CIO comments from Wharton

From CNet News:

The CIO has come a long way.

Over the years, as technology has grown more integral to a company's operations, the job of the chief information officer has expanded and become more business-centered. Instead of managing only the computing technology of a company, from the wires to the networks and applications, CIOs in many companies are now involved in determining their company's strategic direction.

CIOs were pushed into this new role by technology itself. The dot-com boom and rise in e-business initiatives forced many companies to realize they could no longer manage their business as they once did, or take for granted their status in their industry. New technologies could make them obsolete almost overnight. In addition, concerns about security, along with new developments like mobile computing, have required a broader outlook.

CIOs have always needed to be fluent in business concepts to help meet a company's objectives. But CIOs must now also capitalize on the strategic and economic value of information. In "knowledge intensive" companies--particularly in financial services, where customer acquisition, marketing and information-based pricing contribute directly to growth--information is often a company's main competitive asset.

It's the CIO, points out Ravi Aron, a professor of operations and information management at Wharton, who helps senior management determine what kind of new service the company can introduce in the market. And it is often the CIO who will make the call about whether a given information-based strategy is realistic.

Many technology-based decisions also affect customers, notes Robert B. Carter, executive vice president and CIO of Federal Express. "The CIO has much more impact now on the revenue of the company, the company's brand image, and the company's perception in the marketplace," he said. This means the CIO must be cross-disciplinary in his or her ability to think about both business and technology.

As technology's role in companies has become more integrated organizationally, with the CIO attending most senior management meetings, the information technology department has increasingly been mainstreamed into the business. IT management, for instance, is now frequently asked to justify its investments economically (as other business units do), using metrics such as return on investment, net present value and discounted cash flow.

A new mold
As a result of this shift, the CIO job description and skill requirements have been recast. More and more CIOs have an MBA and, ideally, experience on both the business and IT sides of the house. "If the CIO comes strictly from an IT background, he's never going to properly interface with the business units or really understand the business," observed William Barna, a senior consultant with Microsoft Consulting Services.

"If business units aren't held accountable for generating the benefits side, benefits won't be generated. That's how companies waste money on IT." --Jeanne Ross, principal research scientist, MIT's Center for Information Systems Research

On the other hand, someone from the business side may not be equipped to manage the IT staff or understand all the implications of a technology decision. Barna added that some of the most effective CIOs he has worked with were not reared exclusively in the IT world. They logged a few years in sales, or managed operations for a business division, before shifting into IT and climbing the ranks.

In some quarters, it is even debatable how much technical expertise CIOs require. For years they had to understand--intimately--how to achieve a particular technology objective. But this may no longer be the case.

Wharton's Aron argues that two changes have made technical know-how less necessary, freeing CIOs to concentrate on strategic initiatives. First, the "how" of implementing complicated technology can be bought from consulting firms like Accenture--making the CIO, in his words, a "sophisticated consumer of advice from outside agencies."

Second, software makers like Microsoft, Oracle and Sybase are eliminating some of the complexity of technology by turning to standardization and Web protocols. In effect, software makers that once sold clients standalone technologies have become systems integrators by assuming the risk that various software components will talk to each other.

In recent years, many large corporations have begun hiring CIOs from outside the IT organization. Dow Corning, Lowe's and UPS are among the companies that have taken this path.

For many companies, bringing in a superstar from outside IT who knows IT well can be a godsend, says Jeanne Ross, principal research scientist at MIT's Center for Information Systems Research. In the best cases, Ross points out, the consistent reaction on the part of IT people has been one of delight.

"They'd been beaten up for years, no one knew what they were doing, and they were overloaded," she explained. "The very first thing a good CIO would do is go in and say, 'These umpteen things--we're not going to do them anymore, since they're not important enough. We can't do everything.' That tended to be an epiphany for many IT people."

Nonetheless, Ross cautions that a broad business mind-set isn't always enough. Hard technology decisions must still be made, and the CIO must understand the IT infrastructure and what's possible or impossible for a company to handle.

FedEx's Carter, who has an MBA (and who says that getting it was one of the best things he did), stresses that there's no way around a deep understanding of technology. The era of CIOs who came from nontechnical disciplines, he points out, is passing.

"Technology decisions are very, very critical, and they're not to be made lightly," he said. "A CIO must seriously contemplate and understand the technologies involved in order to steer the company in the right direction."

Shared accountability
While CIOs must think about IT investments in terms of their company's business objectives, they must also push for shared accountability from the business units that would profit from the benefits. A new application may promise extra sales revenue, says Microsoft's Barna, but when a CIO presents that benefit to a chief financial officer, the CFO typically won't consider it real until the head of sales actually builds it into his quota for the next year. And the salesman may discount the value of his benefits if he has to put more sales into his quota. For companies serious about using the business case to make a decision about an IT investment, accountability of the measurable benefits that are likely to result is a vital goal.

"CIOs must change the culture in the IT unit so everybody thinks that in this business we can only afford so much in order to achieve a certain amount of functionality." --Jeanne Ross

Ross agrees that establishing accountability outside IT is crucial. "If business units aren't held accountable for generating the benefits side, benefits won't be generated," she said. "That's how companies waste money on IT."

