Postmodern Manifesto: Goodbye Service-Based IT; Hello Innovation

If there’s anything harder than predicting the future, it’s reaching a consensus about it. The trends affecting IT today are easy enough to spot—outsourcing, globalization, increased regulation, increased complexity and never-ending demands from the business for growth and revenue—but it’s much more difficult to figure out how all these trends will converge to determine the size, composition and strategy of the IT department over the next few years.

So we read the research—not only our own “State of the CIO” surveys (see www2.cio.com/research for all the data) but also studies by other organizations—and talked to some of the more thoughtful and visionary CIOs we know to come up with a portrait of what we call the Postmodern IT Department.

The executive summary goes like this:

The Postmodern IT Department will be smaller, more distributed and dependent on a tightly integrated supply chain of vendors. It will be in desperate need of multitalented specialists who have in-depth technology knowledge but who can also create new products and capabilities that businesspeople might never have envisioned.

CIOs will need to transform themselves into innovation leaders, not merely infrastructure stewards, and they will have to remake their departments in that image.

IT will need to be a full partner, if not a leader, in business process innovation.

Now let’s get granular and see what the Postmodern IT Department will look like and how it will work.

1. IT will assume responsibility for business innovation across the company.

IT has spent the better part of 40 years automating business processes. It could do more, but that’s not what the business is asking for. “The discussion that the business wants to have today is, How are you going to partner with me to win in the marketplace?” says Shaygan Kheradpir, CIO of telecom giant Verizon. “They see that the world is full of IT innovations that the customer never asked for. When did a customer ever ask for the iPod or Google? Yet once they get them, they can’t live without them.”

IT can envision what the business can’t by combining broadband connectivity, the Internet, software, and even gadgets like cell phones and PDAs into new processes and capabilities that solve the problems of the business and its customers. “IT departments can’t be focused simply on making internal customers happy anymore,” says Ann Senn, national managing director of strategy and innovation for Deloitte Consulting U.S. “They have to be focused on what’s going to deliver value for the enterprise and external customers. It’s not about just getting the marketing department to stop yelling at me.”

The ongoing shift to service-oriented architecture (SOA) will improve IT’s ability to innovate because it requires that IT understand how the business does its work. SOA represents the highest order of business process innovation: a set of tasks (termed services) such as “credit check” or “customer record” that are expressed in technology and can be combined quickly and repeatedly into new combinations. SOA could be the fastest-growing enterprise IT strategy in history. It became practical only with the arrival of Web services in 2001; yet by the end of 2004 a Forrester Research survey found that

70 percent of large companies had adopted SOA, with 19 percent saying they are using it for “strategic business transformation”—a promising percentage of the total considering the gaps that remain in Web services standards and the lack of proven, standardized methods for implementing an SOA.

IT’s role in process innovation will only increase, say CIOs, because the demand for process innovation among businesspeople is permanent now, thanks to the Total Quality Management and Six Sigma movements of the ’80s and ’90s. “Process change has become embedded in individual functions and business units, and they have seen the benefits to their bottom lines,” says Judith Campbell, CIO of insurance company New York Life. “So they come to IT because they want to know what other parts of the company have done. We’ve gone from being the engineers of new processes to being the movers of innovation across the company.”

This shift from providing services to innovating new ones is coming in baby steps at New York Life. The number of staff devoted exclusively to process design and innovation is small. There are 10 innovation experts within a total programming staff of 600, which reflects the shortage on Campbell’s staff of people with relationship and management skills, as well as a lack of interest in this kind of work among programmers who grew up loving their ones and zeroes. Moving to the innovation group “isn’t a natural career path for many people,” says Campbell. “They tend to like technology more than they like processes.”

Yet demand for IT people who can innovate shows signs of picking up over the next few years. In a survey of 82 companies that began in 2005 and is continuing, a team of academic researchers at the Society of Information Management (SIM) asked which skills IT leaders thought were most important to keep in-house today. With the exception of system analysis and system design, the top skills were all related to business process or project management. The IT leaders’ projections for their internal needs for 2008 were nearly identical—except that business skills got even higher rankings.

