The Dynamic Synchronization of Strategy and Information Technology

Managers are continually being confronted with new and ever-changing competitive pressures from deregulation, globalization, ubiquitous connectivity and the convergence of industries and technologies. But managers’ ability to respond rapidly to those challenges is predicated upon having a sophisticated and facile organizational and technical infrastructure, and a degree of information-technology flexibility that traditional approaches cannot provide. Increasingly, even at global companies known for their competitive and technical savvy, the gap between emerging strategic direction and IT’s ability to support it is significant and debilitating.

Working with more than 500 senior executives in large companies over the past four years, we have been able to identify the nature and seriousness of this disconnection. Typically, we worked with groups of 25 to 30 managers, each focused on business transformation. We asked managers to respond to a set of questions about their capacity to lead change within their companies. Almost invariably, they indicated that the quality of the IT infrastructures in their organizations lagged behind their need and desire for change and was, to some degree, an impediment to it. (See “Managers’ Dim View of Companies’ Capacity To Lead Industry Change.”)

Although in every case, the companies’ chief information officers or chief technology officers sincerely intended to support the business managers in creating value in quickly evolving markets, they were constrained by legacy infrastructure —incompatible databases and applications, poor quality of data, restricted scalability and business processes trapped in vendors’ software modules. Moreover, because IT departments are often assessed on their ability to control costs and not on their ability to respond flexibly to strategy, the expectations and goals of the business managers were, in many cases, at odds with those of the CIOs and CTOs.

The required flexibility — IT or strategic — will not be created without a shared understanding and a shared agenda between the business managers and IT managers. In this paper, we will develop an approach to reconcile that disconnection — an application scorecard to facilitate dialogue within corporations and enable business managers and IT managers to close the gap.

The Lag Between Strategy and IT Capability

With every industry currently undergoing transformation, most companies strive to develop new approaches to competition and value creation. However, the capacity to change embedded in the technical and social infrastructures lags the desired strategic direction. Agreement on urgency is lacking, as are systems that support collaboration.

Today’s consumer-centric world has created a shift toward access, transparency, consumer dialogue and risk reduction. Customers’ actual experiences with companies determine value and loyalty.1 Efficiency in business processes is necessary but not sufficient to be competitive. The changing landscape calls for innovation and experimentation, which in turn require changes in culture, managerial capability and employee skills. But even more important are changes where the rubber meets the road —that is, the IT-application environment oriented toward rapid reconfiguration of business-process and work-flow technologies.

That is why information infrastructure is so critical. It must energize the internal organization, engage customers in dialogue and foster collaboration among all parties.2 IT is not merely a support function needed to improve efficiency. That thinking locked companies into rigid enterprise-application software only to have them realize that their business practices and processes did not fit a vendor-designed package. In bending to the requirements of packaged software, IT organizations limited the ability of managers to adapt to changing competitive conditions. Information infrastructure has to be able to accommodate changes quickly and at low cost. Operating an enterprise with widely varying capacity for change is analogous to driving an automobile with each wheel spinning at a different number of revolutions per minute.

A lag in information-infrastructure capacity often stymies key dimensions of strategic needs (innovations in product development, reaction to market changes, global-account management, timely response to a crisis and so on). Consider the tire-related crisis at Ford Motor and Bridgestone/Firestone. Just to identify and locate the nature of the problems took months. The companies’ information infrastructures were not up to the task.

Closing the Gap and Leveraging IT

Attempts to create new business models enabled by technology have shown mixed results. Take e-commerce. The rise and fall of pure-play e-business ventures, or dot-coms, demonstrated that startups could roll out information infrastructure to conduct basic business transactions and quickly build interfaces with customers and suppliers. However, many failed because they underestimated the complexities of logistics. Meanwhile, established companies with good logistics struggled to launch e-business sites attractive to customers and able to enhance the links between suppliers and partners. Success in the emerging economy means excelling at both bricks and clicks: attracting crowds to sites while acing logistics, channel management, pricing, branding and the like.

A few established companies have leveraged emerging information-infrastructure capabilities to become more efficient and innovative — and are leading change in their industries. For example, Mexico’s global cement-manufacturing company, Cemex, caused a stir in an industry not known for its dynamism — the cement industry. Its model features small batches of cement mix sold as needed over the Web and delivered promptly. In fact, Cemex opened up a new, unserved market — the do-it-yourself one at the bottom of the economic pyramid. It was able to reach the very poor, who build their houses one room at a time. The bricks-and-clicks success also benefits from the visibility of its customer orders, plant loads and location of trucks — all enabled by the company’s information infrastructure.

