IT Effectiveness & Business Value - Why binary targets are key to Transformation
We love binary thinking in Western cultures. In fact so much that the traditional view on strategy is based on either cost advantage or differentiation. Particularly in the current times of economic distress, many companies turn to cost cutting and postponing development projects. Simultaneously, close to 90% of surveyed Nordic companies see digitalisation as important and one third rate it as their number one top priority*. With this short read I aim at demonstrating the logic for looking at these two seemingly incompatible and binary goals to transcend conventional categories to deliver Technology-driven competitive advantage and outstanding performance, hence espacing the "deadlock" for Digital Transformation.
The issue of aligning Business and IT
A MIT study survey* of over 500 senior Business and Technology executives worldwide revealed that 85% companies perceived their IT capabilities as not highly effective. They were either in the maintenance zone or torn between allocating budgets to support Business and maintaining old, complex systems, applications and other infrastructure. Besides mere technology legacy, there were old organizational structures, culture, and management hesitations that impede progress. The impact of these maturity gaps in organizational and technology capabilities is further visible at the competence level, one study indicating that even a 4% shortage of IT and Digital skills have massive impact on the ability to carry out projects, estimated to result in loss of revenues and efficiency in excess of €7B in Nordics alone.
Now, let us turn back to the MIT study in which 15% respondents who positioned themselves to the highly effective side of IT & Business alignment. Interestingly, even companies that don’t consider their IT organizations highly aligned with Business were spending 15% less on IT than peers, and their company growth rates were 11% higher. Yet the fortune 7% had lower IT spending, while higher Annual Sales Growth rates. How can Technology-driven growth be delivered with a less than average budget?
Effectiveness as the key to transformation
The companies that achieve the highest growth and successful transformations manage their bottom lines. Herein lays the key link to alignment, that is, managing IT with the same best practises and standards as you manage Business units. Companies with this mindset reduce cost by managing the complexity and legacy down. They actively prevent future costs by sourcing IT and software wherever it makes the most sense, and by engaging in strategic planning to build capabilities and structures for their future needs. Whilst, the best performers tightly align their IT organization to the strategic objectives of the overall business. These effective IT organizations align investment and governance principles across organizational lines and make business executives responsible for key IT initiatives as well.
Instead of perceiving effectiveness as purely cost management and digital value creation as a purely glamorous Business projects, IT and Business executives must be strategic partners to balance their budgets and allocate investments to technology, organizational structures, culture, capabilities and competence management. The emphasis placed on achieving Effectiveness and Alignment will pay off for organizational uplift and renewal toward Digital. The stakes and rewards are high as a study on 400 Nordic companies showed; companies with a stronger digital intensity derive 9% more revenue from their physical assets, are 26% more profitable and achieve a 12% higher market valuation than their average peers*.
Finally, it is important to remember that the journey to Digital Transformation is relatively long-term, but it will pay off if you execute rigorously. May the growth of Microsoft (258% over 5 years), Bestbuy (198% over 7 years), Nike (69% in 2 years), and Target (66% over 8 years*) provide motivation to your journey as well.
Melkki Operating Model Advisory is focused on helping IT and Business executives to re-organize and optimize the operating model in order to create more value from IT and to deliver IT enabled innovation. For further information, please contact Johanna Suortti via LinkedIn or email johanna.suortti(at)melkki.fi.