Charting new IT organizations

What will the IT organization of the future look like? We gathered experts for a virtual roundtable discussion about how CIOs are reorganizing their IT operations to improve customer service and gain a competitive advantage from such emerging technologies as wireless networks, unified communications and service-oriented architectures.

Our panel includes: Paul Groce, partner and leader of the CIO practice at CTPartners; Johna Till Johnson, president of Nemertes Research; Mike Jones, CIO of Children’s Health System and a member of the executive board of the Society for Information Management; and Jerry Luftman, distinguished professor at the Howe School of Technology Management at Stevens Institute of Technology.

What are the biggest issues holding back IT departments in terms of their organizational structures?

Groce: One of the largest issues CEOs have is a frustration with CIOs not being in touch with the business, and that frequently is a result of the organizational disconnects between the CIOs’ organization and the business. Unsuccessful CIOs may, in the name of greater cost control and production efficiency, pull all IT resources into a shared services group, but as a result they often lose connectivity to the business. You have to be very careful about what you centralize and decentralize. The issue is this: How can the CIO construct a hybrid model that provides the efficiencies of a centralized organization while still maintaining touch with the business? One of the more effective solutions appears to be the hybrid model that allows centralized production activities but maintains contact with the business through business-relationship managers, who make sure that business needs are heard.

Luftman: We’re really pushing the hybrid or federated organization, which combines the strengths of centralized and decentralized organizational structures. From my research, it’s clear that companies that are federated have a better shot [at] receiving a higher score on alignment of IT and the business. In centralized organizations, the decision makers tend to be reluctant to move to a federated model because they are losing people reporting to them. Another issue is the career for IT professionals in a federated structure because they now report to the business. Another issue is that it’s not just the organizational structure that CIOs need to focus on. If you change your organization but you don’t change your governance processes, it’s not going to work.

Johnson: The top issue holding back IT departments is mapping the technical expertise to the business issues. The cliché is that IT departments need to better understand business issues. That’s not what I mean. They need to take a more holistic view of when and where IT can become a differentiator or a value proposition, and then focus resources on that. The second issue would be convergence. What I mean is not just VoIP; it’s unified communications. That affects messaging people, help desk people, application people, infrastructure people. You’re looking at something that’s critical for the company to run and every user in the company touches. Handling that effectively is very, very critical. The third issue is not new: It’s basic management skills. Management breaks down into projects, processes and people. IT people tend to be poor at one of these three things.

Jones: The biggest issue I see holding back IT departments is span of control. How much can you have somebody responsible for on an operational basis and still have them looking at the future and emerging technology? This whole issue of who is responsible for what is going to get more intense. For example, who has responsibility for video conferencing? Is that an application or is that a network? There is a lot of gray.

What trends are you seeing in terms of CIOs reorganizing their IT departments?

Luftman: The trend is to move to federated organizational structures. That’s what I’ve seen clearly in the last five years. But there are some failures because companies don’t look at all the things they need to do because this group of IT people now reports to this particular business group. With a federated organization, you centralize those things that everybody would agree makes sense to centralize: infrastructure, networks, databases, common systems. The things you decentralize are the applications that are directly in support of meeting the business objectives. Then there’s a whole bunch of stuff that people could debate abut whether it makes sense to centralize or decentralize, like help desk and maintenance. With a federated organization you also want a federated governance process. Such a process says that IT decisions — such as what projects are done, what projects aren’t done, how much money is invested in certain projects — those decisions are made jointly by the IT and business unit people.

Groce: One of the biggest trends that I see is the move toward functional convergence. This involves taking like processes and like technologies across lines of businesses and placing those in a centralized service factory. The move to functional convergence has led to the evolution of the shared services organization. The CIO has led the way in many areas of business change, such as outsourcing. The application-development function was one of the first things to go overseas. As a result of that, business processes were outsourced. More and more, CIOs are leading technology outsourcing and business process outsourcing across their companies. The other trend I have seen is a bit of a backlash regarding outsourcing. Three years ago, people believed you could outsource everything. There’s a positive swing towards outsourcing common, noncritical applications, such as data entry or enterprise systems. But there is a push to be very cautious about outsourcing critical business applications, particularly proprietary applications.

Johnson: There’s a very strong trend of having the IT department responsible for packaging lots of different technologies into a service. Virtualization is driving this trend, and so is convergence. The other trend is there is an upswing in the number of people constructing five-year plans. For the past seven or eight years, companies have been digesting the Internet. Now there is a whole new round of technologies that are sneaking up on companies. These include mobility, [SOA], unified communications, virtualization and grid computing. In the security space, you’re starting to see things like identity management and enterprise rights management. There’s a certain amount of fear in people’s voices when they call us about their five-year plans. They’re asking us: What am I missing?

What would your ideal IT organizational chart look like?

Jones: I would have five CIO-level reports at the most. I’d have a manager of special projects, who could be assigned to do anything and would take charge of projects that were not going right. I’d also have a manager of engineering, who would define best practices for the organization. Networks, servers and operating systems would be under one person. I’d break out technology, so that one person would be responsible for identifying and researching technology and seeing how it would fit into the organization. I’d keep application development separate.

