Efficient IT Shops: Two Trends Foreseen

By Janaki Akella, Kishore Kanakamedala and Roger Roberts

CIOs continue to be under pressure to effectively utilize technology to enable businesses while containing costs, but IT’s ever-increasing portion of total capital expenditures shows what a pipe dream this is. Nonetheless, the challenge is slowly but surely being addressed by service-oriented architecture (SOA) and lean principles-two of the best management tools in a long time to control IT costs and make IT more effective.

A recent McKinsey & Company survey of 72 CIOs and other senior IT executives from North American companies with annual revenues of at least $500 million confirmed two trends we have seen in our consulting work. First, nearly two-thirds of respondents plan to migrate to SOA in 2007. SOA is already bringing organizations major benefits: large reductions in development time, lower maintenance and other operating costs, and greater flexibility to change business processes. For example, one global financial services firm has saved about 12,000 person-days in system-development time after adopting SOA and providing developers with a set of services from which they can write applications.

CIOs’ embrace of SOA is not a surprise. The burgeoning costs of IT are substantially fueled by the rising cost of software, particularly custom systems and customized commercial packages. SOA enables companies to reuse software, update and replace it more easily, and organize themselves more modularly and efficiently. Perhaps even more important, SOA lets companies establish much deeper electronic connections with suppliers and customers, way beyond the “store-and-forward” information format of electronic data interchange. With these benefits in mind, nearly half the CIOs surveyed were implementing SOA to integrate their systems with those of their external trading partners.

The second trend our survey revealed was the use of lean manufacturing principles (a methodology for improving processes) in data centers. Twenty-eight percent of the companies had applied or decided to apply lean practices to improve their data center operations. Originally developed by automotive giant Toyota Motor Co. 30 years ago to streamline its factories, lean techniques have been adopted in a number of service industries over the past decade. CIOs are increasingly using lean approaches to rein in rising data center costs. The typical large company’s data center has hundreds of millions of dollars in raised floors, server farms, mainframe computers, networking equipment and storage devices. The “glass house” is a voracious consumer of power and employs hundreds of highly skilled technicians to run it around the clock. We’ve seen lean principles reduce data center waste and boost labor productivity as much as 40 percent in some processes. In fact, leading offshore IT service vendors such as Wipro have already generated significant improvements in quality and cost through lean approaches.

While the benefits of SOA and lean approaches are indeed sizable, they aren’t easy to obtain. CIOs will face a number of challenges in getting their IT organizations to adopt SOA and lean principles. Every major change in technology or approaches requires changing people’s mindsets and the ways they work. SOA and lean approaches require big changes in everyday behavior and decision processes of people across the IT function. CIOs must lead the charge.

Service-Oriented ArchitectureLet’s start with SOA. CIOs will have to strengthen the architecture function, particularly by bringing along business-savvy architects to learn SOA and shifting away from technically-oriented architects; setting baseline standards for the way applications store, manage and share information and investing in SOA-based middleware technologies such as the enterprise service bus.

SOA also requires CIOs to help their organizations decide where to adopt it first. That’s because while the potential benefits are enormous, they don’t come quickly, and the investment can be substantial. For one Internet service provider, we projected a 40 percent return on a $100 million-plus investment in SOA over four years-but a negative cash flow until year three. Replacing everything at once is not possible. Success with SOA will depend on achieving early wins. As a result, CIOs must determine where SOA services will have the greatest value. Defining and designing services will pose additional challenges for CIOs. SOA is about identifying business activities and grouping them into self-contained services. However, from company to company, services can be quite different-from subroutines that define a few bits to a whole business function such as sales. In designing services, IT must do so in a way that reflects a highly specific business need-nothing more, nothing less. This task can’t be left to technical experts; it requires professionals who understand the business activities of the company.

Getting Lean

“Leaning” a data center is likely to be quite challenging as well. Data centers have over time become labor intensive, consuming approximately 40 percent of the average IT operations budget in personnel managing data centers, networks, call centers, help desks and desktop installation. Adopting a lean approach can help shrink wasteful labor by turning the headlights on all types of inefficiencies, for example: inflexibility and variability in processes, duplicate or non-value-added activities, and unnecessary waiting. Leaning requires major changes in three areas: operating systems, management systems, and mind-sets and behaviors.

Changing the way the systems are operated entails removing unnecessary but entrenched steps in common processes such as incident management and demand management. Changing the management processes that oversee operations may require rethinking the organizational structures and boundaries. And finally, the lean principles will force data center employees to shift their beliefs about how they should work and their workplace behavior. Lean calls for workplace metrics to be visible and open to anyone, so employees can work together to solve problems. There aren’t too many IT shops with boards showing incidents closed by every data center employee. CIOs will have to make data center employees comfortable with forcing everyone’s performance out into the open. 

CIOs will also have to make data center employees comfortable with lean’s focus on processes and their continuous improvement. Computer science educations rarely teach process-orientation and continuous-improvement techniques. Data center employees will need to be taught by lean experts. There are many from the world of manufacturing and an increasing number from service industries. CIOs must pair these lean “coaches” with their data center managers, operators, and engineers to learn the processes, systems, and behaviors of lean. Much of the learning will be experiential and require pilot projects. Once they learn lean principles, data center professionals must get used to continuously improving the way they do their jobs–not making changes only once. To instill a continuous-improvement mind-set, CIOs will have to rethink how their data center managers interact with business users and IT employees on the application side of the IT shop, redefine measurement and incentive systems, and rethink the organizational structure and governance mechanisms in the data center.

Two Promising Roads to EffectivenessFor CIOs, SOA and lean principles represent two of the best management tools in a long time to control IT costs and make IT more effective. Those who become proficient at using SOA to improve the quality and cost of the software that runs their companies and who become masters at lean approaches to streamline the data center will no doubt be able to satisfy the CEO and CFO whose focus is on cost containment. Such CIOs will also be able to stand beside their counterparts in manufacturing, procurement, distribution and other business functions that have generated substantial operating and financial improvements in their domains and show how the IT function, too, can contribute to the effort.

Janaki Akella and Roger Roberts are principals at McKinsey & Company and co-leaders of its global IT architecture practice. Kishore Kanakamedala is practice manager of McKinsey’s IT infrastructure practice.