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Avoiding the Alignment Trap in IT

Information technology remains a terrible bottleneck to growth in most companies, mainly


because executives focus on the wrong remedy for their IT problems.

By David Shpilberg, Steve Berez, Rudy Puryear and Sachin Shah

Charles Schwab & Co., the big financial services firm, grew up around its information
technology capabilities. IT was the key factor that allowed the young discount-brokerage
house to offer customers lower prices on trades than traditional brokers. Later, as discount
brokerage became more of a commodity business, Schwab transformed itself into a full-
service, online broker, and by 1998 it was earning a significant share of its profits in the
online trading business. But in the next few years competitors caught up to Schwab, and
some surpassed it. Several brokerage houses, both discount and full-service, were frequently
able to beat Schwab on price.

The Path to IT-Enabled Growth

Our survey revealed a pattern to IT disappointment and failure. It came in two clear tones:
general ineffectiveness at bringing projects in on time and on the dollar, and ineffectiveness
with the added complication of alignment to an important business objective. In the latter
cases, projects dragged down more than their own weight. We call this quadrant, at the top
left of the chart below, the alignment trap.

Eleven percent of our survey respondents were snared in the alignment trap. These companies
spent 13% more than the average company on IT yet posted 14% lower revenue growth on
average over three years. In the quadrant below them, a full three-quarters of company
respondents drifted in the "maintenance zone." Here, IT projects were treated like plumbing,
less aligned to major business objectives and bumping along at slightly below-average levels
of growth despite average levels of IT expenditure.

Results for the remaining companies were much better. About half of these focused more on
execution, and their effectiveness at getting IT projects up and running on budget meant their
costs came in 15% below the average for the entire sample. Despite the fact that these
projects weren't thoughtfully tied to business objectives, their companies' revenue grew at
11% above average over three years. In the final quadrant, the top right, companies highly
effective at making IT projects happen and at aligning them to business objectives took the
prize. Their three-year average sales growth exceeded the average by 35% and their costs
were 6% lower. Contrary to conventional wisdom, the path to IT-powered growth lies first in
building high effectiveness and only then ensuring that IT projects are highly aligned to the
business.

Surprising as it seems, given the company's strategy of using technology to distance itself
from competitors, IT had become part of Schwab's problem. By the company's own
reckoning, IT staffers' responses to business requests had become slow and expensive. IT
engineers had to spend more time than ever fixing bugs in the systems. Meanwhile, several
big, ambitious projects were overdue — including the tax-lot accounting system Schwab had
envisioned to serve its most profitable customers — and the slow progress of these projects
was preventing the company from responding effectively to competition. Still, the company
kept throwing money at projects because it didn't see an alternative. "We said we have to
keep spending money because we're half pregnant and you can't be half pregnant," recalls
Deborah McWhinney, president of Schwab Institutional. A red flag went up when Schwab
found itself spending 18% of revenue on IT while three of its leading competitors were
spending 13% or less, a cost disadvantage amounting to hundreds of millions of dollars
annually.

The fact that a company as tech savvy as Schwab could find itself in this predicament is
instructive. It underscores a growing realization we have found among the companies we
work with that the usual diagnoses of IT's troubles — and the usual prescriptions for fixing
those troubles — are often misguided. For many years now, companies seeking to deliver
higher business performance by harnessing IT have focused on alignment. By alignment, we
mean the degree to which the IT group understands the priorities of the business and expends
its resources, pursues projects and provides information consistent with them. Almost every
company we have worked with recognizes that IT and business priorities must be tightly
linked. In practical terms, that means IT spending must be matched to the company's growth
strategies. There must be shared ownership and shared governance of IT projects. It's become
something of a mantra voiced by senior business executives: A lack of alignment can doom
IT either to irrelevance or to failure.

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 troubling pattern: even at companies that were
focused on alignment, business performance dependent on IT sometimes went sideways, or
even declined.

