Strategic Systems: Defining the Real Meaning for IT Departments
This overused term is at risk of losing all meaning. Whatu0019s truly strategic?
By N. Dean Meyer
The word strategic is used so freely these days that it’s at risk of losing all meaning. People attach the S-word to their pet project hoping it will help gain others’ approval. “Ooh … ahh … wow … it’s strategic!” people are supposed to say. “Yes, let’s do it without any further justification!”
With such overuse, the word has come to mean little more than “nice”—a bland superlative. He’s a nice guy. This project is strategic. Yawn. This is a serious problem, because it’s imperative that IT and business leaders know what truly is strategic in order to focus scarce resources on really important, high-payoff initiatives.
What’s a Strategy?
Step one in understanding what’s strategic is to define what a strategy is. I’ve heard people use the term as a synonym for a goal, as in, “Our strategy is to create business value through ERP.” Sometimes, the word is even used to mean the reward you’ll get when you achieve the goal, as in, “Our strategy is to be recognized as a leading supplier of information technology and services to our business.”
In fact, the word strategy means a comprehensive plan of action to achieve a goal. Within that context, a “tactic” is an individual action that’s a step along the way. Note that strategies are not necessarily long term in nature. In today’s dynamic business environment, strategies may have time frames counted in months, weeks or even days. As an example, think of a corporate acquisition deal that’s culminated quickly to pre-empt a competitor.
Furthermore, strategies don’t have to be huge and expensive. That acquisition deal could be made more favorable if negotiators simply have access to real-time news and market information on the other firm. And of course, something that’s big and expensive isn’t necessarily strategic. Replacing an obsolete mainframe is hardly going to impact a corporation’s business strategy.
Strategies are the means by which organizations achieve their few key goals.
From Whose Perspective?
Step two in sorting out what’s really strategic is to separate two perspectives: strategic to IT versus strategic to the business.
As always, I’m coming from the perspective of IT as a business within a business. As such, IT must have its own strategies for prospering in a complex market with tough competition.
IT strategies may focus on cost reduction with investments in modernizing its infrastructure or improving its processes. They may focus on entering new market segments, with investments in entirely new services and skills. Or they may build better partnerships by improving the IT relationship management function or business-IT alignment.
Note that IT strategy is not a list of projects that IT will deliver to clients! Those projects are “sales,” not strategies. Consider whether you would buy stock in a company with this vision: “Our strategy is to be the leading provider of widgets by selling this list of widgets to this list of customers in the year ahead!”
Despite what many consulting firms may try to sell you, IT strategic plans (like those of a corporation) must be at a higher level. Investments are truly strategic to IT only if they significantly improve its ability to serve its clients’ businesses.
Levels of Business Value
When we discuss “strategic systems,” we generally are referring to IT solutions that contribute directly to clients’ business strategies—the second of the two perspectives.
IT solutions create business value at a number of levels. Consider the stair-steps of IT value (My thanks to Preston Simons, CIO of Abbott, for his help refining this chart.):
As IT climbs the stair-steps, it contributes successively more strategic value. Up through Level 3, the benefits are simply enhanced productivity. At Level 4 and above, technology allows the business to do things it otherwise could not do—termed “value-added” benefits.
Level 1. Operations
At Level 1, IT is just keeping things running. While this has value—indeed, most firms cannot survive without it—no initiatives at this level can be considered strategic. For something to be strategic, it has to be a means to some new end, not just essential to maintaining the status quo. This doesn’t mean that investments to “keep the lights on” are unimportant by any means; it just means they’re not strategic to IT or to clients.
An example of an investment at Level 1 is the replacement of IT infrastructure that’s at the end of its life.
2. IT Efficiency
At Level 2, investments in IT pay off by making future IT products and services less expensive. These initiatives may be strategic to IT (if the IT strategy is focused on lowering costs, which isn’t always the case, as discussed above). But Level 2 initiatives will not be considered strategic to the business.
Examples of a Level 2 investment are a migration to a new infrastructure platform that will significantly improve IT’s cost structure, server consolidations, process improvements like ITIL, and IT organizational improvements.
3. Business Efficiency
Level 3 initiatives spend money on IT to save even more money by making clients’ business operations more efficient. These investments are only strategic if the clients’ business strategy focuses on reducing costs. That’s a big if. Unless clients are in a commodity business where product cost is the primary buying criterion, clients’ strategies are more likely to focus on innovation, product differentiation through features or quality, market image or customer satisfaction.