The success of Amazon.com (which even sells information-infrastructure services to partners to host their own Web-site storefronts) demonstrates that leveraging information infrastructure is not limited to large, established companies or specific industries. Keebler saved more than $55 million with a new, automated production system and integrated enterprise application. Then there’s General Electric Lighting, which developed a successful in-house category-management software application and later offered category-management services to some partners and customers.

Cemex, Keebler, Amazon and GE Lighting each aspire to lead an industry. In seeking new ways to compete and to create customer value, they pay attention to creating new capabilities in their information infrastructure. They not only align IT with a given business strategy, they make IT an integral part of strategy. In fact, this is not about aligning strategy and IT; it is about a continuous and dynamic synchronization of the capabilities inherent in the information infrastructure and the demands of strategy. Dynamic synchronization facilitates change and leads to “next practices.”

However, in most large companies, rigid infrastructure necessitates huge costs to introduce change. One telecom CEO we know confided that the company’s information technology is “our most difficult and expensive challenge.”

The Current State of Information Infrastructure

Among the varied causes of the disconnection between managerial imperatives and information-infrastructure capabilities are changes in business environment and technology, senior management’s approach to IT and IT’s defined role.

Business-Environment Changes

The half-life of business models is decreasing. Dynamic collaboration in the value network (suppliers, customers and partners) is increasing. Today’s global companies work with numerous countries and currencies. Hence they must get information infrastructure to connect internal and external systems seamlessly. Mergers and acquisitions in industries that force incompatible systems to be held together with Band-Aids further complicate the task.

Advances in Technology

Over the last decade, technologies have changed significantly in all the components of information infrastructure — the public network infrastructure, operating systems and database management, and business applications. In many of those components, we are seeing a convergence of standards, with the exception of business applications. Since these application systems encompass the business processes, they experience the shocks of change both from the changes in the competitive dynamics of the business and from technological changes. The application software represents the focus for internal debate between business managers and CTO/CIOs. Suppose a company wants to change a business process — for example, to connect directly to a supplier’s inventory-management system or to adopt a new inventory policy. It needs to change the appropriate software applications. Or suppose it wants to migrate to a new technology platform. Although changes can be implemented in any platform or vendor system, the key is to design the application infrastructure in such a way that the cost of change and the time taken to implement it are reasonable.

That has not often been the case, because companies have generally designed systems with a standard user interface and have not anticipated the need for frequent changes. The legacy systems grew too old and unwieldy either to support innovation through speedy change or to generate efficiency gains. (See “Balancing Flexibility and Efficiency.”) To improve data consistency and business-process efficiency, companies adopted large enterprise applications predesigned by vendors. Yes, those vendors offer the option of customizing various business modules, but the cost and time present problems. Moreover, managers are then dependent on vendors when seeking new functionality.

Thus, full implementation of enterprise systems may not be the answer to a flexible information infrastructure that supports both efficiency and the capacity to experiment and innovate.3 A development framework with flexible bridges as an integral part of the application architecture is needed. Current rapid-development frameworks include the integration platforms IBM WebSphere and BEA WebLogic. Other application-development frameworks approach system design by embodying business functions in multilayered reusable components (for example, the framework that India’s Ramco Systems provides large companies). The goal is to provide ease of change at the business-component and interface levels and deliver “economies of change.” (See “A Flexible Application-Development Framework.”)

Organizational Context

The reasons for infrastructure lags are not purely technical. Organizational issues — such as IT governance, senior managers’ approach to IT investment and lack of line managers’ involvement in IT decisions — are equally responsible. Adopting the latest technology may not be necessary for a flexible information infrastructure. But appropriate organizational and governance policies are. What good is the latest system if line managers don’t use it? Complicating matters is line managers’ inability to understand the impact of IT investments on future business flexibility. As Ravi Apte, the CTO and executive vice president at the American Stock Exchange, has said, “It becomes the responsibility of the CIO/CTO to constantly educate line managers.”

