Strategic use of IT - Computershare

Continuing with the theme of operational versus strategic IT investment, this week is a brief look at Computershare, an Australian company that started life providing third party share registry services to Australian listed companies. The company has expanded both internationally and into complementary high volume services such as handling parking fines and administration of rental bonds. It has increased revenues 36% over the past 5 years and profit  by 106% and employs 11,000 staff in 20 countries. It really is a great Australian success story.

It's relevance to this blog is that Computershare has used and developed its IT platform extensively to continually automate its processes and services. In short its IT capability forms an integral part of the company's sustainable competitive advantage. Using the analysis developed in this blog over the past few weeks Computershare stands out on some key criteria:

1. The board of directors and senior management take an active interest in IT strategy and spending (none of this reporting via the CFO)
2. IT spending averages 10% of revenue (9.9% in 2011), significantly higher than the 2.2% average for operationally focused IT operations
3. Portfolio management underpins all IT investment decisions
4. The strategic importance of IT is recognised by the board and senior management - it even gets a mention in the annual report to shareholders.
5. R&D makes up 41% of the IT budget compared to industry average of 30%
6. Contractors and outsourced IT is mininimal, 95% of IT manpower is in-house allowing critical knowledge to be developed and protected.

So should you race out and spend 10% of your annual revenue on IT? Well that depends on whether IT is part of your competitive advantage or not. What Computershare illustrates is that IT investment and management should be a series of deliberate decisions consistent with its place in an organisation. Cutting IT costs while claiming IT should be strategic is just plain fantasy, bad management or both.

Is your IT team strategic or operational?

"Do not expect value from a CIO with an operational profile" proclaims KPMG in their report "Cost to Value 2010 Global Survey on the CIO Agenda", but how do you determine what "operational" is?

Last week I provided a simple survey to determine if your IT team has a primarily operational or strategic focus. Of the 15 criteria listed there are 5 criteria that have stood out in my research to-date as being diagnostic, that is companies with a strategic focus almost always have these traits and those that are operational almost never do. The 5 criteria are:

1. Who does the CIO report to?: CIO's that have a reporting line into the CEO or top executives are 70% likely to be strategically orientated. CIO's who report to the CFO or COO are never strategically orientated. This makes sense, if IT is strategic to the business then the CEO wants to be involved, if it is something that should be neither seen nor hear (nor ever break) then it goes to the CFO. Many CIO's seem to forget this and think they can be strategic for behind the CFO, the results suggest otherwise.

2. Are portfolio management techniques used to manage IT investment?: This one surprised me. In 99% of companies with a strategic orientation portfolio management was in use, in operationally focused IT teams it was 11%.

3. When IT investments are being considered what are the key criteria for approval?: 98% of companies with a strategic IT orientation focus on strategic fit, while only 23% for companies with a operational focus.

4. Are IT benefits managed?: For companies with a strategic IT focus 70% actively manage benefits, for operational IT that percentage drops to 0%!

5. Is the CIO focused on value delivery or cost cutting?: 85% of strategically focused CIOs focus on value while only 22% of operational focused companies do.

So what does this all mean? Well, it has significant influence on what the CIO can achieve in a organisation and it also provides a guide as to what the CIO should be focusing on to align with how IT is truly viewed by the executives.

There will be no blog next week, back on the 21st of November.

Strategic IT versus operational IT, how do you tell the difference?

Is your IT team strategic or just keeping the lights on? How would you know? Over the past few years I have been undertaking some research into the role of the IT team within a company. In short, is the IT teams role predominantly strategic (rare) or focused on operations (common)? Many CIO’s consider themselves ‘strategic’ when the rest of the company considers them ‘operational’ and wonder why they feel frustrated and not taken seriously by other managers. Understanding whether IT is strategic or operational in an organisation is the first step delivering better IT services.

To determine whether your IT operation is strategic or operational it is necessary to look at the ‘actual behaviour’ and position of IT in the organisation not the stated strategies or objectives.

Take the following quiz to determine the primary orientation of your IT group. Answer each question as either column A or column B, depending on which answer applies the most:

Count the number of scores for column A and column B. If you answered predominantly A scores then IT has a strategic orientation, if the answer if mostly B scores then IT is operational. The implications of this will be discussed next week as it has a huge impact on the value that the IT team can deliver to the organisation.

Canny homeworkers 'out source' work

I had a fascinating discussion with someone today whose friend is a contract programmer. The friend works from home and where possible sends the work he has offshore to be done, then checks it and uploads it per his contract. Apparently he gets the work done for 30% of his hourly rate so make 60% without doing any work. While sub-contracting is common in production programming, it is not common (or probably expected) in personal contracting.