Examples of Level 3 systems are those that improve bargaining power with suppliers (such as supplier e-commerce), increase inventory turns, reduce administrative workloads and optimize logistics.
ERP generally delivers value at Level 3 (with spin-off benefits at Level 2). Even most business process improvements that are triggered by the implementation of ERP do little more than improve efficiency, though certainly there are examples of higher levels of value when ERP is triggered by strategic changes in the business rather than the other way around.
4. Business Effectiveness
Level 4 investments in IT make clients more effective. IT tools may enhance individual creativity, thinking and decision-making abilities or communications effectiveness. IT solutions may also enhance collaboration within teams, or improve corporate-wide alignment. By helping clients do their jobs significantly better, IT may create value within any business strategy.
Examples of IT solutions that deliver Level 4 value include the gamut of end-user computing tools when they’re applied to specific human thinking and collaboration needs. My first book, The Information Edge, included 60 case studies that illustrate Level 4 benefits. Mary Boone’s follow-on book, Leadership and the Computer, described a series of case studies where end-user computing tools enhanced executives’ ability to lead their organizations.
IT business applications may also deliver Level 4 benefits. For example, at Abbott Laboratories, an Electronic Laboratory Notebook helps chemists share research findings in the drug discovery process, precluding redundant experiments and improving collaboration. It also helps secure Abbott’s intellectual property by documenting discoveries in an organized form.
5. Customer Relationships
Level 5 solutions enhance the relationship between the corporation and its external customers, improving customer satisfaction, loyalty or reach.
Customer loyalty programs, pioneered by American Airlines’ frequent flier program, are a classic example of Level 5 systems. A great example of this concept is WelcomeAddition.com, provided by the Abbott Nutritionals Division. It gives new and expectant parents access to a wealth of information about pregnancy and babies’ first years. Participants can connect with other new parents, read articles and research questions, and interact with baby experts. The site encourages healthy living while building loyalty to Abbott’s infant nutritional line of products.
As another example, my stock brokerage firm provided me with a trading tool that allows me to monitor markets, analyze strategies and enter trades. Now that I’ve got it set up the way I like it, I’m not going to move my portfolio to another brokerage house to save just a few cents per trade.
ERP and CRM may deliver benefits at this level if they allow separate business units to come together and treat customers holistically (rather than viewing them as a set of separate contracts)—an IT patch for a corporate sales function that’s divided by product line rather than by customer.
With regard to customer reach, e-commerce delivers Level 5 benefits by allowing firms to enter new market segments without a physical presence.
6. Product Value
Level 6 is the most lucrative, and the most elusive, form of strategic value. At this level, IT enhances the value of the corporation’s products to external customers.
When IT is part of the product, this level is obvious. Examples are found in any IT service provider. ADP provides payroll services, and any improvements in its payroll applications improve its product. At the consumer level, Internet banks are learning that the ease of use and capabilities of their websites are as important to customers as their rates.
A very interesting example of Level 6 value is found in the automobile auction industry. Two major companies auction fleets of used cars for manufacturers and rental companies. Since the price they get for the cars is equivalent—it’s a highly efficient market&151;they compete on service. A significant portion of their service is the information they provide to their customers about the market and the transactions. In other words, they compete based on the ability of their information systems to package and format data coming from the auctions in a way that’s most useful to their customers.
Information technology really can make people smarter, teams more collaborative and corporations more effective at serving their customers. IT really is strategic in the true sense of the word. But if we keep using that S-word so carelessly, it will become devoid of meaning. Even worse, strategic may come to be associated with any project that’s tough to justify. (By the way, value-added benefits are measurable with the right methods.)
If the word strategic does lose its meaning (and perhaps it already has), then it will be tough to get business leaders to see the real potential of IT. It will be tough to separate the wheat from the chaff in portfolio management processes. It will be tough to work with clients to discover the really meaningful, breakthrough opportunities for IT.
Language is fundamental to clear communication and to clear thinking. Please, let’s be a bit more reserved about labeling projects “strategic.” And when we do assign that label, let’s really mean it.
Beyond that, let’s design an IT organization and resource-governance processes that continually channel our time and resources to projects that will significantly leverage both IT’s and clients’ business strategies.
Dean Meyer helps IT leadership teams design high-performance organizations. Author of six books, numerous monographs, columns and articles, he brings innovative systematic approaches to what others consider the “soft” side of leadership. Contact him at firstname.lastname@example.org or visit his website for information that can help you implement these ideas, or with suggestions for other buzzwords to analyze in future.