Virtually no company or industry has been spared during the brutal economic slump of the past few years. With a recovery seemingly at hand, it’s tempting to breathe a sigh of relief and get back to business as usual.
All companies periodically face obstacles in both good times and bad, says Amir Hartman, who’s a consultant and cofounder of Mainstay Partners, professor at Berkeley’s Haas School of Business and author of the 1999 best-seller Net Ready. His new book is Ruthless Execution: What Business Leaders Do When Their Companies Hit the Wall (Financial Times Prentice Hall, 2004). In it, Hartman says that turnaround starts with managers (“benevolent dictators,” he calls them) who ruthlessly execute strategic decisions and have voracious appetites for change. Leaders who are always satisfied with performance become complacent, leading to stalled growth, says Hartman. Equally important is excellence in “operational governance,” the formal and informal practices and rules that shape how decisions get made and work gets done within an organization. CIO contributor Lauren Gibbons Paul asked Hartman how the principles in his new book apply to IT organizations.
CIO: Can you expand on your vision of a ruthless leader? What characterizes a benevolent dictator?
Amir Hartman: Focus and accountability. Those are the key themes. These folks are relentless about focusing on initiatives that are going to drive results that matter. They are also very keen on driving accountability—delivering on your word or promises, and dealing with the consequences when one doesn’t.
When I think of accountability, Larry Bossidy, the former chairman of Honeywell and Allied Signal, comes to mind. He’s an operator, a COO-type CEO. He clearly communicates expectations. Given the room to perform, if results aren’t delivered, he looks elsewhere. When the Honeywell-Allied Signal merger was happening [Bossidy had left by then], Honeywell lost its direction. The board asked Bossidy to come back to get stakeholder confidence back up. He found key personnel. He committed to Wall Street that the company would become profitable and drive specific working capital reduction targets. That commitment and communication translated into clear directives to the management team, which in turn drove very specific IT investments to increase productivity and reduce working capital.
What do ruthless leaders do when faced with adversity?
They recalibrate their strategies. Recalibration is a fact-based process by which we assess and determine which strategy we’re going to pursue. Every company goes through that process, but not every company does it in a fact-based manner.
What does that mean for a CIO?
From an IT perspective, strategy-setting is usually not fact-based. Ruthless companies are fact-based. They find out exactly where they’re making their money. The process forces a clear understanding of which customers and businesses are profitable. Most times, IT organizations are in a very reactive mode. They should shift more toward fact-based portfolio management. If top-line growth is the major imperative, they need to figure out how to reduce the dollars spent running the business systems and reallocate some resources toward top-line growth initiatives.
Portfolio management is the essence of recalibration. Every company has a portfolio, but most companies don’t understand that they have a portfolio. Cisco is a great example [of being fact-based]. Everyone knows Cisco was a young company that was in hypergrowth mode until 2001. All of a sudden the bottom drops out. Where they had been in growth and acquisition mode, very swiftly and convincingly Cisco CEO John Chambers was able to shift the strategy to focus on things that more mature companies do, such as cost and productivity management. They look at things in a very fact-based way: [Looking at our] portfolio of initiatives, as well as the attention and resources that we’re allocating, is this an optimal portfolio?
The benevolent dictator part comes in around operational governance: What do we measure? [Operational governance is about] roles, responsibilities, how we’re going to play the game and make decisions. [Being a benevolent dictator means having] a very clear, fact-based discussion and setting of expectations. This is positive because it’s very well-respected amongst the troops. They really appreciate the clear setting of expectations. These principles are very applicable to CIOs. [Editor’s note: Hartman has worked at Cisco.]
How can a CIO aid in recalibration of strategy?
CIOs have a lot to bring to the table: leadership, portfolio management and recalibrating the strategy. There’s a lot the CIO can do there?validating the direction the organization is taking and relentlessly focusing on that direction. Analyzing and assessing whether IT investments are being optimized. Are we allocating those in the right way? But if you look at IT budgets and spending, a very small percentage of the spend is for discretionary initiatives that create value for the organization.
Most investments are for fixed assets that are meant to run the business. CIOs need to ask, Where are my IT dollars going? Are they focused on the right areas? How variable are those dollars?
If you were to ask most CIOs, Are the senior-most leaders actively involved in the prioritization and selection of IT initiatives? most CIOs would say no. A good CIO needs to be able to drive participation because IT is, in my opinion, a business-driven line issue—or it should be. According to my data, less than 12 percent of companies can accurately measure the impact of their IT investments. They’ll measure things like percentage of projects that were completed on time and on budget—that’s a classic measure. I’m not saying that blowing away the budget and the time line is a good thing, but it’s not necessarily reflective of the [project’s] strategic impact. Part of it is very context specific. Asset-intensive industries such as manufacturing tend to look at return on net assets. In other industries, the key metrics are different. The IT organization needs to play a significant role in measuring the key metrics for its industry. I’m not satisfied with the answer that IT investment is hard to measure.
