The weakest link in digital transformation

Enterprise IT refers to the function of investing, developing and operating technology solutions within enterprises. It is a multitrillion-dollar industry going through a fundamental transformation. This is why:

• Digital revolution: The pace of business change is unprecedented, driven by technology innovations. In 2016, mobile, analytics and cloud initiatives led digital transformation. In 2017 and beyond, APIs, the internet of things (IoT), machine learning and other advanced technologies will become the enablers of emerging disruptive business models.
• Change in mandate: Enterprise IT was born to support the industrial-era business with reliable and efficient solutions. In the digital age, its mandate has been elevated to lead and provide a competitive advantage with differentiating capabilities and speed.
• Deglobalization: For decades, enterprise IT relied on global labor arbitrage for cost efficiency. As the political opinion on globalization tilts toward the negative, the traditional way of running enterprise IT will become increasingly unpopular, ineffective and cost-prohibitive.
• Cloud: Public cloud solutions have become mainstream, and leading vendors like Amazon, Microsoft and Google are increasingly gaining market share from internal enterprise IT organizations.

Changes at this scale naturally call for a new IT operating model for enterprises to exploit opportunities, and for internal IT organizations to strengthen their business relevancy. To date, the pace of management innovations benefiting enterprise IT has grossly lagged behind innovations in the technology space. And arguably, the prevalent enterprise IT operating model is the weakest link in ongoing digital transformation, because many enterprises rely on outdated management practices and behaviors.

Popularity of traditional cost efficiency levers 

Think about data center or network consolidation, application rationalization, offshoring, outsourcing, workforce restructuring, shared services, discretionary spending restrictions and the like. Industry examples suggest that these levers have been mostly exploited, further savings are increasingly elusive, and overuse is counterproductive. Above all, they all focus on the input cost efficiency of IT, e.g., cost per labor-hour or cost per server. The input cost efficiency was a critical success factor in the industrial age, when scale and scope economies mattered the most. It is far less significant in the digital age due to the shifting focus on business outcomes through agility and speed. Understandably, the traditional levers are proven, broadly accepted, and within the comfort zones of existing management teams, but they are a major leadership and organizational distraction on the way to digital transformation. Consequently, the traditional cost-efficiency programs continue to capture significant executive mindshare at the expense of advancing innovative management practices.

Unnecessarily risky agile investments

The traditional program and project management theory was designed for plan-driven waterfall projects. It consistently underperforms on agile initiatives due to its backward-looking management metrics and controls. When dealing with agile, what executives need to know is how much work is left, not how much work is done. The fixed sizes of teams and the flexible scope of agile development make it impossible to detect risks and issues on time. Consequently, agile program budgets and schedules don’t blow up but bleed insidiously. Programs with over 100 full-time employees are most vulnerable.

Software capitalization: A vivid illustration of the continuing influence of industrial-age management relics in the digital age

Before the digital age, business changes were delivered by annual programs through infrequent releases of enterprisewide functionality on monolithic systems, e.g., ERP, CRM, HR, trading, risk, etc.

Back then, it was necessary to treat software as a capital asset to encourage investments with long-term value. This logic no longer holds true, since new functionality is now delivered in small and frequent increments with much shorter useful life spans. Furthermore, software capitalization can be wasteful and counterproductive due to its unintended consequences — technical debt accumulation, project priority distortions, financial accountability gaps and administrative overhead, to name a few.

Increasing burden of the business-IT divide

As mandated, the prevailing enterprise IT operating model does an excellent job in defining how to deliver and operate technology. And, by design, it offers very little substance on how to be an effective business operator.

In the industrial age, it made sense to separate the duties of business and IT functions, since the benefits of scale and scope economies far exceeded the cost of waste associated with a functional divide. However, as technology evolved from centralized systems into distributed and web-based solutions, the operating waste of the business-IT divide became increasingly noticeable:

• The business value of IT was uncertain, because several KPIs were impossible to track — e.g., cost of delay, cost of unit functionality delivered, and realized vs. promised benefits of technology investments.
• Changing requirements, priorities, constraints and tradeoffs were seldom discussed after project approval until user acceptance.
• The true cost of defects, rework, low-value work, busywork, manual work, slow decision-making, work-in-progress inventory, underutilized assets and resources, and loss of knowledge wasn’t managed.
• Although financial transparency was available, it wasn’t actionable due to convoluted cost allocation schemes. For example, a customer at an investment bank might know the detailed unit cost of servers, but he was obliged to pay 42% of that cost after five years of decommissioning the servers. Hence, nothing was decommissioned.

The increasing burden of business-IT divide led to several operating model enhancements involving business and IT joint leadership, project portfolio governance, and business relationship management. These enhancements helped contain the burden, but the fundamental modus operandi of enterprise IT — i.e., IT takes orders and delivers solutions — has remained practically unchanged.

So what?

Let’s put in perspective the opportunity cost of retrofitting, rather than innovating, the enterprise IT operating model for digital transformation:

• In an earlier article, I estimated 9% to 15% of the money spent on retrofitting the existing model is wasted. And I have seen organizations where more than 20% of the existing technology expenditure could be repurposed without impacting the business outcomes.
•  For a midsize financial services enterprise with $1 billion in aggregated technology spending, this amounts to $90 million to $150 million in forfeited investment potential for digital transformation every year.
• Considering that 70% to 80% of existing IT budgets are already locked in to keeping the lights on, and only about 15% of those budgets are available to spend on digital transformation initiatives, the cost of failing to adopt management innovations is jaw-dropping.

Oren Hariri, an author and business professor, reportedly once said “the electric light bulb did not come from the continuous improvement of candles.” Similarly, the future of the multitrillion-dollar enterprise IT industry will not evolve from the retrofit of half-century-old IT management practices with relics of the industrial age.

Then, why are much-needed management innovations lagging? And what options do CIOs and their stakeholders have in 2017 to turbocharge their digital transformation investments? 

What do you think? Stay tuned. . .