Recently I have been witness to rapid, often painful, change within my own internal IT division over the last few years and observed the on-going developments in the industry. It is clear that IT departments changed dramatically in a short amount of time and the pace is not relenting. This has led me to try to picture what IT will look like within large institutions in the future. It is becoming more and more apparent that the structure of our internal IT organisations are very often based on the traditional legacy models that served enterprises well in the past. Big IT investments and centralised systems are best managed and maintained by an rigid organisational structure. The IT department and the business units are today usually far more disconnected than many CIOs would care to admit. IT used to be something that was done by the IT department based on fairly static business processes. However we’re now in a different world, where IT is seen increasing as just a commodity and business processes need to be able to react quickly to changing economic conditions. No longer is the IT department responsible for big monolithic systems (e.g. payroll etc.) but IT is now embedded in every business process so in some sense every department is an IT department. Surely if the IT organisation doesn’t aid the business then it will be eventually pushed aside and replaced.
The Journey From Past to Present
This excellent post by PEG covers this subject well. PEG paints the picture of the traditional IT organisation as it was in many enterprises and then slices it up to represent the current model once outsourcing/off-shoring has been considered. The left hand diagram showing the more traditional split, and the right showing the emerging norm:
Diagrams from PEG: The IT department we have today is not the IT department we’ll need tomorrow
It surprises me how many people consider their jobs as not being under threat from outsourcing as they’re role is above the bottom tier on this sort of diagram, but as you can see it is inevitable that the line between permanent staff and outsource partner staff will continue to rise to the point represented in the triangle on the right, with a good cross section of IT roles being fulfilled by partner organisations. This represents where many large enterprises are at present whereby some “doing” roles are maintained in-house but the management and planning layers are also supplemented by outsource/offshore partners. The bulge in the middle represents the extra permanent resources required to cover the additional overhead of managing partner resources. Taking a bank to be the textbook example of a large enterprise with a significant scale IT organisation then this research into European banks activities provides some insight into the strategy driving these changes. Unsurprisingly cost reduction is key, but its not the only factor…
“Survey participants cited cost reduction as the primary reason to outsource IT functions, followed by cost variability (for example, the flexibility to respond to peak demand without ramping up internal resources) and access to know-how or skilled personnel. The main benefits of outsourcing were access to know-how or skilled personnel and a guaranteed level of service. (The cost benefits associated with outsourcing often fell short of expectations.) The biggest disadvantages of outsourcing were high switching costs and limited control over critical elements of the IT environment. On the whole, however, the survey shows that banks have embraced outsourcing. Only 3 percent of the banks surveyed were planning to decrease their outsourcing activities. The case for offshoring was slightly different. Although banks used offshoring primarily for the same reason they used outsourcing—to reduce costs—the main benefit of offshoring was less stringent foreign labour laws. The biggest disadvantages of offshoring were opposition among domestic personnel, large overhead, and loss of control.”
Both partner strategy models are therefore seen as suffering from elements of losing control of assets or deliverables and somewhat adding to management overheads, but providing some agility by providing a mechanism to ramp up or down resources as required.
PEG extends his model to show that in the future there will be an increased reliance on SaaS and automation tools and therefore a chunk of the IT organisation structure will be replaced by these as well as outsourcing/offshoring roles.
Diagram from PEG: The IT department we have today is not the IT department we’ll need tomorrow
Within the current model, management layers have often become too complex and unwieldy. With the IT organisation being a business entity itself within the enterprise and with 65% of IT spend just being used to maintain current service, business functions and IT often clash over priorities and the allocation of funding. In many instances resulting in the business going outside of the IT Org to secure services or growing their own ‘black ops’ internal capability just to get things done. This again challenges the traditional IT organisational model where IT keeps a tight control.
