The downturn has thrown the notion of “business as usual” out the window. Companies must be prepared to act swiftly and decisively to address potentially sizable near-term cost pressures. Simultaneously, firms must be ready to act boldly and seize opportunities that present themselves—opportunities that stand to translate into long-term competitive advantage.
And some companies are doing precisely that. For example, one of the leading European mobile operators has embarked on a fundamental transformation of its technology function, which it calls “50/50/50.” The aim is to reduce costs by 50 percent, improve time to market by 50 percent, and improve the return on technology investments by 50 percent. Clearly, this is an ambitious target but one that, if realized, will make IT and the business much more agile and better able to implement the company’s fast-changing strategic agenda.
For most CIOs, though, two key questions remain—what are the bold moves that I should execute and how can I create a more agile IT function? Below we offer some thoughts.
Fundamentally Restructure IT Costs
Most IT cost-reduction exercises have been focused on “finding the next 10 to 15 percent.” However, we are now seeing more and more radical moves from IT organizations—including targeted cost reductions of 40 to 50 percent—driven by a fundamental restructuring of many industries. Banking is at the forefront of these efforts; other industries will follow.
One of the German Landesbanken is currently going through this restructuring process, aiming to deliver a 40 percent reduction of its existing IT cost base. The bank expects to achieve the initial 15 percent through a renegotiation of supplier contracts and optimization of the IT organization, and the remaining 25 percent with a combination of business-driven IT savings (for example, a reduction of service levels) and head-count-related savings (for example, a reduced number of desktops and workspaces owing to layoffs and attrition). Although the target is ambitious, the bank has a clear plan in place to deliver these savings.
Invest in Innovation
Like previous recessions, today’s downturn will lead to a significant increase in the number of innovations. Technology will play a major role in most of these. Companies that create a dedicated innovation team with a dedicated budget and that implement a structured approach and process to innovation management can expect to see a payoff in the medium to long term. They can also expect to develop some short-term innovations that they will need in order to survive the downturn.
A global insurance company that is currently using mechanisms such as Web-based tools and innovation forums to capture new ideas has recently appointed a new head of innovation within the IT function. With a small team and a dedicated budget, the CIO wants to send a clear message to the organization that innovation is at the top of his agenda, particularly during the recession. Working closely with a small team on the business side and reporting to the head of strategy, the innovation team’s aim is to deliver growth opportunities for the downturn and beyond.
Invest Selectively in New Strategic Platforms
“Renovating in winter"—that is, investing in new capabilities when market conditions are challenging—is not something companies typically do.1 Notes: 1 See Renovate in Winter: Taking Advantage of the Downturn to Modernize Core Systems in Banking, BCG Focus, May 2009. However, there is a clear rationale for why CIOs should consider it now. Doing so would send a clear signal of confidence to customers and markets; it would create capabilities that should reach maturity in time for the upturn; and it would help retain the best talent by providing them with an important and strategic initiative to work on. This is a particularly relevant consideration for IT departments with a large in-house organization and, hence, substantial discretionary resources.
In banking, the economic crisis has forced many players to postpone major IT renovation programs. However, a growing number of banks are increasing their efforts and investments to create a more cost-effective bank for the future. More than half of the 13 banks worldwide that have more than $2.5 billion in Tier 1 capital and are rated AA or better by Standard & Poor’s have undertaken or are planning to undertake a modernization of their core banking systems.
Develop the Next Generation of IT Talent
A recession is the best time to hire top talent. The pressure to reduce head count will make high-performing IT professionals consider leaving their current employers, either because they are directly affected or because they are no longer motivated to work for the company. This is the talent that most CIOs desperately need in order achieve a step change in the performance of the IT function. Of course, space has to be created for this new talent: this can be done by tackling organizational inefficiencies through delayering and a focus on rigorous performance management.