New demands by business managers have led to ad hoc investments in information infrastructure and incremental changes and maintenance enhancements. During the last five years, companies have invested more than $300 billion in enterprise systems, often with questionable business returns. Too many companies saw such packages as a quick solution to legacy-system problems. Only companies that selectively implemented appropriate modules and made a clear justification of their choices succeeded in reaping business benefits.4 In order to be thoughtful about IT investments, senior business managers and IT heads need to ask:

• Does the application architecture and underlying infrastructure in the enterprise reflect the company’s strategic vision?
• What are the inherent risks and impediments to change embedded in our information infrastructure?
• What does a viable portfolio of IT capabilities look like?

A methodology and framework are needed for assessing how flexibly the company’s applications infrastructure can manage the trade-off between efficiency and innovation.

Applications-Infrastructure Scorecard

Using a company’s business practices to capture competitive advantage is accomplished primarily through business-software systems. This does not imply that the quality of data or its accessibility and control are unimportant. But even there, the application systems are needed to convert static data into contextual business insights. In order to understand the capabilities, impediments and risk profile in their information infrastructure, business managers and IT managers need a common framework. Our research suggests the six questions that are critical for such a dialogue: 1) What is the role of application in strategy? 2) Is knowledge about the business-process domain stable or evolving? 3) How much does the application get changed? 4) Where do we source the application? 5) What is the nature of the data? 6) What are the quality problems? Companies that answer those questions and develop an application-infrastructure scorecard will be able to manage the trade-off between efficiency and innovation.

Role in Strategy

For each application system in the infrastructure, line managers need to determine whether the business processes encompassed in that application are core to strategy. That is, to what extent are the efficiency and flexibility of those processes linked to the implementation of business strategy? For example, one large manufacturing company in the automotive industry found that systems and business processes related to new-product development and product-lifecycle management were core. Financial and human-resources applications were important as support. Hence in a given business, each application in the infrastructure can be identified as core or support, depending on the role of respective business processes in business strategy.

Knowledge About the Business Process

Companies can classify the application systems embedded in the information infrastructure on the basis of whether the business-process domain is stable or evolving. In stable domains, knowledge about how the business process operates — and about what users expect — is clear. In evolving domains, knowledge about future changes in the business processes and in user expectations is embryonic. In a manufacturing business, for example, payroll and general-ledger applications are specific and stable domains; applications that support customer interface over the Web or collaboration with suppliers are, most likely, evolving. Homogeneity of user interests also determines whether a domain is stable.

Note also that each application in the infrastructure must be classified as stable or evolving in the context of each business. For example, although human resources is a stable domain in most industries, the dynamics of change imposed on HR processes in fields such as hospitality may require an evolving-domain perspective.

Similarly, the nature of user-interface applications depends on context. Most customer-interface systems over the Web are viewed as evolving-domain applications because they are the touch points to a wide variety of customer needs. However, the banking industry’s consolidation and the consequent need for standardization have meant that user-interface applications for financial trading systems must be stable. When Deutsche Bank acquired Banker’s Trust, thousands of traders were transferred to a new system. To facilitate the transition, Deutsche Bank used packaged software and treated the interface for the bank’s relatively homogeneous users as a stable domain.

The applications in a company’s information infrastructure comprise, first, stable-domain applications that support consistency and efficiency, and second, evolving-domain applications that support experimentation and validation of new business models and processes. (See “Application-Portfolio Dynamics.”) We can envision at the bottom of a funnel the stable-domain applications, such as general-ledger applications, which have a low-risk profile. Evolving-domain applications, such as those geared to improving supply-chain collaboration, have higher risks and go near the funnel’s top. How do companies manage a portfolio of applications? If competitive realities are pushing companies to create new business models and experiment with evolving domains, the need for more applications at the top of the funnel is pronounced. But the mission-critical nature of such applications drives managers to stabilize processes early, forcing the applications to the bottom of the funnel in order to reduce the risk profile. The tension between innovation and stability means the application portfolio in a company’s information infrastructure is constantly churning. The rate of churn also reflects the level of innovation and changes in the business processes.

Degree of Change

IT departments that adapt applications to changes in business functionality and quality-related issues should categorize those applications periodically as to the degree of change implemented (high, low and moderate). Appropriate measures might be time and resources spent on maintenance and new development. Combined with information about other applications dimensions in our scorecard, degree-of-change data can help both business-line and IT managers understand how their application infrastructure reflects and influences business strategy.