Tighter financial conditions, increasingly competitive environments and a desire to maximise returns is leading to a model of pay per use and more utilising of partners and outsourcing models. Technology advances are making this transition possible (e.g. Cloud Computing, SaaS). Future IT departments will increasingly utilise these external services resulting in them adopting a very different structure. Whilst the traditional IT organisation has been geared to building and maintaining large complex systems and is staffed with technical people, the rapidly emerging model is one where IT skills are outsourced to numerous vendors and IT staff become the negotiators and orchestrators of these relationships and contracts. Instead of managing systems changes internally the IT organisation is increasingly just the middleman between the business and the outsource/offshore partners. The role becomes one of managing projects more than technically implementing them. Reports can be found of in-house IT departments cutting 90% of headcount with a rapid shift to offshore/outsourcing with the remaining staff focusing on the planning and relationship management tasks. This Boston Consulting Group paper suggests there is an essential move from “doer” to “orchestrator”, with the IT Organisation “doing fewer of the traditional ‘run the business’ activities” instead leaving them to external providers and doing more coordinating of (one or many) providers activities to meet the design. This “network of external providers and integrators” needs monitoring and tuning and the structure of the IT Organisation will need to centre around these activities.
A quote from Reinventing The IT Organisation by Antoine Gourevitch, Stuart Scantlebury & Wolfgang Thiel…
“Unless CIOs take swift action, the IT organisation will be at risk of being reduced to a thin layer between the business and the specialist outsourcing firms.”
The outcome will presumably be either a slim organisation staffed with Change Managers and Project Managers responsible for liaising with the partners to satisfy business requirements, or alternatively these changes could prove the catalyst required to move to true business driven IT, where IT skills are integrated with the business units to enable them to react rapidly to changing business needs. Larry Dignan in his post welcomes the idea of breaking up the traditional IT organisation, seeing it as an anachronism. He classes CIOs as often “out of their league”, “process jockeys” who would “rather be scouting new technologies” than innovating. I would agree that this appears to be the case in many large organisations where IT, some would argue, has frustratingly become detached from the goal of driving business value through technology, losing itself in bureaucratic processes. These organisations can seem a long way from delivering core bottom line business value. PEG discusses the detachment of Enterprise Architecture and the business, together with a description of little ‘a’ and big ‘A’ architects, here and its well worth a read. Even where IT organisations do deliver real value its often to timescales that seem painfully long to the business customer but painfully short to the IT guy wrapped up in bureaucratic red tape. Perhaps this isn’t ITs fault as such but more the arcane structure of the IT organisation as we have come to accept.
One way suggested for IT organisations to remain relevant and address future challenges is for the business and IT to move closer together than ever. This has been talked about for many years but with the demise of the monolithic IT organisation the next few years could see this model mature. Perhaps decentralised pockets of business IT shops closely aligned to the business units will be the norm, introducing new challenges around how to control these pockets.
This shift towards IT/business integration could be very rewarding for an enterprise as in reality modern business processes are often tightly intertwined with the LOB applications in use and so anything that can be done to ensure that those LOB applications support the business processes instead of restricting the pace of business change will be welcomed. Dreischmeier & Thiel suggest new ways of working may be required as IT organisations are forced to adjust their operating model to become faster, more agile and to embrace rapid-development approaches. The business can’t afford to be held back by a slow and unwieldy IT organisation.
One concept I particularly like is the concept of “introducing Product or Solution Managers” to address the “lack of end to end ownership within IT Orgs”. The person would “own the IT product/solution across all technical layers”. This role should improve TCO and aid business & IT priority alignment. Dreischmeier & Thiel also see the CIO as a key player in ensuring that the IT organisation is “Proactively Engaging in Business Transformation Activities” and that even the IT organisation is very well positioned to be a key player in this transformation as it is aware of the end to end business processes (in theory). They suggest:
“Creating, together with the business, a new-business-model team that seeks out and addresses the changes in economics of the relevant industry as it changes through increased competition and environmental forces”.