Why wouldn't a high degree of alignment alone bring about improvement? In our experience,
a narrow focus on alignment reflects a fundamental misconception about the nature of IT.
Underperforming capabilities are often rooted not just in misalignment but in the complexity
of systems, applications and other infrastructure. This complexity develops for
understandable reasons. At Schwab, for instance, the enormous complexity of the company's
IT system wasn't the result of IT engineers somehow running amok. Rather, the company's
various divisions were driving independent initiatives, each one designed to address its own
competitive needs. IT's effort to satisfy its various (and sometimes conflicting) business
constituencies created a set of Byzantine overlapping systems that might satisfy individual
units for a while but did not advance the company's business as a whole.

Complexity doesn't magically disappear just because an IT organization learns to focus on


aligned projects rather than less aligned ones. On the contrary, in some situations it can
actually get worse. We've seen firsthand how IT organizations provide dedicated resources,
such as application developers and data centers, to each business unit — in order to improve
alignment. They develop customized best-of-breed solutions designed to serve each
business's unique needs. Meanwhile, they ignore the need for standardization and upgrading
of legacy systems. They create a labyrinth of new complexity on top of the old, making
system enhancements and infrastructure improvements ever more difficult to implement and
leaving significant potential scale benefits untapped. Costs rise, delays mount, and the
fragmentation makes it difficult for managers to coordinate across business units. In these
situations, the intent focus on alignment can actually hurt the units instead of helping them.
As Richard F. Connell, senior executive vice president and CIO of Selective Insurance
Group, told us, "Aligning a poorly performing IT organization to the right business objectives
still won't get the objectives accomplished." That, in a nutshell, is the alignment trap.

Uncovering the "Alignment Trap"

To test these patterns systematically, and find out more about the root causes of companies'
IT problems, we conducted a survey of more than 500 senior business and technology
executives worldwide. We followed up the survey with in-depth interviews of 30 chief
information officers and other senior leaders from a broad cross-section of companies.

One thing we confirmed quickly was that Schwab is far from alone in its belief that it is
struggling to harness IT to its growth strategy. Only 18% of respondents believed that their
company's IT spending was highly aligned with business priorities — that IT, in other words,
always or nearly always established and acted on priorities that supported their business
strategy. Only 15% believed that their IT capability was highly effective, that IT ran reliably,
without excess complexity and always or nearly always delivered projects with promised
functionality, timing and cost.

The survey also showed that almost three-quarters of respondents believed that their IT
capability was neither highly aligned nor highly effective, again consistent with the general
patterns we have seen (see "The Path to IT-Enabled Growth"). These companies occupy
what we call the "maintenance zone." IT at these companies is generally underperforming,
undervalued and kept largely separate from a company's core business functions. Corporate
management budgets the amounts necessary to keep the systems running, but IT doesn't offer
enough added value to the business and often isn't expected to. Companies in the
maintenance zone recorded a slower rate of growth — 2% below the three-year average in
the survey — while spending the same as the average every year on IT.

Only about one in five senior executives reported in the survey that their company was highly
aligned, fairly consistent with our experience. When we looked at the 11% of companies in
which IT was highly aligned but was not highly effective, however, we found those
companies were considerably worse off than their counterparts in the maintenance zone.
While their IT spending was 13% higher than average, their three-year growth rates were
14% lower than average.

This finding was startling, even given the limitations of the survey, which combined self-
reported assessments of senior executives with actual data on IT investment and business
performance at their companies. It underscored the pattern we encountered at a number of
companies with ample IT budgets and strong alignment, but not much to show for it. (See
"IT Hopes vs. IT Realities.) In these cases, it seemed to us possible, even likely, that the
alignment prescription could be worse than the disease. Our thinking has been shaped in part
by Schwab and a handful of other companies that have been learning to break out of the trap
and create IT organizations that enable growth rather than inhibit it. The number of
companies that have already succeeded at this task is small: In our survey, only 7% of
respondents said that their IT organizations were both highly aligned with business strategy
and highly effective in delivering what was asked of them. But those companies as a group
recorded a compound annual growth rate over three years that was 35% higher than the
survey average. More surprising still, they were spending 6% less on IT than other
respondents. For a large company, the stakes in getting IT right can thus be enormous. In
some cases, companies can save hundreds of millions in costs, while increasing sales growth
dramatically.

