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Avoiding the Alignment Trap in IT Information technology remains a terrible bottleneck to growth in most companies, mainly because executives focus on the wrong remedy for their IT problems David Shpilberg, Steve Berez, Rudy Puryear and Sachin Shah October 01, 2007 READING TIME: 25 MIN

Charles Schwab & Co., the big financial services company, grew up around its information technology capabilities. IT was the key factor that allowed the young discount-brokerage house to offer customers lower prices on trades than traditional brokers. Later, as discount brokerage became more of a commodity business, Schwab transformed itself into a full-service, online broker, and by 1998 it was earning a significant share of its profits in the online trading business. But in the next few years competitors caught up to Schwab, and some surpassed it. Several brokerage houses, both discount and full service, were frequently able to beat Schwab on price. Surprising as it seems, given the company’s strategy of using technology to distance itself from competitors, IT had become part of Schwab’s problem. By the company’s own reckoning, IT staffers’ responses to business requests had become slow and expensive. IT engineers had to spend more time than ever fixing bugs in the systems. Meanwhile, several big, ambitious projects were overdue — including the tax-lot accounting system Schwab had envisioned to serve its most profitable customers — and the slow progress of these projects was preventing the company from responding

effectively to competition. Still, the company kept throwing money at projects because it didn’t see an alternative. “We said, we have to keep spending money because we’re half pregnant and you can’t be half pregnant,” recalls Deborah McWhinney, president of Schwab Institutional. A red flag went up when Schwab found itself spending 18% of revenue on IT while three of its leading competitors were spending 13% or less, a cost disadvantage amounting to hundreds of millions of dollars annually. The fact that a company as tech savvy as Schwab could find itself in this predicament is instructive. It underscores a growing realization we have found among the companies we work with that the usual diagnoses of IT’s troubles — and the usual prescriptions for fixing those troubles — are often misguided. For many years now, companies seeking to deliver higher business performance by harnessing IT have focused on alignment. By alignment, we mean the degree to which the IT group understands the priorities of the business and expends its resources, pursues projects and provides information consistent with them. Almost every company we have worked with recognizes that IT and business priorities must be tightly linked. In practical terms, that means IT spending must be matched to the company’s growth strategies. There must be shared ownership and shared governance of IT projects. It’s become something of a mantra voiced by senior business executives: A lack of alignment can doom IT either to irrelevance or to failure.

That much is true. But in our work with IT and business executives and dozens of companies in many different industries, we began to see a troubling pattern: Even at companies that were focused on alignment, business performance dependent on IT sometimes went sideways, or even declined. Why wouldn’t a high degree of alignment alone bring about improvement? In our experience, a narrow focus on alignment reflects a fundamental misconception about the nature of IT. Under performing capabilities are often rooted not just in misalignment but in the complexity of systems, applications and other infrastructure. This complexity develops for understandable reasons. At Schwab, for instance, the enormous complexity of the company’s IT system wasn’t the result of IT engineers somehow running amok. Rather, the company’s various divisions were driving independent initiatives, each one designed to address its own competitive needs. IT’s effort to satisfy its various (and sometimes conflicting) business constituencies created a set of Byzantine, overlapping systems that might satisfy individual units for a while but did not advance the company’s business as a whole. Complexity doesn’t magically disappear just because an IT organization learns to focus on aligned projects rather than less aligned ones. On the contrary, in some situations it can actually get worse. We’ve seen firsthand how IT organizations provide dedicated resources — such as application developers and data centers, to each business unit — in order to improve alignment. They develop customized best-

of-breed solutions designed to serve each business’s unique needs. Meanwhile, they ignore the need for standardization and upgrading of legacy systems. They create a labyrinth of new complexity on top of the old, making system enhancements and infrastructure improvements ever more difficult to implement and leaving significant potential scale benefits untapped. Costs rise, delays mount and the fragmentation makes it difficult for managers to coordinate across business units. In these situations, the intent focus on alignment can actually hurt the units instead of helping them. As Richard F. Connell, senior executive vice president and CIO of Selective Insurance Group, of Branchville, New Jersey, told us, “Aligning a poorly performing IT organization to the right business objectives still won’t get the objectives accomplished.” That, in a nutshell, is the alignment trap.

Uncovering the “Alignment Trap”

To test these patterns systematically, and find out more about the root causes of companies’ IT problems, we conducted a survey of more than 500 senior business and technology executives worldwide. We followed up the survey with in-depth interviews of 30 chief information officers and other senior leaders from a broad cross-section of companies. One thing we confirmed quickly was that Schwab is far from alone in its belief that it is struggling to harness IT to its growth strategy. Only 18% of respondents believed

that their company’s IT spending was highly aligned with business priorities — that IT, in other words, always or nearly always established and acted on priorities that supported their business strategy. Only 15% believed that their IT capability was highly effective, that IT ran reliably, without excess complexity and always or nearly always delivered projects with promised functionality, timing and cost. The survey also showed that almost three-quarters of respondents believed that their IT capability was neither highly aligned nor highly effective, again consistent with the general patterns we have seen. (See “The Path to IT-Enabled Growth.”) These companies occupy what we call the “maintenance zone.” IT at these companies is generally underperforming, undervalued and kept largely separate from a company’s core business functions. Corporate management budgets the amounts necessary to keep the systems running, but IT doesn’t offer enough added value to the business and often isn’t expected to. Companies in the maintenance zone recorded a slower rate of growth — 2% below the three-year average in the survey — while spending the same as the average every year on IT. The Path to IT-Enabled Growth

