The Financial Times

Is your company caught in an IT alignment trap?

Simply aligning IT goals with business goals doesn't guarantee improved business performance. In fact, the alignment itself can create a trap, decreasing profits while increasing IT spending.

Par Rudy Puryear, Steve Berez, and Sachin Shah

First published on juin 12, 2008
min


Most companies believe that information technology goals must be aligned with business goals to create value. Far fewer understand that alignment alone does not guarantee improved business performance. In fact, it can be a trap. Charles Schwab & Co, for instance, 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 valuable customers. Worse, Schwab was spending 18 per cent of revenue on IT, while three of its leading competitors were spending 13 per cent or less, an annual disadvantage of hundreds of millions of dollars. That tech-savvy Schwab found itself in this predicament is instructive. It signals a growing realisation we have found among companies we work with that the usual diagnoses—and fixes—of IT's troubles are often misguided. Indeed, our work with dozens of IT and business executives reveals that even when IT organisations are well-aligned with the units they support, business performance dependent on IT sometimes goes sideways, or even declines. How? To improve alignment, IT organisations often deploy enterprise resource planning systems or develop best-of-breed solutions designed to serve each business's unique needs. Meanwhile, they overlay complexity on older legacy systems, postponing infrastructure improvements and leaving significant scale benefits untapped. Costs rise, delays mount, and fragmentation undercuts co-ordination across business units. Aligning a poorly performing IT organisation to the right business objectives won't get the objectives accomplished. Further warnings emerged when we surveyed more than 500 senior business and technology executives: few rate their IT capabilities highly. We queried them about both alignment and effectiveness, and found that they fell into four camps. Nearly three-quarters believed their IT capability was neither highly aligned with their business goals nor highly effective. These companies occupy what we call the "maintenance zone". Minimal budgets keep systems running, but IT doesn't add much value. Such companies recorded a slower rate of growth—2 per cent below the three-year average in the survey—while spending on IT was the same as the average. More troubling was the 11 per cent of companies in which IT was highly aligned but not highly effective. Surprisingly, these companies fared much worse. Their IT spending was 13 per cent higher than average, and their three-year growth rates were 14 per cent lower. These firms were in the "alignment trap". Only 8 per cent believed IT was highly effective, but not highly aligned. They delivered projects with promised functionality, timing and cost. These we categorised as "well-oiled IT organisations". Significantly, high effectiveness made a substantial economic difference: these companies 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. These "IT-enabled" organisations—only 7 per cent of all respondents—recorded a three-year growth rate 35 per cent higher than the survey average, while spending 6 per cent less. These findings make clear that getting IT right is critical. For most companies, the foremost task is to focus first on increasing the effectiveness of the IT organisation. For IT to enable growth, that first critical move is the one that companies often get wrong. Applying three key principles can help move organisations to high effectiveness: Simplify. Simplifying the IT function may mean delaying incremental spending to upgrade customised legacy systems and committing instead to a standardised new infrastructure. Such an approach requires a greater investment of time and money up front, as standard systems are rolled out across the enterprise, but will lead to lower costs later. "Rightsource" capabilities. Effective IT requires capabilities ranging from help desks to creating innovative business applications. Today, nearly all are available from low-cost IT specialists offshore. One useful way to guide sourcing choices 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 functionality that the business needs. To meet these challenges, IT must be equipped with the right objectives, 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 IT delivers. Schwab proves both IT alignment and effectiveness can be attained. 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 periods 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. Rudy Puryear is a partner in the Chicago office of Bain & Company and leader of the firm's Global IT Practice. Steve Berez and Sachin Shah are Bain partners in Boston and London, respectively.

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

Charles Schwab & Co, for instance, 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 valuable customers. Worse, Schwab was spending 18 per cent of revenue on IT, while three of its leading competitors were spending 13 per cent or less, an annual disadvantage of hundreds of millions of dollars.

That tech-savvy Schwab found itself in this predicament is instructive. It signals a growing realisation we have found among companies we work with that the usual diagnoses—and fixes—of IT's troubles are often misguided. Indeed, our work with dozens of IT and business executives reveals that even when IT organisations are well-aligned with the units they support, business performance dependent on IT sometimes goes sideways, or even declines. How?

To improve alignment, IT organisations often deploy enterprise resource planning systems or develop best-of-breed solutions designed to serve each business's unique needs. Meanwhile, they overlay complexity on older legacy systems, postponing infrastructure improvements and leaving significant scale benefits untapped. Costs rise, delays mount, and fragmentation undercuts co-ordination across business units. Aligning a poorly performing IT organisation to the right business objectives won't get the objectives accomplished.

Further warnings emerged when we surveyed more than 500 senior business and technology executives: few rate their IT capabilities highly. We queried them about both alignment and effectiveness, and found that they fell into four camps.

Nearly three-quarters believed their IT capability was neither highly aligned with their business goals nor highly effective. These companies occupy what we call the "maintenance zone". Minimal budgets keep systems running, but IT doesn't add much value. Such companies recorded a slower rate of growth—2 per cent below the three-year average in the survey—while spending on IT was the same as the average.

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

Only 8 per cent believed IT was highly effective, but not highly aligned. They delivered projects with promised functionality, timing and cost. These we categorised as "well-oiled IT organisations". Significantly, high effectiveness made a substantial economic difference: these companies 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. These "IT-enabled" organisations—only 7 per cent of all respondents—recorded a three-year growth rate 35 per cent higher than the survey average, while spending 6 per cent less.

These findings make clear that getting IT right is critical. For most companies, the foremost task is to focus first on increasing the effectiveness of the IT organisation. For IT to enable growth, that first critical move is the one that companies often get wrong. Applying three key principles can help move organisations to high effectiveness:

Simplify. Simplifying the IT function may mean delaying incremental spending to upgrade customised legacy systems and committing instead to a standardised new infrastructure. Such an approach requires a greater investment of time and money up front, as standard systems are rolled out across the enterprise, but will lead to lower costs later.

"Rightsource" capabilities. Effective IT requires capabilities ranging from help desks to creating innovative business applications. Today, nearly all are available from low-cost IT specialists offshore. One useful way to guide sourcing choices 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 functionality that the business needs. To meet these challenges, IT must be equipped with the right objectives, 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 IT delivers.

Schwab proves both IT alignment and effectiveness can be attained. 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 periods 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.

Rudy Puryear is a partner in the Chicago office of Bain & Company and leader of the firm's Global IT Practice. Steve Berez and Sachin Shah are Bain partners in Boston and London, respectively.