IT Infrastructure Chapters 3

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IT InfrastructureChapters 3 4

• INFO 410
• Glenn Booker

Images are from the text authors slides
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IT Impact on Organizations

• Some thought the computer revolution would turn
  hierarchical organizations into a global
  networked economy
• While the impact of IT has been huge, maybe not
  quite that extreme
• Large firms need to be agile to stay afloat
• Small firms need to be networked to stand a chance

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IT Impact on Organizations

• Organizational design choices affect the
  flexibility and efficiency of the business
• Org helps manage info complexity, uncertainty
• Org must be aligned with strategy and environment
  to respond to opportunities and threats
• IT can facilitate new and improved organizational
  structures and processes

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Organization Design Challenge

• How simple or complex is the structure of our
  enterprise?
• How stable or not is the business environment in
  which were operating?
• Like we saw in the IT Impact Map, these answers
  can change over time for a single organization

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Need new capabilities

• The late 20th century saw much corporate
  downsizing, reengineering, and general reduction
  of hierarchical structures, all needed to help
  compete with customized solutions in a newly
  global market
• And increased use of strategic alliances and
  partnerships
• But hierarchy lives on!

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Need new capabilities

• So there was motivation to reduce hierarchy
• Yet dont want to lose speed or efficiency
• Giving up control is hard, even if you want to
  empower others!
• Like GE and ABB in mid-90s
• Want to be global and local, big and small
• Decentralized but with central control and
  reporting

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LeapFrog

• For example, LeapFrog went from a startup in 1995
  to the 3 toy company in 2002
• Five platforms running 100 software titles, 35
  toy products, plus educational software division
• Need constant innovation to stay competitive, but
  use IT to control operations

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Organization Design Challenge
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Hybrid or matrix organizations

• The big/small problem was first solved with the
  matrix org structure in the 60s
• Want control efficiency, flexibility speed
• Often done by combining functional organization
  with a project-based structure
• Looks good on paper, but hard to control
• Strategy too complex for actual capabilities!
• Hard to tell how fast environment is changing

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Hybrid or matrix organizations

• So why try another hybrid organization?
• IT can now help handle the info demands
• Data was often paper or verbal, hence
  communication channels were slow
• Now electronic and networked information can
  share information fast enough to keep up
• E.g. IBMs Business on Demand to unite info,
  processes, and people

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Barings Bank

• Barings collapsed in 1995 due to 1.2B in
  trading losses by one trader
• Trader also had access to the system which
  reported on trades
• Wiped out the capital reserves of the bank
• A similar problem was averted at Societe Generale
  when sudden growth and profits caused suspicion

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Hierarchy not all bad

• Both bank examples show that having limits on
  responsibilities and decisions, standardization
  of jobs, and restricting access to information
  can help protect org from a single point of
  failure
• Except if that point is at the top? (Madoff)
• Hierarchical control systems keep processes in
  line via checks and balances

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Contrast hierarchy vs. hybrid orgs

• Hierarchical org approach based on mgmt making
  decisions to meet predefined goals
• Do what youre told!
• Controls over transactions help with risk mgmt
• Newage organizations want to empower people and
  expand their responsibilities
• Hard to define new rules if old ones thrown out

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Lessons from the 80s and 90s

• Speed is good, but not if you lose control
• Need new products, fast cycle times
• But bad fast decisions can quickly go awry
• So need constant monitoring, and high expertise
• Empowerment is not anarchy
• Empowering might pass decision authority lower,
  but often isnt clear whos in charge
• Authority connected to complex org design

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Lessons from the 80s and 90s

• Org design features include structure, reporting
  relationships, and compensation
• Empowered structure needs more sr mgmt
  involvement, clearer communication, and
  monitoring
• Org is more than just structure
• Thats why the matrix alone didnt work
• Need the rest of the features to change too

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IT impact on capabilities

• Organizations are information, communication,
  decision-making systems
• So how fast information is processed limits an
  organization, and how fast they respond to
  market changes
• Common mistake is to change part of org, and omit
  the controls and reporting aspects

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Frito-Lay

• In mid-80s tried to speed product development
  alone
• Many new product variations, marketing campaigns,
  promotions
• Ignored supply chain, mfg, and order fulfillment
• Field sales tried to adjust for local needs,
  competition without distribution support
• Chaos

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Frito-Lay problem
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Frito-Lay

• Then coordinated operating process changes
• Left out org and mgmt systems to control them
• Resulted in missed opportunities, overlooked
  problems
• Need to redesign processes from end to end, with
  org, control, and incentive structures
• Change is an enterprise function
• Faster processes need faster info, more authority

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Redefining Control Systems
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Con-Way, Inc

• Con-Way freight used IT to support global org and
  control systems
• Consolidated into one IT platform across three
  divisions, supporting shippers, receivers,
  carriers
• Further improvements with WiFi and RFID

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Accountability and collaboration?

