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.):
- Improve the organization’s ability to anticipate changes in the external environment through stronger business intelligence capabilities.
- Create a dynamic enterprise performance management (EPM) capability that permits rapid adjustment in goals, strategies and tactics.
- Attract new talent in the right location, at the right time and for the right price.
- Continuously improve IT’s cost structure.
- Redesign IT’s operating model for maximum flexibility and responsiveness to change, leveraging new technologies and provisioning models.
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.