Special Report - What's on the CIO's Mind: Key Issues in 2010

By Erik Dorr

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Editor's Note: This clients-only report was first produced in January 2010 and is being reprinted here with permission from The Hackett Group.

As companies slowly emerge from the recession, they are encountering fundamental changes in the global business environment. These changes will have far-reaching implications for the way IT services are provided and funded and how IT performance is assessed. Against this backdrop, IT’s strategic priorities for 2010 are to retool the IT organization to support the business in an environment of high risk and volatility, accelerated globalization and need for innovation.

This must be done with resource levels that have been permanently reduced. Participants in this Key Issues Study report that their top priorities are demand and project portfolio management; transformation and optimization of their service delivery model; talent management; and continued cost reduction.

CIOs report their chief initiatives in 2010 include infrastructure virtualization, function reorganization, application portfolio consolidation and improving portfolio management capability. Talent management, though a high priority, lags in execution.

The “New Normal” and its implications for 2010’s IT agenda

2009 will be remembered as one of unprecedented economic extremes. Following the near-collapse of the global financial system in late 2008, 2009 began with a sense of impending economic doom. However, by late 2009 the stock market was enjoying its biggest rally in 70 years, marking a shift toward cautious optimism about the return of growth in 2010 and beyond.

There is no question that 2009 was the ultimate test of the quality of business leadership. For most executives, shifting from full crisis mode at the start of 2009 to planning for recovery by the year’s end was a novel, even unprecedented experience. Those who can manage the transition will come out of the recession stronger and more competitive, having permanently improved their cost structure and operating models. By contrast, those who fail to learn and apply lessons learned will find their competitiveness eroded to the point that they are jeopardizing the future viability of their companies.

Coming out of the recession, it is critical for G&A leaders to understand what has structurally changed in the business climate, and what the implications are for business support organizations and their specific function. The most important of these structural changes are characterized as follows:

Increased business volatility and risk: Opinions about the future volatility of key economic indicators (housing prices, interest rates, commodity prices, consumer demand, etc.) vary widely. Uncertainty about future conditions increases business risk, which in turn has repercussions for IT.

Importance of new markets to growth: There is widespread agreement that growth opportunities in emerging economies outstrip those in developed Western economies. Companies failing to adapt to and capitalize on this changing pattern risk falling behind.

Acceleration of innovation cycles: Cycles of creative destruction are integral to the value-creation process. When business uncertainty is high, this process tends to intensify, performance gaps between “winners” and “losers” widen, and industries restructure at a faster pace (consider how the auto industry’s lingering structural problems led to drastic industry restructuring in the space of a single year). The key to survival under such circumstances is innovation, not only in product and service offerings, but in business models and processes.

While the above-mentioned changes represent macroeconomic shifts, they have major implications at the enterprise level, as well. Specifically, thriving under “new normal” conditions requires two essential capabilities:

• Being predictive in strategy - Strategy is based on implicit or explicit assumptions about the future. In a high-risk, high-volatility environment, having a strong predictive capability provides a performance premium, creating an incentive for companies to improve this capability. Companies that base their strategy on a linear extrapolation of the past, on the other hand, will falter. Additionally, the tolerance bandwidth for errors and corrections has been significantly reduced.

• Being predictable in operational execution - When the rate of external change is accelerating, the penalties suffered due to inadequate or slow response times increase. Sometimes this will be an opportunity cost (i.e., missing out on a market opportunity), and sometimes a direct cost (i.e., continuing to go down an unprofitable path). Our evaluations and modeling indicate that companies with predictive strategy capability but lagging predictable operational execution will have a harder time competing in a global marketplace.

These trends characterize the context in which business support functions including IT will operate. Since the function’s value and performance will be measured against these trends, there are some very specific emerging operational requirements for IT organizations. (To ensure that these capabilities are robust enough to achieve enable systemic change, they must be implemented against the background of a holistic Service Delivery Model.):

Meeting these requirements involves enabling the business to accelerate its speed of execution, improve its risk-management capability, support innovation and improve operational efficiency. All of the aforementioned requirements can be met only if IT is able to provide better information on a more timely basis to the rest of the enterprise, and to help drive higher levels of automation and analytical capability throughout the value chain.

