Most companies have absorbed the axiom that IT goals must be aligned with business goals to create value. Yet, far fewer understand that alignment alone doesn’t guarantee business growth. In fact, it can be a trap.
Charles Schwab & Co., one of the leading US brokerage firms, for instance, gained prominence through its mastery of IT, first as a discount broker, then as a leader in online trading. By the early 2000s, however, IT had actually become a detriment—a patchwork of custom systems was snarling operations and new IT-based products were delayed. Worse, Schwab was spending 18 percent of its revenue on IT, while three of its leading competitors spent 13 percent or less, an annual disadvantage of hundreds of millions of dollars.
That tech-savvy Schwab found itself in this predicament is instructive for Australian companies that seek to use IT as a lever for growth. Here in Australia, many firms in sectors ranging from financial services to retail have initiatives underway to ‘realign’ IT more into the business units, to better align and service the individual business needs. This will enable IT to better service the business, yes?
That much is true. But in our work with IT and business executives and dozens of companies in many different industries, we began to see a very troubling pattern: even at companies that were focused on alignment, business performance dependent on IT sometimes went sideways, or even declined. Schwab’s quandary signals a growing realization that the usual diagnoses—and fixes—of IT troubles are often misguided. To improve alignment, IT organizations develop best-of-breed solutions designed to serve each business’ unique needs. They hold off standardization and upgrading of legacy systems. They overlay complexity on old systems, postponing infrastructure improvements and leaving significant scale benefits untapped. Costs rise; delays mount; and fragmentation undercuts coordination across business units.
This kind of focus hurts units instead of helping them. Defining the alignment trap, Richard F. Connell, senior executive vice-president and CIO of the New Jersey-based Selective Insurance Group, says, “Aligning a poorly performing IT organization to the right business objectives still won’t get the objectives accomplished.”
Another warning emerged when we surveyed more than 500 executives: Few of them rated their companies’ IT capabilities highly. We found that they fell into four camps.
In the first, nearly three quarters believed their IT capability was neither highly aligned with their business goals nor highly effective. These companies occupy what we call the maintenance zone. Minimal budgets keep systems running but IT doesn’t offer added value and, often, isn’t expected to. Such companies recorded a slower rate of growth—2 percent below the three-year average in the survey—while spending the same as the average every year on IT.
More troubling was the second camp. Here, 11 percent of companies had IT highly aligned, but not highly effective. Surprisingly, these companies fared even worse. While IT spending was 13 percent higher than average, their three-year growth rates were 14 percent lower than average. These were in the “alignment trap.”
Only 15 percent believed IT was highly effective and delivered projects with promised functionality, timing and cost. These we categorized as “well-oiled IT organizations.” Significantly, effectiveness on its own made a substantial economic difference. Among highly effective companies, even those that didn’t consider their IT organizations highly aligned were spending 15 percent less than average, and their growth rates were 11 percent higher.
The final camp was the rarest breed: both highly aligned and highly effective. Such “IT-enabled” organizations amounted to only 7 percent. But they recorded a compound three-year growth rate 35 percent higher than the survey average. Moreover, they spent 6 percent less on IT than other respondents.
These findings make it clear for companies here in Australia to learn from the mistakes of others, that getting IT right is critical, and can offer important opportunities for those seeking to gain more return from their IT investments. For the majority of companies, the single most important task is to forget about enhancing alignment for the moment, and to focus first on increasing the effectiveness of the IT organization. In order for IT to enable growth, that first move is critical—and it’s the one that companies often get wrong.
Three key principles are useful in moving organizations to high effectiveness:
• Simplify: Raising effectiveness usually involves simplifying the IT function. That may mean delaying some of the division-specific applications that have been custom-tailored on legacy systems. Such an approach requires a greater investment of time and money upfront, but will lead to lower costs later.
• Rightsource capabilities: Effective IT requires capabilities ranging from managing help desks efficiently to creating innovative business applications. Today, nearly all these are available from IT specialists in India and elsewhere. A useful way to make sourcing choices is to decide what needs to be proprietary. In-house development makes sense for applications that are strategic, or critical to competitive differentiation.
• Focus on value delivery: To be highly effective, IT must complete projects on time, on budget, and with IT functionality that delivers what was requested by the business (with agreed upon modifications). To meet these challenges, IT must be equipped with the right objectives, skills, processes, and resources. For example, without a business case and key performance indicators for IT projects, it is difficult to measure and improve the value delivered by IT.
Schwab proves the value of attaining both IT strategy alignment and effectiveness. Indeed, it quickly re-established these tandem goals and is getting results: Per trade costs have decreased more than 50 percent, while average time taken to execute trades at peak times has fallen 80 percent.
Best of all, as Schwab climbs out of the alignment trap, clients are rewarding it with increasing trades and assets. In other words, IT is once again igniting Schwab’s growth. It could do the same for you.
Donie Lochan is a partner in Sydney, and the head of Bain’s Asia Pacific IT practice. Steve Berez is a Bain & Company partner in Boston.Rudy Puryear is head of Bain’s Global IT practice.