How have these companies managed to reach that point? While each has followed its own
path, there are some common approaches shared by the high-performers. Several have
diagnosed early on where their company falls on the spectrum of effectiveness and alignment.
(See "Diagnosing Your IT Pain.") For the majority of companies, the single most important
task has been 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. Maintenance-zone
companies that try to move directly upward on our chart into the alignment zone, rather than
rightward into the effectiveness zone, typically end up in Schwab's contradictory position.
They are traveling in the right general direction, but they're following a road that can't get
them to their destination. Because they believe that alignment is the key solution to their IT
troubles, they can wind up spending enormous amounts of money without solving their
problems.

Investing in Effectiveness

The legendary inability of IT organizations to do things quickly continually mystifies people


outside of IT and frustrates those within it. "This little change I'm requesting is going to take
three months?" asks a sales manager, incredulously. The IT manager he is talking to knows
that the change isn't so little — because of overlapping systems, adjustments need to be made
in hundreds of different places — but she can't expect him to understand all the machinations
involved. Both feel that the IT system is like a swamp: Projects just get bogged down. Some
companies spend more than 80% of their IT budget on maintenance, patches, upgrades, and
other routine expenses, and less than 20% on the development of new applications and
capabilities.

Diagnosing Your IT Pain

Companies can start to develop a picture of their IT strengths and weaknesses by asking some
key questions about IT alignment and effectiveness:

Effectiveness

• Are our IT projects delivered on-time, on-budget, and with IT functionality that is
precisely what was requested (with appropriate modification) to gain desired business
results?
• Do our IT systems run smoothly and reliably?
• Does our IT applications portfolio contain redundant applications that perform the
same or similar functions?
• Is our IT infrastructure consolidated in a few locations?
• Do we outsource the right activities?

Alignment

• Does our IT organization fully understand business priorities?


• Are the priorities of our IT projects aligned with business requirements?
• Does business actively participate in IT projects and investments?
• Do our IT systems provide business with the right information, in the right form, at
the right time, in the right place?
• In managing critical IT functions (e.g., architecture and infrastructure), do we balance
well the needs of the entire organization with those of individual businesses?

All told, 85% of our survey respondents reported that their company's IT capabilities were
not highly effective. They were either mired in the maintenance zone or snared in the
alignment trap. Only 15% placed themselves on the highly-effective side. Note that high
effectiveness alone made a substantial difference to a company's economics. Even companies
that don't consider their IT organizations highly aligned were spending 15% less than
average, and their growth rates were 11% higher. For many companies, these are numbers
that justify considerable investment in pursuing effectiveness.

Making your company's IT organization effective does not necessarily involve replacing
people in IT. You could hire a whole new staff only to find they run into the same problems
as the old staff (probably more, since they won't be familiar with the crazy quilt of IT systems
built up over the years). Rather, in our experience, we have found three critical principles
most significant in moving organizations to high effectiveness.

Emphasizing Simplicity. "Simplicity is the ultimate sophistication." The words are


Leonardo da Vinci's, but the mantra should be that of every CIO. Any company's first step
should be to focus relentlessly on reducing complexity rather than increasing it. That sounds
like an unexceptionable nostrum, except that the cheapest and quickest way to respond to
individual demands for improvements from business units is almost always to do something
that increases complexity. Reducing complexity means developing and implementing
companywide standards. It means replacing legacy systems where possible and eliminating
add-ons. It means building new solutions on a simplified, standardized infrastructure rather
than extensive customizing or more layering on top of whatever happens to be there. Such an
approach requires a greater investment of time and money up front and will lead to lower
costs only later. For that reason alone, it can be hard for companies to make the commitment.

One company that was able to make such a commitment is De Beers. When Debbie Farnaby
became their director of information technologies four years ago, she found a huge number of
different application programs in use at De Beers facilities around the world. The problem
wasn't lack of alignment. IT staffers worked closely with production managers at each mine
and would develop applications — often in the computer language they happened to be most
familiar with — to do whatever the mine managers needed. But there was no standardization,
so a program written at one mine wouldn't necessarily work for another. In addition, the IT
organization was bleeding money: it spent roughly 20% of its total software investment every
year on licensing fees alone.

