A fundamental set of assumptions has traditionally underpinned the role of the IT organisation in the value chain. The assumptions are, in some organisations, so deeply ingrained that they are taken for truths. Failing to revisit these will increase the divide between IT and the business and will undoubtedly undermine the IT organisation’s ability to support and drive digitalisation and business agility. More importantly, it will undermine the business’ competitive strength.
“For too long we have been busy with our own internal issues. It is about time we focus our efforts on the business. Our role is to manage the complexity, not eradicate it. We need to embrace change, not try to stop it through standardisation”
– Director, IT operations, 3gamma client
In 3gamma’s experience, there are three dominant cost/flexibility-assumptions currently held by many IT organisations:
- Assumption 1: Standardised IT processes and large scale outsourced deliveries reduce cost and create efficiency
A 3gamma review of IT outsourcing contracts from the last decade highlights this as one of the deepest held assumptions within IT organisations. The focus has been on standardising tickets, service requests, server configurations, processes interfaces etc. Perceived economies of scale with service providers and an ambition to lower unit costs have motivated IT organisations to enter into long contract times. In addition, IT organisations have been trying to reduce dependency on knowledge and professionalism and build these into a set of standardised processes driving automation.
- Assumption 2: A consolidated information technology environment is a strategic asset and a justified end in itself
Many IT architecture transformations during the last couple of years have focused on creating highly consolidated architectures on the assumption that these create efficiency and transparency. Consequently, many companies have created monolithic consolidated solutions implemented via off-the-shelf enterprise resource planning (ERP) systems, methodologies and technology standardisations.
- Assumption 3: IT organisations should be based on a distinction between development and operations
To build specialised knowledge, implement common processes and realise economies of scale, IT functions have been grouped together based on their role in an internal value chain. This has typically taken the form of a separation between operations/maintenance and development, creating separated IT staff functions with their own capabilities.
Taken together, these assumptions paint the picture of an IT factory focusing on delivering a limited, standardised set of products with a standardised set of processes. IT organisations have invested heavily in these ways of working, but solutions based on these assumptions often fail to deliver the promised efficiencies. Coupled with an unfocused organic growth of workarounds to customise the ERP solutions, this has led to a consolidated, tightly integrated IT environment with very low flexibility to meet evolving requirements. This has also accentuated the bull-whip effects in the delivery of IT services.
The unpredictable real world of business means circumstances change and the solutions and approaches must change with them.
Conscious decisions must be made to ensure business alignment of IT
In a number of recent 3gamma engagements, we have experienced the adverse effects of these assumptions. At one company, a project was unable to pilot test its solution, as the required service request wasn’t part of the services contracted in the infrastructure outsourcing agreement, and the IT organisation’s governance policy didn’t allow other providers.
In another, the IT organisation focused all their energy on internal projects such as transitioning infrastructure across data centres, while informing the business that new requirements would have to be met sometime within next fiscal year. Faced with IT being an obstacle, the business chose another solution outside of the IT organisation’s control.
This ‘shadow IT’ behaviour is not uncommon. In a recent study of UK financial institutions, 44% of surveyed organisations said that the business had bypassed the IT department to procure public cloud infrastructure. In addition, a recent Gartner survey revealed that “eighty-one percent of respondents in Western Europe said they regularly approach IT to solve technical issues, but only 28 percent would go to IT for best practice advice on how to use technology”.
IT organisations must move from production unit to business partner.
Digitalisation impacts IT in a fundamental way. It brings about market fragmentation, disruptive business models, decreasing product volumes, increased customisation and shorter product and service life-cycles. In view of this, consider the adverse effects of current assumptions: lock-in effects, lead times, complexity and legacy. The divide created by these assumptions is significant.
To bridge this divide, organisations need to become more nimble, agile and flexible. IT organisations and their IT strategies need to account for fragmentation and variety. They need to embrace uncertainty and accept that the business has to change continuously. In doing so they need to acquire, control and manage a diverse set of internal and external capabilities. These capabilities and their components need to be managed as a portfolio that is continuously optimised and improved.
Based on 3gamma research, forward-looking IT organisations should leverage three key tools in order to find the optimal cost/flexibility trade-off in their business context:
- Process design trade-offs: balancing business responsiveness with efficiency demands across the value chain.
- Capability scoping: setting the scope for the internal IT organisation in relation to vendors, partners and customers/users, and securing configuration of the capability setup.
- Technology integration and decoupling: defining and implementing a balanced IT architecture aligned with business and IT processes, together with a mix of internal and external capabilities that can be reconfigured to meet ever-changing requirements.
Process design trade-offs
Process responsiveness is key to managing variety. In the state of ITSM in agile organisation’s, 3gamma identified customer centricity, communication, continuous improvement and the ability to remove obstacles, as core competencies of high performing IT organisations. 3gamma’s recent research on how to set up a service management office identified the need for cross-team collaboration and a balanced level of governance in line with the companies’ maturity and business logic. High performance is created by responsiveness across technology, processes and organisation: a responsiveness that is based on the needs of the business and not defined by any specific framework or solution. The responsiveness needs to be cascaded through the various organisational units and service providers involved in the value chain; from demand to supply. To support this setup, IT organisations need to become service integrators that manage a complex supply network.
