Finishing Off IT

In the Spring 2005 issue of the MIT Sloan Management Review, Nicholas Carr suggested in his article “The End of Corporate Computing” that the commoditization of information technology would signal the end of corporation-owned and operated IT in favor of a centralized set of utility-style providers. While Carr was correct that IT has, indeed, become a commodity, his prediction that IT operations would migrate away from corporate control to outsourcers may not be coming true. In fact, in the short time since Carr wrote the article, there is evidence that companies are choosing to return control of certain essential functions to their own IT departments.

The reason for this lies in a fuller understanding of what it means for a resource to be a commodity. IT, like many other commodities, is governed by the resource dependency theory: When a resource becomes so ubiquitous that it becomes essential to survival, the risks imposed by its absence outweigh the burdens of maintaining its availability. This is the case with many aspects of corporate computing. IT processes are fully integrated in nearly all business practices, from simple e-mails and data storage to more complicated core practices such as forecasting and audit procedures. IT has become so ubiquitous, in fact, that it is taking on another common attribute of commodities — the need for government oversight and regulation.

Other commodities, such as gas and electricity, have become so pervasive in the economy that it has become necessary to agree on a set of standards to govern their usage. There are regulations as to how these resources are created, who can create them and how to measure their usage, and penalties are created for abusing these standards. A similar situation is occurring with IT, for example, U.S. government regulations requiring 911 emergency service across broadband and digital phone providers. Moreover, IT has been so integrated into our culture that government regulations on business and government practices include IT components. For instance, Title 21 Code of Federal Regulations governs electronic records and signatures for all companies under the authority of the U.S. Food and Drug Administration. The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act, requires financial institutions to establish administrative, technological and physical safeguards to ensure the confidentiality and integrity of customer records and information (electronic or otherwise).

It is precisely the problems of integration and regulation that have necessitated the return to corporate computing. As companies find their business practices increasingly tied to IT solutions, they find outsourcing increasingly dangerous. A study published in 2005 by Deloitte Consulting LLP, a U.S. subsidiary of global financial consulting firm Deloitte Touche Tohmatsu, reviewed 25 organizations currently spending a combined $50 billion annually on outsourcing and found that 70% of the firms had negative experiences with outsourcing. A key finding was that outsourcing generates new risks and made compliance regulation complex. Fully 64% of the organizations studied have brought at least some functions back in-house because of their negative experiences.

An example of a corporation that restored its in-house IT is JPMorgan Chase & Co., which ended its $5 billion IT outsourcing deal with IBM Global Services in September 2004. When JPMorgan originally announced the IBM deal in December 2002, Thomas Ketchum, JPMorgan’s vice chairman at the time, said the contract would “accelerate our pace of innovation while reducing costs.” Upon canceling the deal, Austin Adams, JPMorgan CIO, said: “The decision to cancel the outsourcing deal wasn’t driven entirely by cost savings. It was about our belief that we wanted to be more involved in every aspect of our business, and technology is a significant part.”

Adams was tapping in to one of the major reasons that IT outsourcing relationships fail. Most IT utilities can take over the easy, repeatable tasks involved in IT. However, they lack the flexibility and velocity to handle complex tasks directly related to core business practices. Because of this, companies are finding they need to preserve at least part of their IT infrastructures. Kurt Potter, research director at Gartner Inc., an IT research and analysis firm headquartered in Stamford, Connecticut, reports: “End-user organizations are having tough experiences from their first-generation outsourcing deals and are learning how quickly their outsourcing contract becomes outdated. Declining asset lifecycles, constant business changes, cost, innovation, and cultural/business fit are affecting the contract length in the life of an outsourcing relationship.” One company that suffered from this problem was Royal Philips Electronics NV. The company recently took back control of its hardware and managed desktop support services for its 75,000 employees because its outsourcer, Dell Inc., could not address the regional needs of Philips’ business.

Equally important for the migration back to in-house IT is increased regulation. As regulations such as the Health Insurance Portability and Accountability Act, the Sarbanes-Oxley Act and the aforementioned Gramm-Leach-Bliley Act force companies to control, archive and report data in specific ways, firms’ relationships with their out-sourcers become much more complicated. Seventeen percent of those responding to the previously discussed Deloitte study mentioned Sarbanes-Oxley as a specific difficulty in governing their out-sourcing relationships. Moreover, the penalty for failing to meet these standards does not fall on the outsourcing partner but on the reporting company. Indeed, senior leadership is accountable to the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board for Sarbanes-Oxley audits. Executives choosing to place that accountability in the hands of an outside company do so at their own peril.