Farnaby began the process of replacing most of the local applications with a single SAP
enterprise resource planning (ERP) system. At the time of our interview, she had rolled out
the new system to nearly all of De Beers's locations worldwide. It had taken three-and-a-half
years and cost 320 million rand (about $45 million at current exchange rates). But the
benefits have been substantial. The new system has allowed her to reduce IT costs and
headcount every year. It has standardized a wide variety of applications across the entire
company. It generates information faster than ever before. Financial reports, for instance,
used to take two weeks; they can now be produced in four days. In De Beers's case, the cost
of the new system wasn't nearly as great as it seemed: the savings on software licensing costs
alone were nearly sufficient, over time, to cover the entire amount.

"Rightsourcing" Capabilities. An effective IT organization needs a wide variety of


capabilities, ranging from staffing the help desk to creating and integrating innovative
business applications. Traditionally, most organizations did as much as they could in-house.
Today nearly all the capabilities any company might want are available from a range of
suppliers, including low-cost IT specialists in India and elsewhere. Choosing the right source
for a capability — maximizing effectiveness while minimizing costs — is thus a critical
consideration. A useful method of making the best decisions about sourcing is to ask yourself
a series of questions.

First: Is there value our company's IT organization can add that will merit keeping the work
in house? Outsourcing, whether it means sending the work to offshore vendors or relying on
prepackaged solutions, is nearly always cheaper than developing solutions in house. Still, in-
house development often makes sense for applications that are strategic in nature or critical to
competitive differentiation. Cleveland-based National City Corp., for example, used to rely
heavily on standard banking software from a leading vendor. But a new CIO, Joseph T.
McCartin, determined that in-house development in selected areas would actually allow the
bank to differentiate itself from its competitors. Four years later, McCartin's department has
developed customized applications for statements, wire transfers, treasury management,
pricing, billing, and a loyalty program, among others. The in-house programs, said Paul
Geraghty, wholesale banking executive vice president, are "much smoother to use, much
more navigable, and integrate better with other products that we have under development.
The look and feel is much more consistent across National City products, and I think clients
will therefore be inclined to buy more."

Another question: If outsourcing seems to be indicated, can we learn to outsource effectively?


Many of the CIOs we spoke with emphasized that they needed a deep understanding of the
tasks or projects being outsourced, so that vendors could be held accountable for performance
and price. That often means doing the job yourself for a while until you understand it well
enough to send it outside. When De Beers installed its SAP system, for instance, it ran its
own "customer competence centers" (as SAP calls centers for coordination and technical
support) for the first 18 months. Recently CIO Farnaby has decided that the company
understands the centers' issues, and so she is exploring the possibility of outsourcing center
management. Similarly, De Beers decided to outsource its help desk — but not before
Farnaby's team had educated users throughout the company about how to use a help desk
effectively. Today the cost of the help desk service is 66% below what it was when it was run
in house.

Still another question: Can we unbundle particular IT projects, separate out the routine or
less-strategic parts from those requiring more interaction with management or customers and
outsource only the former? Selective Insurance, for example, outsources to an Indian vendor
some legacy systems that will not be rebuilt. Meanwhile, Selective develops new applications
in house. But the company also breaks down work into segments and makes individual
decisions about each segment. "Routine work — for example, rate changes — we can spec
out here," explains CIO Connell. "Then the programming and initial testing will be done in
India, and we will bring it back for integration and user testing."
Whatever the sourcing decisions, companies need to revisit them regularly as their strategic
priorities and in-house capabilities change.

Creating End-to-End Accountability. Companies cannot build effectiveness unless they


hold IT and the business accountable for delivering expected results on time and on budget. It
sounds obvious, but many companies observe it only in the breach. Survey data suggest that
about three-quarters of IT projects are canceled or fail to deliver expected results on time and
on budget. It isn't sufficient for company executives simply to issue an order that people will
now be held accountable. True accountability reflects organizational changes: Executives get
the information they need to measure IT progress; IT people are held accountable for
outcomes; line managers give IT the resources it needs and then work closely with IT leaders
to exercise joint supervision of individual initiatives.