Sourcing of Applications

The decision on how to source an application reflects the capability constraints and risks inherent in the search for fast development and external expertise. The main ways of sourcing are, first, custom-built systems developed in-house; second, minor customizations to packaged modules from enterprise software and other vendors; and, finally, third-party vendors or applications-service providers for maintenance and new development. Unfortunately, those options present impediments. The application scorecard, in letting managers analyze sourcing decisions, the application’s role (core versus support), and the application’s relative stability, reveals the infrastructure’s impediments to change. For example, Kellogg, a leader in the food industry, initially outsourced its new customer-interface systems through the Web. The application was core to the business strategy and had to be tweaked often to support innovation and to exceed customers’ expectations. When Kellogg management saw that the degree of change needed made outsourcing impractical, it moved the application in-house.

Nature of Data

To understand the capabilities and impediments in the application infrastructure, managers also must evaluate the nature of the data that the application handles. One helpful measure is the data’s relative confidentiality. Are the data public or proprietary? If the data are public, then using an application-service provider (ASP) may be a reasonable approach. If the data are highly confidential, an ASP is more risky. That’s because ASP sourcing entails remote delivery of services over the Web — and possibly unacceptable exposure to security threats.

Quality Problems

Managers should classify quality problems, too. Do users find that the software application conforms to requirements? Although IT departments sometimes take the metrics related to the reporting of a single application’s defects and use them for internal performance measures, it may not be appropriate to use such metrics to assess quality-related problems across applications. It is more helpful to capture various applications’ conformance-related quality and relate that to the other scorecard dimensions. For example, high conformance-related quality problems in a stable-domain application such as payroll or general ledger cannot be tolerated. But a fairly high level of conformance quality problems is expected for evolving-domain applications.

Using the Application-Portfolio Framework

Clearly, executives need to be aware that successful strategy implementation involves enabling good communication between line managers and IT managers. Business managers know how much flexibility is needed from an application infrastructure; IT managers understand the architecture of the current infrastructure.

The application-portfolio scorecard can help both groups by highlighting impediments embedded in the information infrastructure. (See “How To Use the Application-Portfolio Scorecard.”) It can launch a dialogue between IT and business-line managers to build an evolving application infrastructure that supports both innovation and efficiency. For example, using enterprise-resource planning (ERP) and other large, packaged systems for some business processes is not a bad idea per se; they certainly do bring efficiency and data consistency. But senior managers need to accept that the fundamental assumption behind such application solutions is stability in processes, not ability to evolve. We know one Midwest manufacturing company that deployed an ERP system in a job-shop environment only to discover that the system could not adapt. Our scorecard can set off warning bells when managers are considering packaged software for an evolving business process. ERP vendors do offer to customize modules for companies, but vendor customization has drawbacks. It not only involves higher costs and is more time-consuming, but the ripple effect of deviating from the package by customizing can hurt the company when the vendor releases newer versions.

Mapping applications on the scorecard dimensions also can help managers track their return on investments and manage their budgets. For example, the scorecard can take the piece of budget allotted to stable applications with incremental maintenance and compare it with discretionary spending on new applications in the evolving domains. Thus it can reveal a company’s commitment to efficiency vs. innovation. Moreover, it can help companies manage the trade-offs by assessing the returns from investments. For example, managers might decide to set clear business goals for applications in the stable-domain but view investment in evolving-domain applications as a calculated risk. Managers will see that cutting their budget for information-infrastructure investments across the board by a fixed percentage is a mistake. After all, applications that support experimentation in the evolving business processes are “seed corn” for future innovation.

Consider how General Electric Lighting gains insight from the scorecard dimensions. The group’s financial system, a stable domain, relies on a standard ERP package, R/2, a version almost ten years old. Unless business strategy demands it, companies need not always implement the latest solutions. As Pete Lopez, CIO of GE Lighting, says, “SAP R/2 functionality works for us to run the business, and hence we don’t see any compelling reason for migrating to the later versions.”

Managers often justify investments in brand-new systems by saying that the legacy systems are using old technology. But the question, “Is the technology old?” is the wrong question. The question should be, “How relevant is the technology in the current business context?” The R/2 modules are still being used at GE Lighting because the rules governing the business process in these stable-domain applications are still valid.

Ravi Apte has a similar view: “We need to assess our applications based on the age of technology, reliability, scalability to new business needs, relevance of the application in the current business strategy and maintainability of the application before replacing them with new technology.” And Dell Computer, a company known for process excellence, has encompassed some business processes connecting its work cells in old, mainframe legacy applications. The applications may be old, but they are still meeting Dell’s business-process needs. The company is reported to have seriously considered large enterprise systems twice and decided not to implement the change.