• Empowerment, teams, and collaboration are hot
  buzzwords
• Authority can be formal or informal
• Includes job definitions, incentives, org, and
  coordination
• Traditional hierarchy balances centralization vs.
  decentralization

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Hierarchical authority

• A hierarchy is designed to limit local decisions,
  make the big mistakes centrally
• Trend to decentralization of decision authority
  is key to new structures
• Self-managing teams
• But coordination and control difficult may lead
  to overchecking self
• Overall business goals often left out

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Hierarchy vs. On Demand
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Phillips Petroleum

• Phillips tried a matrix org, with centers of
  excellence
• Didnt get enough information to make good
  decisions
• Added a business intelligence system
• Teams of ops managers could make decisions
• Gave senior execs oversight, without slowing
  processes

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Chapter 3 summary

• Keeping up with the 21st century requires more
  than a token re-organization!
• Leaving hierarchical structures requires complete
  rework of management processes
• IT provides real time information needed to guide
  good decisions

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Chapter 3 summary

• Need to define activities, decisions, and
  resources to fulfill our strategy
• Determine which activities and decisions are
  inside organization vs outside
• Integrate processes with business environment and
  mgmt cycle control times
• Sense internal and external opportunities and
  threats

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Chapter 3 summary

• Group people and partners in teams and units to
  coordinate and control processes
• Provide tools and incentives to make good
  decisions today, and innovate for tomorrow
• Use creativity and potential of everyone
• Create culture of shared values, so everyone
  meets personal and shared goals

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The case for IT

• Carr argued in 2003 that IT is no longer a key
  strategic emphasis
• Major IT systems, like Sabre for AA, and
  Walmarts supply chain were critical for
  competitive advantage
• Now IT is a common commodity due to reduced price
  and plenty of development tools
• You still need IT, but it isnt likely to be a
  strategic competitive advantage

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IT overspent

• Too many had been spending wildly on IT
• Need more focused and thoughtful approach
• Many insist compet. advantage still possible
• Easy availability of IT makes it valuable
• Carrs idea based on old investment model of IT
  no longer true with open source, open standard
  infrastructures

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On Demand IT

• So IBM created Innovation On Demand to
  emphasize the flexibility that is needed for
  business processes and organizations
• The key is that the way IT provides value to
  organizations has changed, and we need to be
  aware of how to exploit IT correctly

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Legacy mindset

• The old way of IT was to budget IT expenses
  within each project
• Based on IT systems supporting a single
  application, e.g. HR, or manufacturing
• Therefore each system belonged to the project
  that used it
• Exceptions to this approach were rare
• Adoption of the Internet forced the change

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The new mindset

• As the worldwide network began to emerge, app
  development, deployment, and integration has
  become much faster
• So there are few isolated systems!
• So the new view of IT is as a string of
  investments, which provide value to the
  organization

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How does IT provide value?
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IT drives cost savings

• We saw that IBM redid its IT infrastructure, and
  saved 2B/year
• Drastic cuts in the number of data centers,
  staffing, and CIOs
• Consolidation into one corporate network, not 31
• Reduction of the number of applications used
• Reengineering back office processes saved another
  1B/year

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IT drives cost savings

• Key vision behind IBMs transformation was from
  decentralized silos to a centralized shared
  services model
• IT serves everyone, so make it coordinated to
  meet those needs

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IT drives revenue growth

• While controlling internal costs is great, still
  need revenue to generate profit
• Can use IT to streamline revenue-generating
  processes
• Boston Coach optimized fleet schedules
• Charles Schwab created online and self-serve
  customer portals

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IT drives revenue growth

• IBM redid its product development processes
• Reduced cost of abandoned projects 90
• Warranty/revenue reduced 25
• Time to market improved 67
• Overall cost savings of 1.6B/year
• IBM redid global supply chain processes
• Time to complete orders went from 48 to 2.5 hours
• Procurement costs down 20 in one year
• 60 increase in procurement volume with no new
  staff