Consequently, IT’s role in determining how well companies perform is more important than ever in the “new normal.” Given the pervasive role of technology in society today, this should come as no surprise. While even five years ago some companies still relegated technology issues to a team of specialists operating in relative isolation, today technology is an integral part of business operations and a crucial enabler of adaptation and change.

Underlying all of the developments on the preceding pages is the finding that functional organizations including IT are rapidly moving from being run based on a national or multinational model to being managed/operated globally. This acceleration of the globalization trend will be the most significant driver of structural business changes.

Recession fallout: The IT resources squeeze

One of the premises of this research is that IT priorities for 2010 are shaped by an expectation of a return to modest growth in 2010. This widely shared assumption is borne out by Hackett research (Fig. 3). Companies participating in our study reported average revenue declines of four percent in 2009 but expect four percent growth in 2010.

Participants also indicated IT resources were cut back in 2009 at a faster rate than actual business declines (7.3 percent vs. 4.0 percent). However, during the recovery, IT resources are expected to grow at a slower pace than business volumes. The net impact: a reduction of IT resources relative to business volume during both phases in the cycle. In other words, some IT resources cut during the recession will be permanent (Fig. 4). This situation further increases and extends the gap between supply and demand for IT services.

 estimated cuts? resource of percentage

The cutback in IT resources does not mean demand for IT services will be reduced commensurately. In fact, G&A functions as well as operations, sales and marketing are looking to IT for help delivering on management’s mandates for efficiency. The net result is a genuine IT resource squeeze. In the short term, many companies have responded with unsustainable practices such as deferment of technology refresh or postponement of application rationalization initiatives. In 2010, the IT strategic priorities and agenda will be highly influenced by this resource squeeze.

Business realities are shaping IT strategic priorities

To understand study participants’ top priorities, it is essential to first understand the broader business issues driving these priorities as well as the IT resources squeeze:

Demand management - Companies report that their top priority in 2010 is effective management and prioritization of IT demand, and the closely related issue of improving capacity planning and portfolio management capability. This finding is consistent with what one would expect in view of the IT resource squeeze.

Companies fully understand they operate today in an environment in which demand for IT services far outstrips supply capacity. The ability to manage demand, plan capacity and implement an agile solution strategy is critical to business survival.

Cost control - Finding ways for IT to further reduce cost is a top priority for 2010. However, most companies have pulled back from last year’s “survival” mode and are now searching for a more balanced approach. In Hackett terms, this includes preservation or restoration of best practices in effectiveness as well as efficiency.

Agility and service delivery model - Another high priority is optimizing the IT service delivery model to increase agility without taking on new fixed cost. This priority is directly related to IT organizations’ need to create a more scalable and variable capability and cost structure in the absence of investment funding. One of the lessons of the economic crisis is that a rigid cost structure cannot handle unanticipated, major revenue fluctuations.

Talent management

As companies downsized in response to the recession, IT talent management and holding onto top talent gained in importance. Luckily for most companies, the weak job market convinced many top IT staff to wait out the recession where they were. Having been put under tremendous stress over the past year, the risk is high that IT’s top performers will leave when the labor market improves. Though the mass exit of retiring baby boomers from the labor market may be less of a concern than before the financial crisis, companies must tune up their practices to actively manage the risk of talent loss through a comprehensive talent management strategy.

[A comment on the talent issue: For years, companies have ranked talent as a key issue across all of the G&A functions, including IT. However, we have observed very few actual implementations of talent management programs. Even good, formal recruiting strategies that would give companies an edge in attracting top IT talent have been few and far between.]

2010 's top IT priorities

2010 top IT priorities

Infrastructure virtualization - Ongoing Hackett research continues to show that virtualization remains the primary technology-architecture-based initiative aimed at keeping IT infrastructure cost in check. Despite focus in the trade press on “external cloud” offerings, virtualization for most companies entails building “internal clouds.” Study participants have achieved dramatic improvement in utilization of resources, while the speed and flexibility of infrastructure resources has improved as well.

This improved technical capability has resulted in improved services agility, eliminating the need for large capital outlays as well as introducing variability to infrastructure cost. There is still a question as to the impact on long-term total cost of ownership (TCO) of virtualization strategies. But virtualization is now a mature architecture approach and is rapidly growing in adoption. Companies with internal virtualization experience are in a better position to leverage off-the-shelf external virtualized infrastructure offerings as they mature.