New technology is more likely to be needed in evolving situations. GE Lighting, for example, has developed custom solutions internally for its evolving business processes and thus has gained better control and capacity to change. That’s why the company developed its category-management application in-house.

Having frequently modified the application, the unit is now expert enough to offer category-management services to customers. Thus the application has become core to the overall strategy of improving customers’ business processes and identifying new opportunity for value creation. Managers would do well to recognize that the flexibility required for such applications is not achievable through packaged software modules without significant commitment of time and resources. The scorecard can benefit companies by revealing the relationships among dimensions such as the evolving vs. stable nature of domain knowledge, the options for sourcing and the efficiency vs. innovation role in strategy.

Whether a business process is stable or evolving is a determination that must be made within the particular business context. Human-resources applications in manufacturing companies may be stable, but in a hospitality business or an education institution, they may require considerable flexibility. The large hotel chain Radisson struggled with the choice of sourcing for human-resources applications in Europe. The business-process requirements were complex and needed frequent changes. The organization finally picked Ramco Virtual Works to provide flexibility for HR processes.

Building Flexibility in Application Infrastructure

Standard packages are fine for stable-domain applications. The real challenge lies in sourcing of evolving applications. But if senior line managers and IT managers can jointly identify the specific flexibility needs in a given business setting, they are more likely to identify the appropriate technology. To create an application infrastructure that accommodates evolving applications, companies must consider three important criteria: ability to connect seamlessly with existing applications in the infrastructure; ability to accommodate changes without incurring significant cost or time; and ability to connect with multiple technology platforms (so the company can limit dependence on a single vendor).

Fortunately, there are new application-development frameworks that look at system design from a business-process perspective. They embody business functions in multilayered business components that can be reused. Ramco’s Virtual Works, for example, uses such a design to deliver “economies of change.” Recently Boeing selected it for building an enterprise-application product for the commercial aviation-service industry. The product will encompass aircraft-maintenance processes and service-related business processes for Boeing customers. Freelon Hunter, a senior manager at Boeing, observes, “We wanted a dynamic application that can be easily adapted to the needs of each customer, and it was clear that we did not want to impose a one-size-fits-all solution.” Because Boeing must keep making changes to improve customers’ business processes, the nature of knowledge in the application has to fall under the label “evolving.” Boeing also anticipates that the application will need to connect to multiple technology platforms across different customers.

A first step in getting applications to support strategy is to use the application-portfolio scorecard to spark a shared agenda for senior IT and line managers. A shared agenda can lead to a blueprint of the current infrastructure capabilities and identification of constraints, inappropriate sourcing choices and the intensity of change in the business. For example, in looking at a high level of change in conjunction with the other scorecard dimensions, managers can more easily set quality expectations for applications. Heavy change might reflect turbulence in the underlying business process because of a changing competitive environment, or it might indicate implementation glitches. A high degree of change and conformance-quality problems from applications in the evolving domains are not usually a cause for alarm, but their appearance in stable-domain applications calls for an immediate inquiry and corrective action.

The scorecard shows the trade-off between innovation and efficiency. Because most business innovations are reflected as changes in the supporting applications, a static portfolio over the years may indicate no significant innovation in business processes. Such a scorecard needs to be part of regular management appraisal and feedback, and it needs to evolve in the context of the competitive environment of each business. Previous research has revealed how companies have approached IT to improve either efficiency or flexibility.5 We argue against an either-or perspective. For sound decisions on new IT applications that implement a business change, line managers and IT managers need to determine whether the role of the business process is to support efficiency or innovation and whether the business-process domain is stable or evolving. Subsequently they must identify other applications in their portfolio that may be affected by the change and explore whether the change can create any impediments for future changes in those applications. Not until then can they make an appropriate sourcing decision.

Increasingly, large companies’ IT capabilities struggle with the conflicting strategic imperatives of innovation and efficiency. Spending on information infrastructure is significant —about 2% to 8% of revenues. Unfortunately, such investments are not often viewed as strategic, and the old efficiency-oriented return-on-investment yardstick is used. The time has come for new measures to gauge the success of investments in basic infrastructure and applications.6 The disconnection between efficiency and flexibility cannot be bridged without an active understanding of the technical and organizational impediments to tying both the IT and the line manager to the company’s strategic tasks. The transition needs a significant change in both the mind-sets and the skill sets of line managers and IT specialists. The scorecard gives managers a framework to understand the locus of efficiency and innovation in their information-infrastructure portfolio.