Johnson: I would have a CIO and a CTO. I would have the CIO reporting directly to the CEO and have a seat on the board. The CIO would be a person who can always put IT investments in business terms. Whether the CTO reports to the CIO or the CEO depends on whether technology expertise is a critical differentiator for the company. If it is, the CTO might be on the board. If not, the CTO can be the person in the IT department responsible for keeping ahead of the curve. The relationship between the CIO and CTO needs to be extremely close. I would have an information steward reporting to the CIO. This person’s job is to be responsible for how data is tracked across the organization. Moving down the ranks, you would have people responsible for each core element: networking infrastructure, computing infrastructure, application architecture, and security. These people would report to the CIO. You might have the architecture person, who would be responsible for data center and user architecture, report to the CTO. Then you’d have service-delivery managers, who are responsible for pulling together networking, servers, storage and mobility to support particular users, such as virtual workers. In terms of having a centralized, decentralized or federated structure, I advise people to think about how to federate with minimum overhead. You want to give people maximum freedom with minimum chaos.

Groce: For a company with multiple lines of business, the ideal would be to have divisional CIOs reporting to the CIO, as well as a head of corporate shared services, a head of project management and a CTO or corporate architect. A simpler organization with a single line of business would have a CIO with a head of application development, a head of infrastructure and a chief architect. You want to centralize infrastructure, but where you run into problems is when CIOs begin to aggregate application development. When you pull that function out of the business and into a centralized factory, then business CIOs have to compete for resources with a shared service. Centralization of application development can be done, but it has to be balanced by having incredibly tight linkage with the business.

Luftman: There is no ideal organizational chart. What you need to do is get IT and business people in the room together to make decisions on the gray areas. It’s easy to decide that some things make sense to keep in IT and others in the business, but you have to make decisions about the gray areas. You have to build a relationship across the centralized and decentralized IT groups. You need to make sure that you are evolving to an environment where you can integrate across the organization.

What kind of returns would a company get out of adopting this new IT organizational structure?

Luftman: I have studied 154 global 1000 companies. Over 1,330 executives participated in my research. About 13% of the companies I studied were decentralized, 40% were centralized and 47% were federated. What I have found is that there truly is a benefit to a federated organization. The IT-business alignment maturity is at a higher level. Companies that have better IT-business alignment have better relationships between IT and business people, better systems, better measurements, better morale [and] better communications; and provide higher levels of service to their customers.

Groce: You don’t measure return financially, you measure return as internal client satisfaction. CIOs typically don’t lose their jobs on budgets or financial numbers. They lose their jobs when line-of-business executives go to the CEO and say that the CIO is failing us, or when revenue takes a dip because of the lack of CIO service. CIOs can become so myopically focused on cost-cutting that they forget about levels of service to the business. Successful CIOs should monitor cost containment, but they should first come up with a metric for measuring delivery of service and internal client satisfaction.

Jones: The return on having a good organizational structure is that a company would operate more efficiently and might be able to find technology that would reduce costs. We do return on investment analysis for our IT projects, but if we break even it’s probably good. A lot of the things we do are focused on improving patient safety.

Johnson: What I’m looking at with my structure is agility. The real competitive advantage is when you figure out that a new technology allows you to do business differently and you get it rolled out as quickly and as cleanly as possible. Agility turns into top-line business benefits. Agility focuses you on the ability to grab market opportunities and beat competitors at exploiting them.

What is the risk for a company that doesn’t reorganize its IT shop along these lines?

Jones: The risk is that you are not going to be very successful. The applications are owned by the users. We’re supporting them. If you don’t have an IT organizational structure where users are involved, you’re not going to be very successful. It’s a two-way street: You either fail or are successful together.

Luftman: The risk [of a poor organizational structure] is that you’ll be an ineffective IT shop. You’ll be spending money inappropriately and not on the most important projects. You won’t be leveraging IT as effectively and efficiently as you could. The relationships between IT and the business will be poor. If companies don’t focus on all the things that are necessary to improve alignment, they’re going to make it harder to leverage IT.

Johnson: There are two risks: One is that you’re held back in the market and you can’t do what it takes to compete. The other risk is that you can do what it takes to compete by brute force, by throwing enough people at it, but now your cost structure is higher than your competitors.

Groce: The risk is that the world could pass you by. You have to keep up with the times. The pace of IT change is faster than that of business change. I would argue that IT doesn’t have to keep up with the business; IT has to run ahead of the business. This is riskiest for companies that have a competitive edge because of technology.

How big of a priority should IT reorganization be compared to other concerns facing CIOs?

Jones: It needs to be a priority. If you’re not functioning efficiently, you need to be making some changes.)

Johnson: There’s a quote from The Hobbit: “Lots and none at all.” IT reorganization should be a very high priority, and then again, it shouldn’t be that high. Getting the business aligned with the possibility of IT should be a huge priority for every business. But the issues of who reports to whom, should you be centralized or decentralized, how many managers you should have, is not as important as it’s made out to be.

Luftman: Reorganization should be an equal priority all the other things I mentioned related to IT-business alignment. You want to try and identify where the IT and business people see their organization going. It’s very valuable to do that. Then you can focus your attention on those [IT projects] that are agreed upon and should be approved.

Groce: IT reorganization is part of the total equation. In any endeavor, you need to define the situation and your objectives. Then you look at how to structure the organization to meet those objectives. The CIO organization needs to be flexible. Marketing teams are matrixed, and so are sales teams. Production teams flip back and forth to produce different products on demand. If the business can demonstrate flexibility to market demands, the IT organization needs to demonstrate the same flexibility.