What about post-hoc measurement?
Very few IT organizations are covering their cost of capital, but they don’t know that because they don’t measure. It’s a very problematic circle. Here are some facts: In a 500-company survey that we did, less than 12 percent of large companies can actually measure the value of their IT investments. Most large companies (with revenue over $1 billion) are spending 50 percent more on IT than their budgets indicate. Most CIOs don’t do post-hoc reviews of actual spend. They don’t really consider total cost of ownership. They typically look only at the initial investment of hardware, software and installation, and not the ongoing investment. From our study, in the case of big automotive companies, their actual IT spend was 100 percent more than the budget. You’re spending a lot more than you think you are. And you don’t have much of an idea of what you’re getting for that investment. That adds up to a major problem. CEOs and CFOs get upset about this, and rightfully so.
What are some questions to ask to determine if you?and your CEO?are ruthless leaders?
Almost 100 percent of the questions can be applied to the CIO [see Are You Ruthless?]. I survey the top 50 executives across the organization. I say, Let’s look at your practices versus best-in-class, and let’s see the gaps, and let’s focus on the red flags that are really critical. How do we close those gaps? [One could] take that same tool and apply it in IT.
Look at whether your organization is relentless about ensuring direct linkage of initiatives to strategic imperatives. Whether your senior leaders are actively involved in the prioritization and review of IT initiatives. Whether your organization has a tradition of discipline and rigor. Whether you kill or close nonperforming initiatives on a regular basis. Our research tells us that the ruthless companies do a very good job of managing talent. They also can identify and get rid of nonperformers.
You have said that most companies have too little and weak operational governance—please give examples of both.
Too little—that’s where IT decisions get made in a very ad-hoc fashion, which is mostly the case. You’ll have a strong business unit leader, and you’ll make investment decisions because that leader wants it—not because it’s good for the company as a whole. There is very little process around selection and prioritization of investments and very little post-hoc review of what was actually accomplished with the investment. Typically, business cases are weak. Ruthless companies are much more disciplined about the process for investing. If you have a process that is rigorous and fact-based, investment decisions can be made a lot more intelligently.
[As for too much corporate governance,] the analog to that is where there is too much bureaucracy. So any size of investment goes through the same justification and review process whether the initiative is a large ERP implementation that will cost a couple of million dollars versus a very small enhancement.
To apply this portfolio framework to IT, you’ve got in essence four buckets, driven by two key variables: business criticality, and newness or innovation. The four buckets are projects that are: fundamental or necessary for running the business, those that aim to innovate the business, those that aim to grow the business, and rational experiments. Investments that aim to innovate the business—and have a much longer payback period—and rational experiments need to be treated very differently. Rational experiments have a much longer payback, higher risk, and they’re more uncertain. Looking at it from an ROI perspective is counterproductive. These different kinds of investments need to be funded, measured and managed differently.
You discuss metrics a lot. You say companies—and CIOs—typically measure the wrong thing. Shouldn’t they be measuring business results?
They should, but they typically don’t. The classic reason for that is that it’s very difficult to measure the efficacy of IT investments. It’s true, in part, because more and more, it’s hard to delineate where IT starts and stops, and where processes start and stop. It will be even more difficult moving forward. [There is some holdover of the] cost-center mentality baggage. So CIOs tend to get away with not measuring things that truly matter. Moving forward, a strong CIO needs to be able to show a linkage between IT investments and what IT does for the business. Not every IT investment creates value. Infrastructure investments are never going to have ROI. They are part of the cost of doing business. But that doesn’t mean we throw up our hands and say we can’t measure it.
CIOs will do a lot of good by driving toward measures that the business cares about—the CEO, the CFO, the board and the shareholders. IT can play a strong partnership role in helping to bring a lot of information about the cost side. Here’s what we actually spent, total cost of ownership for this investment. They need to partner with the business unit lead to bring visibility and clarity as to what these investments are providing to the company.
There is a reticence on the other side of the fence: Business leaders typically don’t believe they should be held accountable for IT investments. The education needs to happen on both sides. A lot of top organizations that I have studied do [hold their business units accountable for IT investments]. It will get on the agenda of leaders even more so because I would wager that by the end of this year, about a third of companies will subject their IT investments to a board approval process.
What percent of companies are ruthless, by your definition?
I studied about 500 companies over a 30-year time span: It’s less than 10 percent. And that’s being generous. The ones that are more ruthless get better results from their IT investments, they have a better ROI on capital than their peer group, and they have a better relative market cap growth and relative market share growth. But if you take any 10-year time span and flip it, you’ll see that less than one in 10 companies can sustain profitable growth over that 10-year period.
Economic conditions seem to be improving. Can CIOs relax a little?
We’re definitely coming out of the trough. I’m starting to see the capital belt loosen up just a tad. But I’m also seeing much more downward pressure to rationalize IT investments, much more scrutiny, faster payback. IT organizations cannot breathe a sigh of relief. There’s actually more pressure that will be put upon them.