Our survey revealed a pattern to IT disappointment and failure. It came in two clear tones: general ineffectiveness at bringing projects in on time and on budget and ineffectiveness with the added complication of alignment to an important business

objective. In the latter cases, projects dragged down more than their own weight. We call this quadrant, at the top left of the chart at right, the “alignment trap.” Eleven percent of our survey respondents were snared in the alignment trap. These companies spent 13% more than the average company on IT yet posted 14% lower revenue growth on average over three years. In the quadrant below them, a full threequarters of company respondents drifted in the “maintenance zone.” Here, IT projects were treated like plumbing, less aligned to major business objectives and bumping along at slightly below-average levels of growth despite average levels of IT expenditure. Results for the remaining companies were much better. About half of these focused more on execution, and their effectiveness at getting IT projects up and running on budget meant their costs came in 15% below the average for the entire sample. Despite the fact that these projects weren’t thoughtfully tied to business objectives, their companies’ revenue grew at 11% above average over three years. In the final quadrant, the top right, companies highly effective at making IT projects happen and at aligning them to business objectives took the prize. Their three-year average sales growth exceeded the average by 35% and their costs were 6% lower. Contrary to conventional wisdom, the path to IT-powered growth lies first in building high effectiveness and only then ensuring that IT projects are highly aligned to the business

Note: Based on 504 responses from 452 companiesSource: Bain Analysis READ LESS Only about one in five senior executives reported in the survey that their company was highly aligned, fairly consistent with our experience. When we looked at the 11% of companies in which IT was highly aligned but was not highly effective, however, we found those companies were considerably worse off than their counterparts in the

maintenance zone. While their IT spending was 13% higher than average, their threeyear growth rates were 14% lower than average. This finding was startling, even given the limitations of the survey, which combined self-reported assessments of senior executives with actual data on IT investment and business performance at their companies. It underscored the pattern we encountered at a number of companies with ample IT budgets and strong alignment, but not much to show for it. (See “IT Hopes Vs. IT Realities.”) In these cases, it seemed to us possible, even likely, that the alignment prescription could be worse than the disease. Our thinking has been shaped in part by Schwab and a handful of other companies that have been learning to break out of the trap and create IT organizations that enable growth rather than inhibit it. The number of companies that have already succeeded at this task is small: In our survey, only 7% of respondents said that their IT organizations were both highly aligned with business strategy and highly effective in delivering what was asked of them. But those companies as a group recorded a compound annual growth rate over three years that was 35% higher than the survey average. More surprising still, they were spending 6% less on IT than other respondents. For a large company, the stakes in getting IT right can thus be enormous. In some cases, companies can save hundreds of millions in costs, while increasing sales growth dramatically.

How have these companies managed to reach that point? While each has followed its own path, there are some common approaches shared by the high performers. Several have diagnosed early on where their company falls on the spectrum of effectiveness and alignment. (See “Diagnosing Your IT Pain.”) For the majority of companies, the single most important task has been to forget about enhancing alignment for the moment and to focus first on increasing the effectiveness of the IT organization. In order for IT to enable growth, that first move is critical — and it’s the one that companies often get wrong. Maintenance-zone companies that try to move directly upward on our chart into the alignment zone, rather than rightward into the effectiveness zone, typically end up in Schwab’s contradictory position. They are traveling in the right general direction, but they’re following a road that can’t get them to their destination. Because they believe that alignment is the key solution to their IT troubles, they can wind up spending enormous amounts of money without solving their problems.

Investing in Effectiveness

The legendary inability of IT organizations to do things quickly continually mystifies people outside of IT and frustrates those within it. “This little change I’m requesting is going to take three months?” asks a sales manager, incredulously. The IT manager he is talking to knows that the change isn’t so little — because of overlapping systems,

adjustments need to be made in hundreds of different places — but she can’t expect him to understand all the machinations involved. Both feel that the IT system is like a swamp: Projects just get bogged down. Some companies spend more than 80% of their IT budget on maintenance, patches, upgrades and other routine expenses, and less than 20% on the development of new applications and capabilities. All told, 85% of our survey respondents reported that their company’s IT capabilities were not highly effective. They were either mired in the maintenance zone or snared in the alignment trap. Only 15% placed themselves on the highly effective side. Note that high effectiveness alone made a substantial difference to a company’s economics. Even companies that don’t consider their IT organizations highly aligned were spending 15% less than average, and their growth rates were 11% higher. For many companies, these are numbers that justify considerable investment in pursuing effectiveness. Making your company’s IT organization effective does not necessarily involve replacing people in IT. You could hire a whole new staff only to find they run into the same problems as the old staff (probably more, since they won’t be familiar with the crazy quilt of IT systems built up over the years). Rather, in our experience, we have found three critical principles most significant in moving organizations to high effectiveness.