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IT drives revenue growth

• IT can help provide business intelligence
• Provide real time relevant information to
  employees (e.g. sales, customer service,
  marketing), thereby increasing revenue
• Canyon Ranch did this
• Aflac created a CRM system for insurance agents
• IBM Global Services consultants used their new
  supply chain processes

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IT drives revenue growth

• IT can help launch new products or services, or
  add value to existing ones
• Embed IT into products
• Boeings e-Enabled aircraft, Medtronics
  pacemakers
• Launch new products and services
• Apple iTunes, Boeings MyBoeingFleet.com
• Add value to existing products
• Nike shoe customization

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IT drives asset efficiency

• Recall asset efficiency revenue/assets
• Assets include financial, tangible and intangible
  assets
• Financial assets include cash, securities, and
  accounts receivable
• Tangible assets include physical inventory,
  facilities, equipment, and newer software

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IT drives asset efficiency

• Tangible IT assets include
• IT operating infrastructure data centers,
  network centers, call centers, middleware,
• Enterprise solutions ERP, CRM, payroll, HR, and
  database management systems, email and
  collaboration tools
• Intangible assets include goodwill,
  acquisitions, intellectual property

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IT drives asset efficiency

• Intangible assets fails to capture expertise,
  experience, proprietary information about
  customers, relationships with other stakeholders,
  brand loyalty, etc.
• IT intangible assets include
• IT systems that support a specific activity, and
  associated people
• Executive leadership and governance systems

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IT drives asset efficiency

• Another key intangible asset is your people!
• Compensation, benefits, and the costs of hiring,
  retaining, and incentivizing people
• So calculating asset efficiency is messy!
• Lower assets or higher revenue improves it
• Shutting down, writing off, or selling poor
  assets helps efficiency
• Outsourcing IT infrastructure done for this reason

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Why outsourcing fails sometimes

• Removing IT functions can increase costs
• Fees to outsourcing partners, costs of managing
  the relationship, etc.
• Can reduce revenue if outsourcing partner
  performs poorly
• About half of world-class companies didnt
  benefit from outsourcing
• Often due to hidden costs

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But not always

• TriSource Title outsourced IT, and found that
  everything having to be digital (not faxed)
  improved efficiency, and reduced workload on
  servers reduced crashes
• Costs per transaction down 20
• Increased costs 25 per year for outsourcing, but
  improved flexibility and productivity make up for
  it

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Assets not so simple

• So while a computer has intrinsic tangible value
  as an asset, how that computer is used can
  produce wildly different intangible business
  values
• IT assets need to be reliable, lean, and scalable
  to help lower costs and increase efficiency
• When they are also agile and leverageable, they
  can help create custom products more easily

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Assets not so simple

• Since most companies IT assets are not lean and
  flexible, upgrading IT infrastructure is often
  worthwhile
• IBM, Proctor Gamble outsourcing to IBM
• This is a key conclusion understanding the
  intangible value of IT assets can help justify
  improvements to IT infrastructure

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IT creates sustainable advantage

• Sustainable advantage (i.e. competitive edge) is
  based on many possible approaches
• Strategic position (iPod)
• Novel capabilities (Wal-Mart)
• Once a leader, need to innovate to stay there

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IT creates sustainable advantage

• Sustainable advantage comes from evolving a fit
  between business model with the opportunities and
  demands of the environment
• This is the virtuous cycle for which we strive
• IT can help your business model evolve by
  controlling costs and delivering solutions, using
  good IT people, partners, and infrastructure

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Business case for IT

• IT can create opportunities to help a business by
  changing its strategy and/or capabilities
• As we saw, cost savings, revenue growth, asset
  efficiency, and sustainable advantage are all
  possible benefits
• Lots of metrics are available to quantify these
  (see page 124)

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Business case for IT

• But a business case must also tell a good story
• Why this? Is this a good opportunity to pursue?
• Why now? How long will it take to implement?
  How long to be financially worthwhile?
• Why you? Are we the right people to be doing
  this? Do we have the resources needed? Do we
  have the commitment and vision needed?

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Project life cycle?

• Strategy is implemented via projects
• Funding for one project is great, but more
  depends on how well that project is executed
• Be sure to learn from each project what was
  good, what wasnt
• Feed that into risk management for later projects
• Recognize that projects might have to die if
  assumptions change drastically during them

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Summary

• Weve summarized the key ways IT can support a
  business model to produce value
• Integrating new technologies into leftover legacy
  systems is a key challenge
• Uncertainty has led to more need for lean,
  flexible, agile systems, not silod monoliths!
• The business case for IT depends on understanding
  its intangible benefits