2. Finance will no longer control IT.

In the postmodern IT era, CFO control over IT will wither away. In fact, the trend of CIOs reporting to CFOs, which surged following turn-of-the-century hard times, has reversed. In Forrester’s 2005 survey of technology influencers, 40 percent of respondents said their CIO reports to the CEO, up from 29 percent in the 2004 survey. Another 38 percent of CIOs reported to the COO or president, up from 27 percent in 2004.

“The State of the CIO 2006” survey showed an even higher pull from the corner office: 42 percent of the 545 CIOs surveyed said they report to CEOs, while the number reporting to CFOs dropped to just 23 percent, from 30 percent in 2004. “[Finance’s control of IT] is over,” says Nextel CIO Dick LeFave. “IT is not just a cost exercise anymore; it’s enabling the business.”

For New York Life’s Campbell, who reports to her CEO, finance’s control of IT is more than a barrier; it’s a competing interest. “CFOs are either specifically being compensated on how well their deals are doing or how much expense they’re cutting,” she says. “IT has to be making investments, and CFOs aren’t rewarded for letting them do that. You can’t run IT on a one-year return on investment anymore.”

Lee Jones, a former pharmaceutical research and development executive who became CIO of the global pharmaceutical division of Abbott Laboratories, agrees. “Having the CFO in charge reinforces the concept that IT is a cost to be controlled,” says Jones, who is now president and CEO of Essential Group, a pharmaceutical services company. “CFOs will tend to manage IT as a commodity.”

In a postmodern world, IT is definitely not a commodity.

3. IT governance will settle on the federated model and shared services.

After the “dotbomb,” companies were rife with recriminations about the quality of governance inside their IT organizations. Ironically, it was uncontrolled demand from the business to build new Internet-enabled infrastructures and business applications that contributed to out-of-control topline costs, not irresponsible IT governance. But that crisis passed. Most companies have since adopted IT investment and prioritization processes that involve key senior business executives. Most CIOs have implemented governance processes for standardizing infrastructure and applications. SOA offers hope for creating an IT infrastructure based on the work of the business rather than applications and functional silos.

IT has long had a plethora of mechanisms for governing itself and the products it offers. There are widely accepted frameworks to guide CIOs in nearly every aspect of their operations, from IT service management (ITIL) to application development (CMMI) to project management (PMP certification). There are also general best practices that have become staples of most IT governance strategies. For example, a recent Forrester survey found that nearly 70 percent of respondents had a formal IT steering committee inside their companies.

Of course, just having committees and frameworks doesn’t necessarily mean that IT will be happily governed. “The concepts are all in place now,” says Dow Chemical CIO David Kepler. “There’s a road map to follow. But we’re still a long way from implementing it all. And while we’re doing it, the road map could change.”

Yet a general direction for running IT has emerged. CIOs have come to a consensus on the overall organizational model for IT: a mix of centralized and local services known as the federated model, which is governed centrally by a small headquarters staff that gives varying degrees of autonomy to IT groups allied with different business units, functions or geographies. Driven by the mandate to control costs, most IT organizations have begun sharing use—and cost—of infrastructure, business applications and generic processes supported by IT (such as finance and HR) across the enterprise, while allowing unique resources to remain local. In a recent survey, Forrester found that 67 percent of CIOs’ IT investments crossed organizational boundaries, with that percentage expected to stay the same or rise over time for 91 percent of those companies surveyed. Indeed, most of IT’s emerging best practices have some element of sharing governance and cost at their core—everything from project management offices to IT governance councils to IT investment and SOA.

Shared services will drive companies to deemphasize the control that independent business units exercise over IT. “The federated model has won,” says John Hill, a former CIO at Praxair who is now CTO of IT service provider Siemens Business Services. “Centralized/decentralized is struggling against extremes, which means the pendulum is constantly swinging. Federated lets you balance things in a more delicate fashion.”

It will be up to the CIO to manage this delicate balance, being careful not to permit rogue spending or allow standards to slip at the local level, while also demonstrating to their various local constituencies that some of the more centralized governance mechanisms are not robbing them of speed or flexibility. It is literally a full-time job.