This can mean radically restructuring the way IT operates. At National City, for instance, IT
used to be closely aligned with the company's business units. "There were people who
worked on retail projects, people who worked on wholesale projects, and so on," said CIO
McCartin. But no one was looking out for the needs of the business as a whole: "We could
not do a big-ticket fix on our core systems because nobody would pick up the check."
McCartin reorganized IT to focus not on business units but on core processes and
capabilities, such as lending and call centers. A new board with representation from all of the
major internal stakeholders now oversees the IT budget and major IT decisions. That, said
McCartin, "has enabled us to create a multiyear transformation program, systematically
replacing antiquated pieces of the system."

A good governance structure may need to set firm parameters to keep IT on track. At the
German wireless telecommunications company T-Mobile, for instance, Head of IT Steffen
Roehn meets with his counterparts on the business side every two weeks to define and
redefine priorities for the next six to nine months. But Roehn enforces a strict policy of no
more than four new-technology releases per year. "Business sometimes has complaints —
they want it faster," he said, "but they have felt the benefits of the strict release cycles and the
credibility and dependability they provide. If I tell them they get it in October, they get it in
October and not January or April." This model of IT governance has helped the organization
maintain its effectiveness.

From Effectiveness to Enabling Growth

Effectiveness is so important that companies snared in the alignment trap — those in the
upper left — almost always find it better to move downward and rightward into "well oiled"
territory first, temporarily focusing on effectiveness at the expense of alignment.
Effectiveness, after all, usually involves centralizing and simplifying a good part of the IT
function. That may mean giving up, for the moment, some of the division-specific
applications that have been custom tailored on legacy systems, just as De Beers and National
City had to do.

But the ultimate quest for a company is to move IT into the upper-right quadrant, where it is
both highly effective and highly aligned, where IT spending is less than average but growth
considerably higher, and where IT appears to be enabling growth rather than inhibiting it.
Enterprises that are IT-empowered in this way create an IT strategy and organization that
fully support key business objectives. They extend the governance bodies and decision-
making processes that ensured effectiveness to guarantee ongoing alignment. Rather than
simply create accountability around a discrete process, for instance, their governance crosses
traditional organizational lines. That makes it possible to create simpler and cheaper, yet
more capable, systems than those of "siloed" organizations. Then, too, business executives
are highly engaged in systems projects, often taking lead responsibility for their success. For
its part, IT must be a highly reliable partner both in setting expectations around feasibility,
time and cost and in delivering consistently.

The combination of high effectiveness and high alignment is a plateau once occupied solely
by pioneering companies such as FedEx, Wal-Mart, and Dell. IT allowed them to change the
game, and to serve customers in ways that competitors could not. Today, a small number of
companies continue to reach these heights one by one, some of them in industries that are not
generally viewed as being IT-intensive. Examining how they do it shows why the
combination of effectiveness and alignment is so powerful.

Nestlé is one such company. Nearly seven years ago, the world's largest food and beverage
company embarked on a project dubbed Global Business Excellence, or GLOBE. The project
collapsed dozens of ERP systems across multiple business units into one, establishing a
common system design and template for the company's worldwide operations while still
allowing differences for local markets. Just as important, CEO Peter Brabeck gave Chris
Johnson, a business unit executive — not an IT executive, accountability for GLOBE's
results. GLOBE "is really a business initiative," Johnson told CNN in an interview last year,
adding that, were it strictly IT, "I don't think [Brabeck] would have chosen me to run it."

By 2006, Johnson and the GLOBE team had standardized data management, systems and
operating practices at 80% of Nestlé's businesses and saved the company $1.6 billion. They
also reduced the number of their data centers around the world from 100 to four. This
consolidation and simplification — effective IT — had dramatic ramifications. Before
GLOBE, the company has acknowledged, its production batch codes differed from one
market to another and its customers were coded differently, so that it never really knew how
much of any one product it was selling. (In fact, it didn't even know how many products it
sold overall. The answer was about 120,000.) Meanwhile, about 56% of the data in its
multiple information systems turned out to be "garbage," causing anomalies such as
salespeople attempting to promote discontinued products. Cleaning up the database in
Nestlé's U.S. home-and-office water business alone saved $300,000 a year.

