Never has there been a time in the history of business where companies could derive more competitive advantage from superior IT performance. In other words: The premium of achieving world-class IT performance has never been higher. Analysis of The Hackett Group’s IT benchmarking database quantifies a difference of 21 per cent in normalised IT cost between world class and peer (Fig. 1).
But, far more valuable than the direct cost advantage, world-class IT enables the digital transformation that is at the heart of most business strategies far more effectively than peers. It is this world-class performance advantage that translates into competitive advantage. Although achieving world-class performance is a long journey, IT organisations can see marked improvements fast. Early wins can free up resources enabling IT to better support digital transformation, including improvement of analytics capabilities, supporting development of client-facing systems and mobile initiatives. The Hackett Group has identified four imperatives for companies aspiring to achieve or maintain world-class IT performance:
Ramping up IT performance for the digital age
Organisations continue to face economic headwinds and other challenging conditions in 2016. Finding new sources of revenue growth remains difficult, resulting in pressure to protect margins through cost control. This, in turn, is straining business services functions’ budgets. At the same time, competitive pressures and a broad range of business risks are increasing, requiring transformation and innovation, not only to support growth, but also to fend off competition.
Adding to this mix of challenges is the disruptive change from new digital technologies, which creates a new set of demands on IT organisations. This environment puts high pressure on IT to deliver services efficiently and effectively. Given limited net new funding, support of digital transformation activities must be funded through re-allocation of resources freed up through improved efficiency of delivery of existing services, largely infrastructure provisioning and application maintenance and support. IT must continuously transform its service delivery model to improve agility, and be able to respond to shifting demands and opportunities.
While other business services functions are experiencing net declines in budget and headcount, IT budgets are seeing an uptick for 2016: 66 per cent per cent of IT budgets are increasing, while 25 per cent are decreasing. The corresponding numbers for headcount are 50 per cent and 33 per cent, respectively. These numbers reflect recognition of IT’s pivotal role in supporting or driving digital transformation initiatives and the importance of technology investment to improve efficiency in all other domains of the business. (Fig. 2).
Total IT cost and staffing levels are significantly lower for world-class IT
World-class IT organisations continue to significantly outperform the peer group in IT service delivery cost and productivity, operating at 21 per cent lower cost. For a typical company with $10 billion in revenue, attaining world-class performance represents as much as $41 million in potential savings annually. World-class IT also allocates its spending differently (Fig. 3).
A higher percentage of spend is allocated to technology cost (44 per cent). Furthermore, world-class companies spend just 53 per cent on “run” activities vs. 60 per cent for peers. This leaves a larger percentage of budget for performance improvement and innovation-oriented investment. IT organisations are under immense pressure to deliver new, often client-facing systems of strategic importance to the enterprise. To respond to these demands, they must divert resources from basic “run-the-business” activities. Our data also shows that world-class companies do not turn to outsourcers to any greater extent to either take over legacy maintenance and support responsibilities or support the needs of digital transformation. In fact, peers have a slightly higher level of outsourcing (14 per cent) as a percentage of total IT cost than world class (12 per cent).
Figure 4 shows staffing levels in the form of IT FTEs per 1,000 end-user equivalents by life-cycle phase (design, build, run). While world-class IT operates with lower staffing levels than the peer group, the FTE gap is much smaller than the cost gap. However, as with cost, world-class IT organisations allocate a much smaller percentage of IT resources to “run” activities. The bottom line: Achieving world-class IT yields a significant cost and productivity advantage and allows IT to focus on higher value “build” activities. Moreover, world-class IT organisations are more effective in how they operate and deliver services. An important measure of IT effectiveness is realisation of ROI on projects. The “return” component of the ROI equation may reflect cost takeout in the business, margin improvement or revenue growth, or any other performance improvement with hard financial benefits.
World-class IT organisations realise ROI objectives for 61 per cent of projects vs. 27 per cent for peers, representing a 125 per cent gap (Fig. 5).
IT effectiveness is reflected in superior performance elsewhere in the business through better leverage of technology, higher levels of automation and self-service. The Hackett Group data incontrovertibly confirms this conduit of value creation: World-class IT organisations deliver consistently higher levels of automation in various areas of the business (Fig. 6).
Moreover, analysis of technology enablement and cost in finance, HR and procurement functions consistently shows strong correlation between the two. Therefore, the higher automation levels shown in Fig. 6 are good predictors of lower cost of the automated processes.