4. CIOs will stop identifying with technology.

Gaining credibility as a business strategist requires that CIOs shake an old habit: their self-identification with technology. “You have to be allied with the company first and technology second,” says Dow Chemical’s Kepler. “You have to be viewed by the CEO as someone who defines success not in terms of technology implementations but in terms of success for the company.” That means subsuming a passion for technology to a passion for business. “You have to be seen as being dispassionate about technology,” says Kepler. “If you’re going to take a risk on building an untested enabling technology, you have to have a great understanding of the business. The high failure rates of new technologies come from missing the connection between the success of the technology and the goals of the company.”

The attitude change in the IT department will be no less dramatic. In a 2005 SIM survey of skills that CIOs expect to most value in their IT staffs over the next three years, project management led the list, followed closely by company, functional and industry knowledge. Other skills in demand included business process reengineering, user relations management, negotiation, change management, communication and managing expectations. Only two technical skills (systems analysis and systems design) made the top 15—and both of those skills focus more on architecture and process than on hard-core programming.

CIOs will need all the leadership skills they can muster to manage this shift without driving away their most experienced people.

5. The IT function will fragment, and then it will need to be reorganized.

To some extent, the deconstruction of IT has already occurred, especially in big companies where the large scale of IT and the separation of IT functions such as help desk, application maintenance and some programming have made them candidates for outsourcing. More and more jobs in IT will become components in a distributed services supply chain modeled on today’s distributed manufacturing supply chains.

IT departments already have undergone a structural shift. The number of programmers employed in the United States has dropped by 25 percent since its peak in 2000, even though the total number of IT workers has increased slightly since then, according to the Bureau of Labor Statistics. In our “State of the CIO 2006” survey, 76 percent of respondents said they outsource application development, maintenance or support—more than double the next highest category.

In one respect, the distributed services supply chain model is actually creating more work. As pieces of the IT supply chain break off and become more specialized, the need for coordination of the pieces increases. That means the number of internal jobs dependent upon external people is increasing. This shift is reflected by the new emphasis in IT departments on relationship management and project management.

Economists call these kinds of skills tacit work, which requires the ability to analyze information, grapple with ambiguity and solve problems, often based on experience. Tacit interactions are complex and require interaction (such as managing a software development project) rather than being simple and solitary (fielding help desk calls with a script, for instance).

Tacit jobs have been growing three times faster than employment in the entire national economy, according to consultancy McKinsey, and they make up 70 percent of all U.S. jobs created since 1998 and 41 percent of the total labor market in the United States. These roles track pretty closely with the categories where the Department of Labor says IT employment has made the biggest gains since 2000: application engineers, systems engineers and network analysts.

For CIOs, the challenge will be to design and manage global IT supply chains that link various skill sets (including tacit work) and multiple components of IT work into logical units. “In the future, IT is going to need to be able to work as a global team to tap into different capability pools to serve the business better,” says Andy Maier, CIO of Zurich in North America, which is creating a more global IT function in response to a global business reorganization. “The thing is to find expertise—underwriting, for example—around the world and centralize it along the business value chain rather than according to geography. I don’t care if an underwriting specialist is in Dayton or Zurich, I just want to be able to access that person’s skills from anywhere.” The glue that Maier is using to link his IT supply chain is common application development processes and tools, along with globally shared repositories.

As Maier suggests, the growth of this supply chain means that fewer employees will be fixed in a particular project or geography. “You may only have a couple of people assigned to a particular project from beginning to end,” predicts Diane Morello, research vice president for Gartner. “The rest will come in and out as they are needed, based on their competencies.”

If the supply chain gets gummed up, the CIO and the IT department will be accountable for the entire sticky mess. Rebecca Rhoads, CIO of aerospace and defense contractor Raytheon, says, “You may have a lot of different providers in the model, but at the end of the day you have to make sure the processes and services are reliable and accessible. If there’s a break in the chain, you will be responsible. Where the break is and who caused it isn’t going to matter much to the business or the user.”

In the Postmodern IT Department, Rhoads says, “What’s going to make us successful is our ability to manage end-to-end services.”