In light of the cost/flexibility trade-off, the interface between IT and business has to be responsive and information must flow freely in the value chain. To achieve this, the value chain needs to be reconfigured:
- IT organisations should strive to minimise the number of handovers from customer to service provider. This doesn’t necessarily mean insourcing, but it does mean that the relationship with service providers needs to change from a transactional interaction to a collaborative relationship.
- IT delivery teams should include a comprehensive set of capabilities to deliver from development to operations and have as few external dependencies as possible. This includes capabilities such as IT risk, IT solution architecture etc.
- Teams should be autonomous and fit for the task. Cross-team processes create dependencies and introduce complexity; these should be minimised and be kept to the essentials.
However, the value chain still needs to be anchored to the overall business strategy and be supported by an overarching enterprise architecture capability.
The level of process responsiveness required may differ between different parts of the IT organisation. Products and services requiring responsiveness need a different operational model than those that do not. The requirements need to be understood and IT organisations should adopt the “operations within an operation” concept to create focused strategies for each specific segment of the business. A responsive operational model is based on an adaptable process setup, different capabilities and a de-coupled IT architecture. Adopting this approach will help to optimise the cost structure of the IT organisation.
As noted by Gartner, operating in a bi-modal responsive mode is key to improving performance. Without it, the risk of shadow IT illustrated by the examples given above is significant.
Being responsive and focused isn’t enough. In a turbulent environment, the value of a specific capability is transitory, which is why IT organisations need access to a constant flow of new capabilities. Existing strengths and assets can become obsolete almost overnight. Major investments, both in monetary terms and through their lead time to implementation, detract focus and can result in immobile assets with potentially short life-spans. In the worst cases, the planned solution has become obsolete before the project has even delivered it.
Several analysts (e.g. KPMG and ISG) note that there is an ongoing shift in the market from cost reduction focused outsourcing, to acquiring new technology and talent. It is not about long-term relationships focused on operations, but rather about specialised implementation services. It is about moving fast and leveraging specialised knowledge.
“In a fast-paced economy, innovation is likely to occur outside of the legal structure of the company. Innovative capabilities need to be acquired and incorporated into an organisation through an outside-in approach to support an organisation’s innovation agenda.”
– From “Unleashing IT’s potential” by 3gamma
In this context, IT organisations need to become service integrators managing a flexible service provider base and a constant churn in the service provider portfolio.
Technology integration and decoupling
In the software-defined era, emphasis shifts from centralised governance and consolidation to distributed knowledge, autonomy and loose coupling. Examples of this include the emergence of container architectures, microservices and network function virtualisation (NFV).
Enterprise architecture is the discipline needed to enable IT organisations to leverage external solutions in a flexible way. In a recent whitepaper, 3gamma outlined three blueprints for aligning IT and integration architectures with operational excellence, customer intimacy and digital innovation. A key finding was that companies looking for innovation need to move to a more modular architecture, avoiding the lock-in effects of consolidated ERP systems. The resulting lack of an integrated reporting capability can be offset by an advanced analytical capability encompassing the loosely coupled applications and components.
A logical consequence of this approach is fragmentation and an increased architectural complexity. This complexity is unavoidable but not unmanageable. It does however highlight the fact that the ability to manage a diverse architectural landscape, delivered by a mix of internal and external solutions, is a competitive advantage. As noted by other analysts, transforming and modernising legacy environments will be complex regardless of approach.
The path to optimisation of IT is unique for each IT organisation and needs to be incremental
There is no clear route to optimisation. It requires an understanding of context, current state and the overall objectives for the IT organisation and the business as a whole.
Many established companies are now engaged in simplification and legacy modernisation initiatives. Approaching change as one-off transformations may in some cases be required, but the transformation approach is likely to have significant negative effects. Under uncertain conditions, big bets are risky and approaching these concepts top-down and driving them as transformation initiatives requires substantial up-front investment and analysis. However, approaching them in an ‘incept, evolve and expand’ way has significant potential as it allows for low risk failure, early learning, and rapid evolution.
When the expected life-span of a given solution, asset or process becomes shorter, it will impact the expected return on the investment. Consequently, it follows that the size of the investment needs to be adjusted. IT organisations need to apply a more iterative approach to strategy formulation and favour continuous improvement for people, process and technology. This also speaks in favour of modularisation in order to reduce the size of the implementation projects. Key findings on delivering IT projects from CIO Insight highlight that “reducing efforts into smaller, more piecemeal initiatives makes them more manageable” and that companies should strive to minimise interdependencies among these ‘mini’ projects.
With rising complexity, the role of the CIO is changing. An inward focus on internal issues detracts focus and energy from business development and change. It also fosters a culture of IT vs. business. The cost efficiency requirements are still there, but forward-looking IT organisations can’t afford to use the same toolbox deployed historically. They need to shift balance and revisit old assumptions:
- Standardisation can’t be used as a general rule of thumb as it undermines flexibility and customisation
- Highly consolidated architectures coupled with long-term outsourcing contracts may be unfavourable when adopting new technology and solutions
- Functional specialisation and division of labour risk creating inefficient and disjointed IT processes
To remain relevant, these IT factory based assumptions used in the past need to be balanced against the responsive business needs of the present.