This raised the question in my mind as to whether home workers (employees) will get in on this and start outsourcing their work to cheaper providers. If you think this is unlikely check out this site that writes academic essays for you (for a fee), the extension of these types of services to doing my job for me is not that hard to imagine. http://www.assignmentmakers.com/Default.aspx

The question that this raises, is how can this happen and how will it be managed in the future? My thesis is that our relationships to work/study is becoming more remote. Historically workers were apprenticed and students met lecturers face to face, therefore it was difficult (not impossible) to fake personal effort. With the coming of the internet the relationship between employee/boss and lecturer/teacher are becoming more and more remote. It will be interesting to see what social system develops to control this. For example contract law developed in England in the 19th century in response to mass production and imports from overseas that broke the traditionally strong relationship between grower/manufacturer and consumer, necessitating a code of conduct (common law contracts) to ensure fair behaviour (as the traditional  'relationship controls' no longer worked). What do you think?

The 2nd economy and the implications for software companies

Last week I wrote of Brian Arthur's article on what he termed the ‘second economy’ that was, all the electronic transactions that go on in our economy automatically in the back ground without undue human interaction and that this ‘economy’ was growing rapidly. In that blog I canvassed the potential social impact if future productivity growth comes predominantly from this sector rather than the traditional economy where productivity means job creation.

There is a second area of interest with the second economy and this the impact on software pricing for the software industry. Traditionally pricing has been based on a ‘per-seat’ basis, this is easy to calculate, usually on a ‘named-user’ or concurrent user basis. But what if your software does not have any physical users, or more typically your software if a successful greatly reduces the number of people an organisation needs thereby reducing your revenue base? While companies such as Oracle who own the database technology have long used ‘processor’ metrics in their processing it has been fraught with difficulty (processor technology is evolving rapidly) and would be much more difficult for a pure application company to administer and police. The answer would seem to be some form of transaction pricing as used by some of the EDI vendors (per-user models make no sense in their industry). Are the software vendors and their customers up to it?

Robots may not take over the world but automated processes might

How is technology changing society and will it be for the better? Science fiction writers have long predicted a society of robotic automation, in the utopian version humans are freed from daily chores by a multitude of robots, the darker versions including nightmares of robots taking control from humans. From the cartoon Jetsons to 2001 A Space Odyssey thru Bladerunner (Do Electric Sheep Sleep) to the animated Wall-e movie it is a recurring theme.

Fortunately it does not look like robots are going to challenge our authority anytime soon, however something just as compelling may be happening right under our noses according to Brain Arthur a visiting researcher at Palo Alto Research Centre (PARC). Arthur posits that there is a vast and rapidly growing ‘second economy’ that is totally automated (without human interference unless it breaks), he give the example of freight transactions where electronic systems linking companies and government departments across multiple countries share data and communicate with each other unseen and untouched by humans.

Arthur raises concerns that this second economy is not only growing rapidly but is the source of the majority of current productivity growth. The implications of this are quite serious, if growth does not create more jobs, and automation continues to eliminate jobs, humans may well find they have more leisure time while computers do the work but it may be a poor unemployed leisure time. This would give a whole new meaning to the term ‘digital’ divide which refers to the digital ‘haves’ and ‘have nots’, the current use of this term relates to access to technology, however it could equally refer to those who have lost the ability to earn an income due to technology driven restructuring. What do you think?

Brian Arthurs article can be found in the McKinsey Quarterly 2011 Number 11.

Do you take ‘opportunity’ cost into account in IT investment decisions

TechRepublic blogger Patrick Gray who writes about challenges in IT management recently wrote of the inappropriate use of IT to solve problems http://www.techrepublic.com/blog/tech-manager/dont-try-to-avoid-hard-work-by-automating/6776?tag=nl.e106 one of the stories he told was of a company spending a massive amount on an IT project to automate a $500 problem. 

I have experienced this myself. I was once confronted by a sales manager who wanted a process his PA did automated so that the PA did not need to do it any more, claiming it was a waste of her time. My team had a look at the IT changes needed to replace the manual work and came up with a couple of months work. Concerned that this was going ahead without any ROI analysis I reviewed the actual work that the PA was doing that was to be replaced and discovered it took up around one day of the PA’s time a month. Doing the wage maths that translated to the manual work costing the company about $4k per month. The IT solution was estimated at $40k, on a discounted cash basis that is about 12-13 years to break even. So the project was canned.

There was one additional question that was not asked and that was what the ‘opportunity cost’ of the work the PA was doing. If the 2 days could be replaced by work that exceeded $40k value to the business a year then the company’s hurdle rate of 12 month payback for the IT investment would have been met. This is a brief example of the way IT investments need to be looked at both from an economic and whole of company perspective. Have you had a similar experience?