6. IT ROI will become even more difficult to prove.

The increase in the number of tacit jobs in the U.S. economy in the coming years has both good and bad implications for IT. Tacit IT is not about automation—the meat and drink of IT since its inception and the route to easily measured ROI. Tacit IT is all about decision support, knowledge management, business intelligence and artificial intelligence. That’s a tough row to hoe for CIOs trying to justify their existence. More and more, businesspeople want information rather than systems, new capabilities rather than automation. In a 2005 survey of IT and business executives, McKinsey found that only 29 percent of business executives believed that automating business processes was the best route to improving operating efficiencies, while 43 percent of IT executives highlighted it. Those numbers speak to a significant disconnect between what business executives want and what IT executives think they want.

But there is, in fact, room for more process automation. According to a survey by consultancy Accenture, fewer than 10 percent of customer interactions and 13 percent of supplier interactions are online. CIOs said they could triple those numbers.

Eventually, however, the shift to tacit work means that opportunities for automation could disappear. And the pressure will be on vendors to make technology think, rather than automate. As the McKinsey report states: “Machines can’t recognize uncodified patterns, solve novel problems, or sense emotional responses and react appropriately; that is, they can’t substitute for tacit labor as they did for transactional labor. Instead, machines will have to make tacit employees better at their jobs by complementing and extending their tacit capabilities and activities.”

The good news is that structuring and supporting tacit relationships using technology is still very new and virtually unexplored. For example, McKinsey found that companies in the top quartile of growth in labor productivity between 1998 and 2004 spent $6,200 per employee on technology for tacit work and $38,200 for transactional. There’s a lot of room to shift that investment as more transactional work starts going out the door. The bad news is that decision support technology is difficult to build and the results difficult to measure.

7. The entry-level IT job will disappear.

The Postmodern IT Department will be looking for people, but CIOs won’t be able to find them. For Nancy Markle, former president of SIM, the impact of the talent gap will rival that of the technology gap the United States became aware of when the Soviets launched the Sputnik program in the late ’50s. “The technology-rich innovators are going to be the economic leaders of the world,” says Markle. “Other countries are moving ahead because they have government-sponsored programs. We need to have government-sponsored programs that target every level from elementary school through college.”

In 2005, when SIM researchers asked IT leaders which skills they felt might disappear from their departments by 2008 because those skills would become obsolete, automated or outsourced, the top ranked were: programming (except for “new” programming skills like Java, .Net and Linux), operations, desktop/help, and mainframe/legacy skills—the kinds of skills that used to keep personnel busy hiring entry-level employees.

Yet when the SIM researchers asked IT leaders which background they valued most in entry-level employees, the vast majority chose computer science. And the core of most computer science programs in this country is still programming—precisely the skill that IT leaders told SIM they don’t value anymore.

Not surprisingly, students are reading those tea leaves. The number of kids who are choosing to major in computer science has plummeted by nearly half since its peak of 3.7 percent of freshmen in 2000, according to the Higher Education Research Institute at the Graduate School of Education and Information Studies at UCLA. Just 1.4 percent of all incoming freshmen in 2004 said they would select the major, and the number of women interested in computer science has dropped to its lowest level since the ’70s. Meanwhile, fewer foreign students are choosing to remain in the United States after graduation because job opportunities in their home countries have improved dramatically.

A few schools in the United States have responded by offering combined business and IT curricula. But the kinds of skills CIOs are looking for in their employees—project management, communication, expectations management—are difficult to teach in the classroom.

Some schools are making internship programs a larger part of their curricula. Kevin Gallagher, assistant professor of management information systems at Florida State University’s College of Business, has increased the number of internships for students in his mixed IT and business program. But Gallagher is limited by the time necessary to set up the internships and by the budgets of local businesses. Indeed, though many CIOs have internship programs, most are for only a few positions—not nearly enough to fill gaps that will arise. “I think the universities and colleges will not produce enough people to keep up with demand, and the same goes in Europe,” says Zurich’s Maier.

8. CIOs will have to step up.

CIOs who faultlessly deliver services of the traditional variety—infrastructure, application portfolio and support—should expect to be under pressure to do more, or soon they can expect to be looking for work. “IT organizations that focus on managing infrastructure and back-office applications may be good candidates for outsourcing,” says Forrester’s Laurie Orlov, VP and research director of the IT Management Team. “Those organizations are thought of as cost centers.”

“The concept of providing a secure, stable infrastructure is merely the price of admission today,” says Jeffrey Campbell, CIO of BNSF Railway. “[To survive], you have to be a transformational CIO.”