Emphasizing Simplicity.

“Simplicity is the ultimate sophistication.” The words are Leonardo da Vinci’s, but the mantra should be that of every CIO. Any company’s first step should be to focus relentlessly on reducing complexity rather than increasing it. That sounds like an unexceptionable nostrum, except that the cheapest and quickest way to respond to individual demands for improvements from business units is almost always to do something that increases complexity. Reducing complexity means developing and implementing companywide standards. It means replacing legacy systems where possible and eliminating add-ons. It means building new solutions on a simplified, standardized infrastructure rather than extensive customizing or more layering on top of whatever happens to be there. Such an approach requires a greater investment of time and money upfront and will lead to lower costs only later. For that reason alone, it can be hard for companies to make the commitment. One company that was able to make such a commitment is De Beers S.A. When Debbie Farnaby became its director of information technologies four years ago, she found a huge number of different application programs in use at De Beers facilities around the world. The problem wasn’t lack of alignment. IT staffers worked closely with production managers at each mine and would develop applications — often in the computer language they happened to be most familiar with — to do whatever the mine managers needed. But there was no standardization, so a program written at one

mine wouldn’t necessarily work for another. In addition, the IT organization was bleeding money: It spent roughly 20% of its total software investment every year on licensing fees alone. Farnaby began the process of replacing most of the local applications with a single SAP enterprise resource planning system. At the time of our interview, she had rolled out the new system to nearly all of De Beers’s locations worldwide. It had taken three and a half years and cost 320 million rand (about $45 million at current exchange rates). But the benefits have been substantial. The new system has allowed her to reduce IT costs and head count every year. It has standardized a wide variety of applications across the entire company. It generates information faster than ever before. Financial reports, for instance, used to take two weeks; they can now be produced in four days. In De Beers’s case, the cost of the new system wasn’t nearly as great as it seemed: The savings on software licensing costs alone were nearly sufficient, over time, to cover the entire amount.

“Rightsourcing” Capabilities.

An effective IT organization needs a wide variety of capabilities, ranging from staffing the help desk to creating and integrating innovative business applications. Traditionally, most organizations did as much as they could in-house. Today nearly all the capabilities any company might want are available from a range of suppliers, including low-cost IT specialists in India and elsewhere. Choosing the right source for

a capability — maximizing effectiveness while minimizing costs — is thus a critical consideration. A useful method of making the best decisions about sourcing is to ask yourself a series of questions. First: Is there value our company’s IT organization can add that will merit keeping the work in-house? Outsourcing, whether it means sending the work to offshore vendors or relying on prepackaged solutions, is nearly always cheaper than developing solutions in-house. Still, in-house development often makes sense for applications that are strategic in nature or critical to competitive differentiation. Cleveland-based National City Corp., for example, used to rely heavily on standard banking software from a leading vendor. But a new CIO, Joseph T. McCartin, determined that in-house development in selected areas would actually allow the bank to differentiate itself from its competitors. Four years later, McCartin’s department has developed customized applications for statements, wire transfers, treasury management, pricing, billing and a loyalty program, among others. The in-house programs, said Paul Geraghty, wholesale banking executive vice president, are “much smoother to use, much more navigable and integrate better with other products that we have under development. The look and feel is much more consistent across National City products, and I think clients will therefore be inclined to buy more.” Another question: If outsourcing seems to be indicated, can we learn to outsource effectively? Many of the CIOs we spoke with emphasized that they needed a deep

understanding of the tasks or projects being outsourced, so that vendors could be held accountable for performance and price. That often means doing the job yourself for a while until you understand it well enough to send it outside. When De Beers installed its SAP system, for instance, it ran its own “customer competence centers” (as SAP calls centers for coordination and technical support) for the first 18 months. Recently, CIO Farnaby has decided that the company understands the centers’ issues, so she is exploring the possibility of outsourcing center management. Similarly, De Beers decided to outsource its help desk — but not before Farnaby’s team had educated users throughout the company about how to use a help desk effectively. Today the cost of the help desk service is 66% below what it was when it was run in-house. Still another question: Can we unbundle particular IT projects, separate out the routine or less strategic parts from those requiring more interaction with management or customers and outsource only the former? Selective Insurance, for example, outsources to an Indian vendor some legacy systems that will not be rebuilt. Meanwhile, Selective develops new applications in-house. But the company also breaks down work into segments and makes individual decisions about each segment. “Routine work — for example, rate changes — we can spec out here,” explains CIO Connell. “Then the programming and initial testing will be done in India, and we will bring it back for integration and user testing.”

Whatever the sourcing decisions, companies need to revisit them regularly as their strategic priorities and in-house capabilities change.

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