The growth of agile development practices have a a part to play here too. Having innovative IT teams that ‘fail fast and often’ and use lean agile techniques to maximise business value could replace traditional models. Smaller, focused development teams under the direct control of the business units using Agile practices and being supported by a central infrastructure function (probably outsourced) could prove a very effective way of actually building what the business really need. The evolution of Cloud Computing technologies provides real opportunities to make these teams very capable. A business unit based developer could ‘mashup’ cloud services together with core on-premise web services to produce a powerful line of business application that is then deployed to PaaS cloud based infrastructure. Forester Analyst Alex Cullan sells the benefits of this model with the term “Empowered BT (Business Technology)” where IT’s role is to empower the business to utilise the technology that they need in order to remain competitive. The traditional arguments against this approach such as the expected system proliferation and business technology decisions being driven by hype, are dismissed as actually not as bad as we in IT would believe. He argues successfully that some proliferation is acceptable if it empowers the business, but there would have to be trust in business leaders to choose the right path for this to work. Is that trust there at this moment in time? Well not according to this MIT & Boston Consulting Group survey where it shows that current CIOs believe that business leaders are not positioned to lead IT enabled business transformation. Only 33% of CIOs consider their company’s senior execs effective at driving business value with IT, and 40% consider them effective at prioritizing IT investments. However perhaps this reflects the differences in the current differing priorities of the of traditional IT Organisations and the business units, with IT enforcing its traditional maintenance role (“keeping the lights on”) and role of application development/innovation more than a real distrust. The paper does however highlight the benefits that can be achieved when the IT organisation avoids the simple “middle man” role and takes the lead role of driving business change (such as lower maintenance costs, faster realisation of business benefits from new systems, and higher employee satisfaction). Perhaps the future of the IT organisation is that of a business in its own right, an internal consulting firm offering assistance in business process design, innovation and development management.
Proctor and Gamble run their IT Organisation as a business within the enterprise running alongside other business services (e.g accounting etc.). Their services are branded and marketed to the enterprise and billed on a usage basis with business units empowered to choose to consume these services or go elsewhere. The emphasis is on running this as a viable competitive internal business that is in tune with its customers (in this case the internal business units) needs. They have Brand managers responsible for “the innovation, pricing and commercialization of the services” that ensuring that the total end to end offerings can match that of 3rd party offerings. Underpinning this though is a collection of external partner relationships that still need to be managed and so in essence this is still heading towards becoming an integrator, orchestrating these partner services into a clear cohesive branded, and hopefully relevant, service. The key here though is the added value provided by this internal IT business service that crucially understands the business and offers competitive services that are completely relevant to the business. This is supported by the BCG research that found where IT Organisations really drove business change they often delivered their IT services as shared services and placed more emphasis on relevant prices and alternative service levels. They tended to centralise IT with lower levels of recorded “shadow” IT being instigated by the business, which could perhaps suggest that these business units felt they were getting sufficient value from their shared IT services, even though it was under central control.
All these changes have massive implications on the skills required within the IT organisation of the future. In the current model maintaining a relevant skilled workforce can be tricky with many key staff feeling demotivated by the outsourcing/offshoring partner model and the subsequent removal of technical roles from their organisation. The loss of junior IT roles to partner resources destroys any future progression opportunities and shows that this model is unsustainable moving forward. Engaging technical people will be increasingly difficult in the current model but perhaps a move to more business aligned IT can help skilled staff remain technical if they wish and also benefit the business through enhanced IT innovation and passion for their roles, instead of forcing good techies to oversee offshore/outsource relationships.
It seems essential now that IT staff of the near future will be expected to have an enhanced level of business acumen and market knowledge to fulfil their roles. Will this come at the expense of excellent technical skills? Maybe! Perhaps the technical skills will be embedded within the offshore/outsource partners and the relevant ‘technical’ skills required in the IT Organisation will be those around technical process design and system analysis. Knowledge of the business will perhaps be more important than any technical skill (for the majority of roles) and therefore it makes more sense to recruit IT staff from within the business units themselves. This is evident in a number of studies with CIOs, such as this BCG study…
“In general, CIOs told us that Internal IT staff roles are shifting away from application development and towards process analysis and engineering, business relationship management, project management and architecture design and implementation.”