Closing the gap: The 4 imperatives of world-class IT transformation
Although the journey to world-class performance typically takes five or more years, IT organisations can see marked improvements much faster. Early wins can free up resources enabling IT to better support digital transformation, including improvement of analytics capabilities and supporting development of client-facing systems and mobile initiatives.
Note that as digital transformation is increasingly becoming “do or die” for the business, it cannot and will not wait for IT to develop the capabilities to support the business. If the internal IT organisation is a bottleneck to digital transformation execution, the business will look for outside partnerships, acquire technologies directly and develop technology management capabilities themselves.
The hallmark of world-class IT organisations is their ability to work effectively with the business to support digital transformation, while at the same time running core information systems and providing infrastructure efficiently. In this section we discuss the four imperatives of world-class IT in the digital era.
Imperative #1: Reallocate resources from transactional focus to value adding
IT budgets are growing modestly at best, so IT organisations have to self-fund their internal transformation (including developing the new competencies needed to support digital business transformation). This has been the reality for the past half dozen years. Yet many IT organisations have significant resources tied up in supporting “run-the-business” activities, which detracts from their ability to support the higher value activities that drive business results.
To achieve this shift, IT must relentlessly focus on efficiency improvements with the delivery of “commodity” services. Because technology is evolving so fast, yesterday’s emerging technology is today’s commodity services. To achieve world-class performance, IT organisations must take advantage of commoditisation and evolve their service delivery model accordingly. A critical step is the adoption of a formal service delivery model that promotes clear roles and responsibilities and ensures that capabilities and costs of resources match the type of work performed.
The de facto standard in IT is the ITIL framework. Second, IT must drive efficiencies through realisation of economies of scale. Shared services or global business services (GBS) should be the default service delivery model for all “commodity,” run-the-business IT services. Third, IT must eliminate non-value added complexity in the architecture and application portfolio. World-class IT organisations have significantly lower complexity (Fig. 7).
The techniques to continually improve efficiency can be summarised as the “blocking and tackling” of technology management. Without it, achieving world-class IT performance is elusive.
Imperative #2: Embrace digital transformation
IT organisations are at a crossroads with one foot in the past – constrained by sunk investments and legacy technology and skillsets – and one foot in the new digital world of cloud, big data analytics, social media, the Internet of Things and mobility. Some are overwhelmed by the challenge posed by the avalanche of technology innovations and take a defensive stance, tweaking the established IT service delivery model. Others are energised by the opportunity to elevate the role of technology to a higher strategic level, as senior management embraces digital as a cornerstone of the business strategy. World-class IT organisations are in the latter camp. Any IT organisation failing to follow the lead of world class by fully embracing digital transformation as the basis for the future state of IT service delivery will be marginalised.
The following steps can be taken to further the digital transformation imperative: Continually monitor and explore technology innovation. The golden rule for successful transformation in the pre-digital era was to never be “technology-led.” Traditional transformations start with a future state operating model and process design and then select technology to implement the design. Digital transformation often starts with conceptualising technology innovation-based, value-creation opportunities (often on a clean sheet of paper) – i.e., it is technology led.
To be able to conceptualise these value-creation opportunities, IT must continually monitor technology innovation and develop use cases with the business. Shorten solution development cycle times. Traditional, waterfall-based solution development methods – with cycle times measured in months or even years – are inadequate for digital transformation. IT organisations must accelerate delivery cycles by adopting rapid application development methods such as agile and integrated solution development life-cycle approaches such as DevOps.
Furthermore, solution development methodologies must be integral to end-to-end business innovation or improvement processes.
Imperative #3: Lead the organisation on the information and analytics transformation journey
The lifeblood of the digital enterprise is information. Unlocking the value of information requires transformation into insights that drive better business decisions, which requires advanced analytical capabilities. IT organisations that grew up in the predictable world of internal structured data1 have been struggling to keep up with the recent explosion of internal, external, structured and unstructured data. As more applications are moving into the cloud, integration of data residing in the cloud with on-premise data sources is increasingly challenging.
Given the strategic value of information, superior information management capability now translates directly into competitive advantage. Furthermore, there is a direct relation between data quality (which is predicated on information management), analytical capability and value realisation through a range of other conduits. The Hackett Group research consistently finds data quality ranked as one of the main inhibitors of value realisation of strategic transformations, including movement of work to GBS, continuous improvement programs, outsourcing and digital transformation more broadly. In other words, the cost of poor data quality is propagated throughout the enterprise through multiple channels.