Shared accountability, though, is tough sledding. FedEx's Carter offers a dose of reality. "If (implementing an IT initiative) is purported to have a savings of X amount, then the business units have that productivity factored into their run-rate budgets," he said. "But at the end of the day, who's going to get the call from the chairman? It's going to be me." If the money is spent on IT, then it's usually IT that will be questioned about the delivery and quality of the goods.

Most importantly, IT must be responsible for clear communication. Historically, technology departments have existed in a kind of IT ecosystem, disconnected from the business units. They often didn't deliver projects on time, couldn't explain what they were doing, and didn't understand the function of other business units. The result is today's IT credibility problem. This "misalignment" between the IT department and business units can now be seen in IT projects that do not meet the needs of those they were designed for, and in the rancor resulting among the various parties.

One way for CIOs to counter this is to get their department to balance functionality and cost. In particular, IT must think about unit costs the way other departments do, says MIT's Ross. Not only is this a more professional tack for any department, but business units are more likely to understand the costs and difficulties of an IT project if they're laid out clearly.

"CIOs must change the culture in the IT unit so everybody thinks that in this business we can only afford so much in order to achieve a certain amount of functionality. It's just like in your house, where you have a budget, and if you spend more than what's budgeted, you go broke," she said. This entails getting IT to calculate costs in clear-cut business terms: What's the unit cost, for example, of a programmer's time to access one item of data in a particular database?

FedEx's Carter points out that nothing is more critical in his work than the relationship between business units and IT. And for some companies, it's a make-or-break situation. "I feel very strongly about this," he said, "because the high-productivity, successful projects in IT in my career have always--not sometimes and not most of the time, but always--been associated with points in time when there were good business partnerships between IT and the business units that they were supporting. More than process (management) and CMM (the Capability Maturity Model), what seems to have the biggest impact on IT's ability to deliver business-impacting solutions is how well connected they are with their business associates."

IT and business decision-makers should be able to sit down at a table and talk--that is, have conversations free of condescension and jargon. "I'm on a rampage since I feel that's a message the industry needs--that we must learn to speak a common language more effectively," Carter said. "I put a lot of the responsibility on the CIO to set the stage for positive business relationships--not just so everybody can be happy and sing 'Kumbaya,' but because it makes for a highly effective implementation of projects and because an effective linkage between the two can bring strategic and competitive advantage to the business."

For trust to be established between departments, IT must change. It's up to the IT department, says the FedEx CIO, to learn about the company's business, understand the business, speak the language of business, learn to think in business terms, and be a better listener. For many in the IT world, this involves a radical shift in mental policy.

Fast-forward
As the pace of technology has increased, CIOs have begun to confront new issues. One task thrust upon many CIOs, says Shafeen Charania, director of the business value division at Microsoft, is the need to act as the integrator of IT initiatives launched outside the IT department.

"I put a lot of the responsibility on the CIO to set the stage for positive business relationships--not just so everybody can be happy and sing 'Kumbaya,' but because it makes for a highly effective implementation of projects." --Robert B. Carter, executive vice president and CIO, Federal Express

In the last half-dozen years, many companies have set up Web capabilities and IT projects outside the IT department. The in-house IT staff might have been too busy or uninterested, or it might not have understood the potential impact of those initiatives. However, "IT is now on the hook for the fragmented Web strategies launched by different departments in the organization," Charania said. A system that was perfect for a given department for three or four years can quickly become problematic if it needs to (finally) be connected with back-end systems that control inventory or fulfillment. It's the CIO who must bring these various initiatives under one roof.

Wharton's Aron suggests another new decision that CIOs increasingly face: outsourcing. A CIO in a tech-savvy company may pursue an information-based strategy, but that information does not have to be developed within the firm or even within the country. The CIO can outsource some of the infrastructure that produces the information to countries such as India, Australia and Canada. Yet the decision to outsource generates a host of new decisions for the CIO and senior management: If we move the back office, should it be paid for in one shot? Should an overseas call center report to the CIO? How should the pricing agreement with the overseas firm be structured?

Eric K. Clemons, an operations and management professor at Wharton, adds that CIOs must also begin to look at the strategic function of technology differently. Technology used to support the traditional economy-of-scale model, which hinged on the idea that growth was good. "Today's strategy focus is on precision--which customers to attract and what to charge them," he said. And tomorrow it might be different, based on changes in the marketplace. CIOs therefore need to think about how technology can help them plan for an uncertain future.

In particular, he says, CIOs must start thinking about contingency planning. This doesn't mean planning for a power failure or the loss of phone lines. Instead, it means figuring out what a company will do if its current strategy becomes inoperative--if, say, regulations change and the company's pricing framework becomes obsolete. This kind of contingency planning is something CIOs did not address in the past. "But given that almost no strategy today can be implemented without precision systems, the idea of not having a backup for your strategy is potentially disastrous," he said.

Clearly, CIOs today fill an increasingly important role in companies. To meet the new demands placed on IT, they must, with their corporate colleagues, be accountable for improving overall business performance, and they must make their case in the language of business. They must also go beyond saving money to delivering technologies that give their company the agility to prosper in a changing world. Only then will they succeed in helping to pave the way to new markets, new sources of revenue and better business returns.

This report was prepared for Microsoft by Knowledge@Wharton.

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