Most companies believe that IT goals must be aligned with business goals to create value. Yet fewer understand that alignment alone does not guarantee performance. In fact, it can be a trap.

Charles Schwab gained prominence in financial services because of its IT mastery, first as a discount broker, then as a leader in online trading. By the early part of this decade, however, IT had actually become a detriment. A patchwork of custom systems was snarling operations and big new IT-based products were delayed, disappointing customers. Worse, it was spending 18 per cent of revenue on IT, while three leading competitors were spending 13 per cent or less--a net disadvantage of many millions of dollars.

Schwab's predicament signals a growing realisation that the usual diagnoses--and fixes--of IT's troubles are often misguided. Indeed, our work with dozens of executives reveals that even when IT groups are well-aligned with the units they support, performance dependent on IT sometimes goes sideways, or even declines. How?

To improve alignment, IT organisations often deploy enterprise resource planning systems or develop solutions designed to serve each business's unique needs. At the same time, they hold off standardisation and upgrading of legacy systems. They overlay complexity on old systems, postponing improvements and leaving significant scale benefits untapped. Costs rise; delays mount; and fragmentation undercuts co-ordination across business units.

This kind of focus on business alignment hurts the units, instead of helping them. As Richard Connell, CIO of Selective Insurance Group, told us: "Aligning a poorly performing IT organisation to the right business objectives still won't get the objectives accomplished."

Another warning emerged when we surveyed more than 500 senior executives: few companies rate their IT capabilities highly. They fell into four camps. Nearly three-quarters believed their IT capability was neither highly aligned with their business goals nor highly effective, and occupy what we call the "maintenance zone". Minimal budgets keep systems running, but IT doesn't offer much added value and often isn't expected to. These firms recorded a slower rate of growth--2 per cent below the three-year average--while spending the same as the average on IT.

More troubling was the 11 per cent of companies in which IT was highly aligned but not highly effective. These companies fared much worse. Their IT spending was 13 per cent higher than average, but their three-year growth was 14 per cent lower than average. These firms were in the "alignment trap".

Only 8 per cent believed IT was highly effective, but not highly aligned--what we called "well-oiled IT organisations". They delivered projects with promised functionality, timing and cost. Significantly, high effectiveness made a substantial economic difference: these firms were spending 15 per cent less than average, and their growth rates were 11 per cent higher.

The rarest breed was both highly aligned and effective. Such "IT-enabled" organisations amounted to only 7 per cent. But they recorded a compound three-year growth rate 35 per cent higher than the average. Moreover, they spent 6 per cent less than the average respondents.

These findings make clear that getting IT right is critical. For most companies, the most important task is to forget about enhancing alignment and to focus first on increasing the effectiveness of the IT organisation. For IT to enable growth, that first move is critical--and it's the one that companies often get wrong. Three principles are key to making the change:

Simplify. Raising effectiveness usually involves simplifying the IT function. That may mean delaying some of the division-specific applications that have been custom-tailored on legacy systems. Such an approach requires a greater investment of time and money up front, but will lead to lower costs later.

"Rightsource" capabilities. Effective IT requires capabilities ranging from help-desks to innovative business applications. Today, nearly all these are available from specialists in India, China, Brazil and Eastern Europe. One useful way to guide sourcing is to decide what needs to be proprietary. In-house development makes sense for applications that are strategic or critical to competitive differentiation.

Focus on value delivery. To be highly effective, IT must complete projects on-time, on-budget, and with IT functionality that delivers what was requested by business (with agreed-upon modifications).
 
To do this, IT must be equipped with the right objectives, skills, processes, and resources. For example, without a business case and key performance indicators for IT projects, it is difficult to measure and improve the value delivered by IT.

Schwab proves that attaining both IT alignment and effectiveness can be done. Indeed, it quickly re-established these tandem goals and is getting results: per trade costs have decreased more than 50 per cent, while average time to execute trades at peak times decreased 80 per cent.

Best of all, as Schwab climbs out of the alignment trap, clients are rewarding it with increasing trades and assets. In other words, IT is once again helping Schwab to grow.  

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.