Within the previously mentioned Proctor & Gamble organisation the same theme emerges as the skills reflect the role of IT within the organisation:
“..traditional IT is just 30% of what we do. If traditional IT is all a person masters, he or she will never be a leader here. The rest is about business knowledge. Those who embrace that approach will certainly increase their value…”
This view was supported by the previously mentioned study into European Banking, but it also went further, pointing out that technical skills were being neglected …
“…many banks appear to be underestimating the value of technical tools and skills, which are critical to developing high-impact applications, maintaining an efficient infrastructure, and managing outsourcing partners.”
So where does this leave you and I? Well, I expect the relevant number of deeply technical IT professionals will decline in Western countries but this decline will be dwarfed by the increase in semi-professional developers, working in the business but using end-user computing tools to develop systems that are meant to be rapid, easy and throw away. Where more complex solutions are sought then outsource partners will happily fill that gap. Escaping the large enterprises and fleeing to the small and medium enterprises will not be sustainable longer term either as the partner model will win there too eventually. It is entirely possible that the partner model will lose some of its lustre (it’s already happening in places) and there may be some swing back to in-house technical teams. If that happens then the IT community needs to be ready to promote a new ‘agile’ alternative that understands and drives true business benefits.
This evolution of the IT organisation is natural in such an immature industry as this but one thing is definite the future is different and we need to adapt. Whichever direction the future takes for you spend some effort in the meantime trying to understand your business customers needs better and keep innovating for them!
Great article – intersting that we’ve both worked for large financials and are thinking pretty much the same sorts of things. Stumbled across it whilst broading thinking after I posted about the 5 Imperatives for IT Departments and what they need to do to move forward, but interested to know if you have any ideas on how we skill geeks up in business skills?
(post is here: http://simon-may.com/uk-technet/5-imperatives-for-modern-it-departments/)
I’m glad you liked the article. I have been enjoying your posts and completely agree with the sentiment – we need to get organisations and techies to wake up to the future. I think that there are things we can do to get geeks skilled up in business skills but really I see the bigger issue is getting CTO’s to realise what is happening in the industry and to re-address where their IT department is heading. I still see a lot of IT depts structured in a way that hides the business from the techies, which makes no sense. If you position a few techies in a team amongst the business ‘on the shop floor’ they soon pick-up what makes the business guys tick, and where the pain points are. Now give those techies the power to change things and they’ll get stuck in building/supporting LOB applications and providing real value. However if you keep them locked in the IT department they become sheltered from the business and only communicate via proxies (analysts, managers etc). So whilst I see building business skills in techies as important I think it can happen more naturally given the right environment. Geeks like building applications that are going to be used and that are providing real value. If they can sit in the same teams as the business they are able to see new opportunities where IT can solve problems or create a competitive advantage for the enterprise. I appreciate that there has to be central control and policies but I think many places have shifted too far down that route and created IT ivory towers with developers buried under processes and bureaucracy. I hope the Agile movement together with the new Cloud Computing paradigm can help address the balance.
Got to say what a well written article this is. I like the way that you have suggested things that might happen or how things might work instead of saying this is what will happen which is far more realistic and gives opportunities for the reader to focus on the thinking.
I’m the Enterprise Architect for my organisation (a university) and I am about to run a business strategy session for the IS Senior Management Team and your thoughts I think are absolutely spot on in terms of moving towards business enablement rather than being Corporate IT who just run boxes and major applications. I don’t think that the changes you surmise will make us immune just because we are a medium-sized organisation and do most things ourself. The other point that I agree on is that it is not good for anyone if IS become that thin interface layer between the business and service providers.
A great article.
Thanks for the feedback. I’m glad that you liked the article and found it useful. It’s great that you are considering these things in your business strategy. I don’t think that enough EA’s/CIO’s are considering this bigger picture. If the IT team don’t align to and enable the business objectives then the business will find another supplier to deliver their requirements, which in my opinion is usually not good for either IT or the business.
Good luck with your business strategy session.