But even as companies bring aspects of their corporate computing back under their control, they risk re-creating the problem Carr saw in the first place. The inefficient, underutilized IT department is no more a solution than is the uncontrollable, inflexible IT utility. The answer lies in the same resource dependency model that created the situation in the first place. One way companies can avoid or mitigate external dependencies is to shift dependency to another resource. Executives can choose to create internal dependencies over which they do have control to counterbalance external dependencies, and this action can result in a competitive advantage. But simply taking back control is not enough. Companies need to master their IT in order to gain this advantage.

Not all resources hold the potential for sustained competitive advantage. Any easily replicable technological, financial or marketing scheme cannot be strategic. What is not easily replicable, and thus is potentially strategic, is an organization’s intelligence and capability. By combining skills and resources in unique and enduring ways to grow core competencies, firms may succeed in establishing a competitive advantage. The key to doing this again lies in IT’s nature as a commodity. Despite its ubiquity, IT still is considered to be different or special. It is the province of specialists and seldom the concern of senior management. And until managers begin treating it like the common business practice it is, IT can never provide the benefits it has long promised.

The current IT organizational and management model is a legacy of the days before IT became a commodity. In most organizations, executives consciously focus expertise and control by technology skill set or “silo.” Often, each silo even has its own management establishment of specialists. These specialists get promotions based on their technical skills, not their business skills. IT leaders and staffs often lack a strong understanding of business strategy and further isolate themselves with jargon and a pure technology focus. This system worked well before the commoditization of IT, but today the system is counterproductive. When executives realize that IT requires a horizontal service delivery focus and act accordingly, the final commoditization of IT can begin. After all, most senior executives show up at sales meetings, ribbon cuttings, audits and other non-IT events. Why are they so much less involved in IT when their firm’s very existence now relies upon it?

The final commoditization of IT should be the goal of all senior leadership. To complete this task, the last vestiges of IT feudalism have to go. CEOs need not become engineers; to the unindoctrinated, accounting, sales and marketing procedures look as foreign as IT. But executives must actively create and sustain an environment in which the IT model can change. For the new IT model to succeed, the entire IT organization, including all silos and their management, must work together as a service-delivery chain. This starts with the understanding that hardware and software are not the key. IT should be separated into discrete tasks based on process instead of technology, and each task must have a specific purpose in the strategic framework. In other words, executives need to approach IT as a people and process issue, not a technology issue. And once those tasks have been designed, just as in any manufacturing organization, the focus needs to be on quality — in this case, not the quality of a given product but the usefulness of a given process. The regular usage of integrated process improvement tools like those typically found in any modern manufacturing organization, such as Six Sigma or lean management, is glaringly absent from most IT organizations. But it is precisely these kinds of tools that will allow corporate computing to come out of the silos and into the mainstream.

Shell Oil, Proctor & Gamble and global insurance firm Liberty Mutual have already begun realignments of their IT organizations around these kinds of horizontal and process-driven architectures. For example, Shell has dramatically improved its processes and can now roll out an application update to 80,000 desktops globally within 72 hours. The company estimates that it saves 6,000 working hours or about $5 million on this process alone. Liberty Mutual embarked on an effort to become one of the top five insurance companies. They transformed their IT organization to align with business and improve customer satisfaction. ne notable project reorganized IT activities in order to accommodate customers’ weekend needs. This dramatically improved resource availability and responsiveness, resulting in more “up time” to critical business systems and services. This in turn increased customer retention and satisfaction, as well as improving the efficiency, effectiveness and economy of dependent non-IT organizations. These and related projects paved the way for Liberty Mutual’s $477 million first-quarter revenue increase in 2006 over the same period in 2005. Stephen Wrenn, Senior Director of IT service management at Liberty Mutual Insurance said: “These are value-added differentiators. . . . [T]he IT organization — which includes more than 2,500 employees — has actually focused on integrated systems and process-management tools to help drive customer service and performance improvements.”

These savings show that IT can and still does provide significant competitive advantage, but only if executives understand its nature as a commodity. Rather than holding it at arm’s length and treating it as someone else’s problem, executives must recognize their company’s dependence on it. Commoditization creates the opportunity to bring it inside an organization and use it to its fullest advantage. As IT moves forward, it is likely that many organizations will continue to outsource much of their corporate computing, and, in the case of many redundant and simple processes, this is appropriate. However, executives who commit to their IT infrastructure will gain significant strategic advantages. As Mike Ackerman, associate director of IT at Proctor & Gamble, says of his company’s five-year initiative to redesign its IT: “As with most things, some people are very receptive and other people are like, ‘I don’t have time for this stuff.’ But if you can make IT an enabler for a larger initiative it’s like a knife through butter.”