Is your CIO funding projects or business capabilities?

Context

Earlier, the CIOs tended to organize their teams and functions around specific projects. Wherever possible, consolidation was touted as the panacea! The seemingly good candidate is RTB (Run The Business) function that typically “Keep the lights on.” Support, both application and infrastructure, falls into this category.

As the rest of the units start aligning themselves to operate nimbly in an agile and digital world, what happened to the IT organization? Many CIOs have simply reorganized them using fancy terms but essentially retaining the same flavour. Ask them about the IT budget. They will talk about RUN and CHANGE. Drill them into more detail, for example the cost of introducing a new product and see their reaction!

In this blog, I share the experiences of working with CIOs and IT organizations around two important aspects.

• How to look at the IT budget and get answers quickly?
• How to align and develop an operating model?

Let’s understand the changing paradigms to the meaning of IT as organizations go digital and embrace new technologies:

Diagram #1: Emerging interpretation of IT in the digital context

In short, business strategy automatically becomes IT strategy. It is no longer possible for CIOs to emerge victorious when the entire business is going southwards! The CIOs are in the thick of things.

Funding Model

Diagram #2: IT Funding by Portfolio

Typically, the CIOs look at the funding by any of the three categories:

1. Type of focus - RTB (Run the Business), CTB (Change the Business) and Grow (Linked to Business Growth)
2. Budget (Cost of personnel, license, hardware, storage etc.)



Diagram #3: IT Funding by Budget

3. Financial accounting sense (Capex / Opex)

Diagram #4: IT Funding by Accounting

These types of funding keep the technological interdependencies and the business led IT aspects deeply hidden. The real cost drivers become virtually impossible to find quickly. In a way, this explains all the IT costs but presents an incomplete view. This may lead to investment silos and/or duplicates. The flexibility needed to understand digital investment is not the hallmark of these methods. Moreover, justifying the legacy refresh takes inordinate time.

Diagram #5: Allocation of IT Budget

Instead, allocate the IT budget by product line. For this, work with business to understand the strategic / relative importance of the product lines annually. Empower the PLMs (Product Line Managers) with the discretion to allocate funds to maintenance, technology refresh, innovation etc. They should have the wherewithal to reallocate the funding as priorities change.

In the diagram #6 below, an illustration is given. The key focus area is to build new business capabilities and ensure the business strategy is not impeded by IT. 

• New business capabilities (BC) are financed by respective business area budgets. Examples can be subscription based services like SaaS or getting third party services.
• New business capabilities are funded by IT to the extent of technology implementation or major changes/enhancements.
• Then comes the "Maintain to Operate" layer that focuses on licenses, upgrades, hardware/software maintenance, staffing etc.



Diagram #6: Shifting Budget Patterns



• Finally the digital foundation layer that addresses cloud / building new platforms etc. This directly mitigates operational risk.

As can be seen, the key differences to this type of approach are:

• Part of erstwhile IT budget for funding new products or building new capabilities is shifted to the respective business unit or area.
• Business area is the owner of the budget for introducing new capabilities.
• The funding that is required for digital foundation is separate from maintenance.
• The linkage of technology to the business capability is clear.

What comes out clearly is that enterprise wide view of technology spending covering business-led IT. This view complements the traditional views to gain quick insight into cost of transforming the landscape, cost of sustenance of new capabilities as well as introduction of newer ones. As the technology funding is clearly aligned to business, the ability of IT to influence and respond increases.

Operating Model

Let's start with what we aspects we should expect from the IT operating model.

• Faster time to market
• Greater business integration
• Flexible ways of working
• Improved customer experience

For this, we need to shift the mindset from projects to products. What are the differences?

Diagram #7: Redesigned Target Operating Model

How do we factor them in the operating model?

• Diagrams 7 and 8 give an overview of how to visualize these changes in the model and consequently the organization of the teams.
• Choose products or business capabilities over projects.
• Each capability is a vertical tower that comprises all IT operations pertaining to it. RTB and CTB work will come under this.
• The product line manager is empowered to organize his teams, allocate budget and change funding.
• These operations are done on the product lines in an agile / DevOps / CI manner.
• Everything cannot operate in a vertical stack. IT has to spot scaling / efficiency opportunities wherever possible. What is not common to each capability but to the entire organization is (1) the building blocks of application and (2) Cloud based scalable infrastructure. These may include shared applications, shared ERP, shared platforms, shared BI and shared data centre etc.

Diagram #8: Team Organization

Conclusion

It makes immense sense to appreciate the paradigm changes in the way IT is viewed and linked to the business. This should logically flow into the way the IT teams are structured and funded. 

What are the advantages of reorganizing the IT along these lines?

• Business knows easily the respective IT to discuss/contact.
• As the IT services each business capability, the skill sets / knowledge of understanding of the business grows within that unit. This means informed resources that have the ability to respond to changes.
• IT supports the business more efficiently in terms of understanding the cost components and come up with answers to question like – what will be the time taken / savings in IT if a product line is killed? what will be the incremental cost of introducing a new product in a particular market? Etc.
• The IT landscape becomes less complex and easier to understand/operate.
• The portfolio metrics, at each capability level, make direct sense to the business head as well as the CIO.

On a lighter note: If a CIO's lingo becomes as close to the business and everyone understands the CIO's response in the first instance itself without seeking further clarifications, latch on to that CIO for God's sake!