Project portfolio management - Companies are widely implementing project portfolio management, or PPM, to address demand management capability. Most already do some form of PPM, so the emphasis for 2010 is on improving processes and capabilities, as well as expanding the scope of initiatives governed by the PPM process.

Note that this initiative does not imply companies are accelerating implementing dedicated best-of-breed PPM tools. Such implementations require large investments that are hard to fund under current economic conditions. The foremost focus of this 2010 initiative is therefore on improving process, governance and skills.

IT reorganization - Repeated, painful downsizings have forced many IT organizations to rethink their organization structure, reporting lines, span of control, etc., in order to reduce headcount. In 2010 and beyond, IT organizational changes will be more related to service delivery model (SDM) optimization. Organization structure (along with governance and service placement) is at the heart of the SDM design.

The 2010 study finds that 67 percent of companies plan to make such organizational changes in the very near future. Moving to common standards, including shared services, is currently by far the most popular enterprise initiative. In IT, this “leverage movement” will advance rationalization strategies, especially in application portfolio management.

Business application portfolio rationalization around a common ERP - Migrating a fragmented application portfolio to a common ERP platform has been on IT’s agenda ever since ERP become the transactional platform of choice for large and midsize companies. Although most have by now settled on a company ERP platform standard, migration of operating companies, individual functions and end-users onto the chosen platform is ongoing. Indeed, application portfolio rationalization continues to be one of the main issues Hackett Group clients struggle with.

At the same time, application portfolio complexity is one of the metrics most highly correlated with IT performance, so the payoff from complexity reduction is significant. For example, Hackett data indicates that world-class companies have just half the number of applications per 1,000 end-users as companies in the peer group.

Strategic implications

The financial crisis of 2008-2009 accelerated several ongoing IT transformation trends. These changes are leading to a totally different business environment, and thus an equally different IT environment. Specifically, structural changes in the global business environment will have far-reaching implications for the way IT services are funded and provided, and how IT performance is assessed.

The days of undertaking multiple strategies in the absence of a unifying service delivery model are over. In practical terms, companies need to define their strategic IT priorities and corresponding initiatives for 2010 and beyond to reflect changing business priorities. In 2008-2009, survival was the sole business priority for many companies. In 2010, the priority is to retool the IT organization to support the business in an environment characterized by historically high rates of risk and volatility, accelerated globalization and need for innovation. IT must accomplish this transformation with resource levels that have been permanently reduced.

About the authors

Erik Dorr is senior research director. He has over 15 years of experience in the IT industry in a variety of positions. Currently, he advises Hackett Group clients on a broad range of strategic IT issues, ranging from application management to enterprise architecture and IT governance. Mr. Dorr has responsibility for the firm’s IT and business process globalization research agendas. In the past, he has taken a consultative and management role in helping large organizations with enterprise system strategies and implementations. Before joining The Hackett Group, he was a research analyst and consulting director for a large IT research and consulting firm and vice president of IT at a global manufacturing company.

Honorio J. Padrón III, is global practice leader, IT Executive Advisory. Mr. Padrón’s career spans 30 years in business technology management, enterprise business transformation, shared services, outsourcing, and customer experience engineering. He is an expert in all facets of G&A service delivery strategy, design, and implementation. He has held senior executive positions in government and at a number of Fortune 500 corporations, including CEO of Exelon’s Business Services Company, Inc.; CIO and SVP Exelon Corporation; CIO and EVP of CompUSA; CIO and SVP of PepsiCo Restaurant Group; and Head of Global Reengineering for Burger King Corporation. He also served in various program management roles at NASA Kennedy Space Center. CIO Magazine selected Mr. Padrón as one of its “Top 100 CIOs,” and RetailTech as one of its “Top 10 CIOs.” Additionally, he is the recipient of a Computerworld Smithsonian Award for CRM innovation and a Contract Design Award from the Outsourcing Institute. Mr. Padrón is a contributing author to e-Enterprise, The Alignment Effect and Winning the 3-Legged Race: When Business & Technology Run Together.