Brabeck also credits the IT-business transformation with empowering growth. Because
GLOBE is tightly aligned as the supply and customer-data platform for the whole business,
the program intentionally does not track its benefits separately. But it does put granular
information at the fingertips of Nestlé managers around the world, allowing them to manage
their businesses more effectively. Over the course of GLOBE's implementation, Nestlé has
seen revenues grow from $50.5 billion to $80.8 billion. Said Brabeck: "I am absolutely
convinced that GLOBE has catapulted us [to] a five-year competitive advantage [compared]
to most fast-moving consumer-goods companies."

Most of the successful companies that we interviewed — the companies that have at least
begun the process of enabling growth through IT — regard the move into the upper right-
hand quadrant as a continuing endeavor rather than a once-for-all process. An example is
First Data Corp., a large company that provides a variety of back-end services to credit-card
issuers and retailers. First Data has grown rapidly in recent years, both organically and
through acquisition. Some of its clients wound up buying service packages from First Data
that were built on two different (and incompatible) platforms — an unsatisfactory
arrangement from the clients' point of view. "The client was saying, we want a single global
solution," said David Dibble, executive vice president and chief technology officer.

Much as Nestlé did, Dibble's team resolved the problem by turning over the reins of IT
governance to the business. In First Data's case, the right business solution meant decoupling
the company's products — service packages — from individual IT platforms. ("A platform
should not be a business," said Dibble. "The business is the business.") That has had two
distinct benefits. It has lowered costs and made the IT underpinnings of First Data's products
more effective. It has also enabled the company to make a sale and get a client up and
running far faster than in the past, thus enabling growth. Dibble notes, however, that this
process of simplification never ends, because each new acquisition brings with it a new IT
platform. His continuing challenge is to make sure that other senior managers understand the
cost of not simplifying, both in immediate expense and in forgone growth.

Effective IT governance aims to keep the IT environment as simple as possible. But


eventually, complexity can still creep back in. One good early-warning indicator is the
proportion of IT spending required for maintenance — "keeping the lights on" — as
compared to product development. If the ratio creeps up, the CIO or CTO can take that as a
sign that it's time for another round of simplification.

Charles Schwab itself has recently taken some substantial steps in the direction of
effectiveness and alignment. The firm's Cambridge Initiative, launched in 2004, is an
advanced utility that enables active traders to track their trades and analyze their portfolios.
Unlike earlier IT projects at Schwab, it was created on a separate platform rather than
overlaid on the firm's mainframe, and it came in on time and on budget. Perhaps more
important, it provided customers with additional value while reducing Schwab's costs to
competitive levels: overall cost per trade was reduced more than 50%, while average time to
execute trades at peak times decreased 80%. Clients showed their approval by increasing
their trades and bringing more assets to bear, reigniting the firm's growth.

These companies and others have learned to interrupt the downward spiral that plagues so
many IT organizations with a clear recipe for successful IT enablement. In our experience
and research, the companies that achieve the highest growth at a low cost manage complexity
down, source IT staffing and software wherever it makes the most sense and create start-to-
finish accountability connected to business results. Then, and only then, the best performers
tightly align their entire IT organization to the strategic objectives of the overall business,
using governance principles that cross organizational lines and making business executives
responsible for key IT initiatives. With IT both effective and aligned, these companies have
put IT where it belongs in the twenty-first century: at the heart of the business processes that
define a company's position in the marketplace.

David Shpilberg is a senior adviser to Bain & Company. Steve Berez is a partner with Bain
in Boston. Rudy Puryear is a Bain partner in Chicago and leader of Bain's Global IT
Practice. Sachin Shah is a Bain partner in London. Comment on this article or contact the
authors through smrfeedback@mit.edu.

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