The recession also presents an ideal opportunity to staff the IT organization with the right type of talent. Although IT departments have come a long way over the last decade and have developed great new capabilities and delivered them with a high degree of professionalism, the typical psychological profile of a technologist, in Myers-Briggs terms, remains “ISTJ.”22 Notes: 2 Myers-Briggs testing attempts to gauge how people perceive the world and make decisions. Individuals are rated on four biases or predispositions: extraversion (E) versus introversion (I), sensing (S) versus intuition (N), thinking (T) versus feeling (F), and judging (J) versus perceiving (P). These individuals tend to be focused, detail-oriented, and organized. There is nothing wrong with this personality type. However, the “S” indicates the need for certainty, clarity, and structure—that is, a clear plan. Needless to say, what is required of IT staff in a downturn is an “N”—someone with the ability to deal with ambiguity and thrive in uncertain situations. Hiring “N”-type individuals might require tapping different resource pools and considering people with backgrounds that are different from those of the “traditional” technologist. Very often, CIOs can find these individuals within the organization—on the business side.
Also, the next generation of IT professionals is accustomed to working in communities and within broad corporate ecosystems that promote collaboration in order to develop solutions more quickly. These individuals are eager to work with a new generation of IT-literate executives who are willing or actually want to engage in a technology discussion because they can see the tremendous value that IT can deliver to the business.
A leading telecommunications company is exploring this opportunity at the moment. The chief technology officer has kicked off a program to identify top talent and is proactively seeking to hire “N”-type professionals into the IT organization. Some of his teams are embedded directly in the business—for example, his innovation team is physically located with the business strategy team.
Finally, it is critical that all hiring decisions be viewed through the lens of strategic workforce management. The IT organization’s role and scope have evolved significantly in most companies—IT is now a business partner and an orchestrator of a complex ecosystem rather than simply a supplier of IT services—necessitating a much broader range of skill sets than in the past. The IT organization must now be strong in such areas as marketing and communications, business-case development, risk assessment, competitive analysis, portfolio management, and customer-relationship management. Only through strategic hiring can such skills be acquired.
Hiring decisions should also reflect the changing size requirements of IT organizations. The establishment of specific new capabilities might entail adding personnel, while better vendor management or a change in the company’s projected long-term revenues might call for a reduction in head count.
Create Trust-Based Relationships with External Partners
Third parties are playing an ever-increasing role in the IT and business operating model. As we discussed in a recent article, we strongly believe that organizations have to develop trust-based relationships with their strategic partners.3 Notes: 3 See “Reinventing the IT Organization: Five Strategies for CIOs,” which appeared in IT Advantage: Putting Information Technology at the Core of Business, BCG Report, February 2009. In particular, in these uncertain times, a common agenda and shared key performance indicators (KPIs) and goals will lead to cooperation that will enable agility and flexibility. And the time to focus on these relationships is now, as the outsourcing and offshoring landscape is changing. There will be a wave of consolidation, as in other industries; and there will be winners and losers.
A leading auto manufacturer demonstrates the type of value that can be derived from greater reliance on trust-based relationships. Whereas the typical auto industry OEM devotes only 10 percent of its sourcing to trust-based relationships with third-party suppliers, this company devotes fully 48 percent.4 Notes: 4 BCG global IT management benchmarking. This emphasis has delivered real results: the company’s procurement productivity, measured as the inverse of transaction costs, is between two and five times higher than that of other OEMs.
There is an uncertain road ahead for most companies. But an engaged IT organization can improve a company’s prospects significantly. IT can help the business react quickly to changing market conditions and execute necessary cost-reduction initiatives. IT can also help in seizing M&A opportunities and launching technology-driven, industry-shaping moves that position the company optimally for a recovery.
To provide this level of support, CIOs and IT organizations will need to make some radical moves and be comfortable with a high degree of uncertainty. But those that get it right will help make their companies winners—and establish IT as a core capability that creates competitive advantage.
The authors would like to thank Gary Callahan, Angela DiBattista, Gerry Hill, and Janice Willett for their editorial and production assistance in the preparation of this paper.