Is technology spending a cost of doing business or a source of alpha?

Oct 18, 2017
CIOIT GovernanceIT Leadership

A modern-day IT strategy should strive to get an IT organization out of its efficiency and reliability comfort-zone, and elevate its business relevancy through continuous improvement in productivity, throughput and measurable business outcomes.

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There is a growing trend of taking the technology spending away from the enterprise IT organizations into the business and to the third-parties —  such as pure-digital service providers and Fin-tech companies — with a hope of stimulating innovation, improving agility, and reducing cost. Meanwhile, as business relevancy and technology spending are drifting away, enterprise IT is becoming increasingly consumed by wrestling with the legacy issues, pursuing efficiency with a diminishing gain, and ensuring the reliability of an increasingly complex and vulnerable technology footprint. Why is enterprise IT not front and center on the innovation agenda of the business in the digital age? The answer lives at the top of the corporate governance.

Fundamentally, the mandate of enterprise IT is influenced by two prevailing convictions among the top corporate executives: the expectations of return on technology spending and the perceptions of the enterprise IT organizations to perform.

fig 1 the maturity path of enterprise it Hakan Altintepe

Fig 1. The maturity path of enterprise IT.

The most basic role of enterprise IT is to provide efficient and reliable technology solutions. In this case, success is defined as meeting the efficiency benchmarks for IT inputs, like $/hr or $/server, and avoiding surprises, such as schedule/cost overruns, or major outages. A significant IT management time is spent on security and compliance, vendor management, and efficiency initiatives like centralization, consolidation, rationalization, outsourcing and offshoring.

When business leaders expect more of their technology spending, and are ready to make incremental investments to gain a competitive differentiation, they look for partners who can deliver innovation at a consistent rate. In this case, success is defined in terms of the productivity and throughput of IT outputs, e.g., earned value, functionality delivered, business processes supported. Consequently, these organizations are often seen as leveraging innovative architectural patterns (microservices, API), operating models (DevOps, agile, XaaS), and management practices (contingency/waste reduction, continuous improvement).

The ultimate plateau on the maturity path of enterprise IT calls for an effective business and IT partnership focused on maximizing the measurable business outcomes,  like revenue, profitability, market/wallet share, customer loyalty, product differentiation, a.k.a., a source of alpha. At this level, it is a prerequisite to master a measurable and manageable relationship between the technology spending decisions and associated business outcomes. In this group, IT leaders invest significant time in optimizing demand portfolios, managing product life-cycles and building strategic alliances such as Fin-tech partnerships.

During the industrial-age, technology spending was commonly managed as a cost of doing business. Although aspirations are running high for a technology-led business differentiation in the digital age, most firms haven’t materially changed their corporate governance to treat technology spending as a source of alpha. Moreover, the business-IT partnership spirit usually established at the senior levels hasn’t permeated throughout the rest of these organizations due to the historical shortcomings of the traditional business-IT interaction model. This is why the business and corporate leaders are increasingly relying on pure-digital and Fintech companies for technology innovation, and enterprise IT is stuck on its maturity path with chasing the ultimate efficiency unicorn.

Much has been written on how to reinvent enterprise IT – redefine IT value proposition, elevate the CIO role, create a digital workforce, or become a value broker, to name a few. I believe that these suggestions are falling short of recognizing the root-causes of the ongoing challenges of enterprise IT:

Challenge #1 – Systemic performance issues

IT leaders should reconsider spending scarce management resources on efficiency programs with diminishing returns; and instead, focus on the untapped opportunity of productivity and throughput gains by addressing complexities, contingencies and wasteful activities accumulated due to an outdated IT operating model.

Challenge #2 – Expectations of return on technology spending

Among all potential providers, the internal IT organizations are well situated to become a driving force of innovation at their enterprises. But first, they need to get out of the traditional efficiency and reliability comfort zone, and strive to get to a higher plateau on their maturity path. To do so, enterprise IT has to pave the way for higher expectations of return on technology spending among corporate leaders by establishing a transparent and controllable relationship between technology spending and realized business outcomes. This will surely energize the IT workforce and their careers, as well as instill further trust among technology stakeholders. Otherwise, the debate about the future of enterprise IT will remain subjective, emotional and political.

Challenge #3 – Perception of IT organization to perform

Enterprise IT should embrace continuous improvement, rather than industry benchmarking, as the basis of its performance management framework. Benchmarks, by definition, promote an average performance in a conventional environment, which sets a bar too low for enterprise IT to remain business relevant in the digital age. Continuous improvement, on the other hand, challenges each team to outdo themselves over and over. Moreover, a well-documented track record of continuous improvement could serve as an assurance against a possible short-term bias when making a long-term provider decision.