Because the value of better data quality propagates through these very same channels, the returns of improving information management capability are extremely high. IT must assume a leading role in guiding the organisation on the information and analytics transformation journey. First, IT must take ownership of the enterprise information architecture. This architecture is changing beyond recognition because of the trends outlined at the beginning of this section. Second, IT must support ongoing business-led, data-related initiatives (i.e., governance, stewardship) by providing services such as master data management, data integration and database administration.
To guide and support the organisation on this journey requires new IT skills. Information architecture and analytics talent will be scarce and come at a high premium. The most adaptable, fastest learning IT organisations with the ability to attract the best talent create competitive advantage for their organisation. The opportunity to create value through information management and analytics underscores the importance of imperative #1 – companies with disproportionately high levels of resources consumed by “running” legacy systems will simply not be able to re-allocate resources to develop these new skills and will fall behind.
Imperative #4: Adopt customer-centric service design and delivery principles
More than any other business service function, IT is impacted by the broad adoption of customer-centric service design principles. The most often-cited technique in customer-centric service design is “design thinking.” This trend, which originated in the domain of redesign of companies’ external customer products, processes and services, is now embraced by internal business service delivery organisations.
IT is profoundly impacted by this because all internal associates, business partners and external customers spend such significant (and increasing) amounts of time interacting with information systems, all of which translate into “service delivery experiences.” Many information systems are notorious for poor, “inside out” design, leading to frustrating user experiences. This technology usability deficit made information systems design (and associated business process) a discipline ripe for innovation.
In the previous section, we discussed the need to embrace rapid application development methods (e.g., agile) as a critical element of the digital transformation imperative. However, iterative and rapid solution development is also critical for customer-centric design. Traditional, waterfall-based solution development methods are inherently non-customer centric. Designing and building systems and processes around customer experience requires small iterative steps and immediate end-user feedback, which is incorporated into next iteration cycles. Self-service is a prime example of the potential of customer-centric design.
World-class IT organisations enable far higher levels of self-service than peers (Fig. 8).
Self-service may be designed inside out, primarily aimed at optimising efficiency of service delivery processes, rather than creating a better customer experience and more effective outcomes. However, enabling self-service is often the first step in the ongoing improvement of such service delivery processes. High adoption rates indicate world-class IT organisations are ahead of peers in climbing this maturity curve on the way to true customer-centric service design. Many IT organisations have a less than stellar reputation for customer service. To improve, IT must adopt customer-centric service design principles for its own service delivery to internal customers.
Understanding the customer experience requires a holistic, structured approach, starting with a clear understanding of customers’ needs and then improving relevant elements of the IT service delivery model. The customer must be the focal point of all key activities and functions within IT. A common technique to improve customer centricity is to set up councils and focus groups to provide “voice of the customer” recommendations. Use these to guide decisions regarding the design of the process and supporting systems. Design councils should be treated as an investment in project success.
They should be created early in the process and participants coached on their roles. Where to begin: Define your IT function’s current state and identify gaps The following are steps IT organisations can take to jump-start their journey to world class:
Assess efficiency gap. Measure baseline efficiency to gauge performance and uncover areas with the largest performance improvement opportunity. IT transformation must be self-funded in most organisations, so understanding the efficiency gap is an essential first step in freeing up resources to re-deploy to more value-added services.
Assess effectiveness gap. The effectiveness gap typically has an operational and strategic component. IT’s ability to meet business needs supporting a portfolio of business improvement initiatives and IT services is an indication of operational effectiveness. Strategically, IT effectiveness is reflected in its ability to support (or indeed lead) the longer term business transformation strategy, in particular as it pertains to “digital.” IT must gain an understanding of its effectiveness performance at both levels.
Assess capability gap and blueprint future state. Armed with an understanding of the different dimensions of the performance gap, IT must analyse root causes and assess which specific capabilities are deficient. The Hackett Service Delivery Model2 is a useful framework for this capability gap analysis, as well as design of the future state (blueprinting).
Develop IT transformation roadmap. A transformation roadmap balances objectives with resource availability and other constraints. Because of the fluid nature of technology and volatility of business conditions, IT transformation must be planned in short cycles and be adaptable to changes in conditions.