IT modernisation: An exercise in alignment A report from the Economist Intelligence Unit Sponsored by Oracle and HP IT Modernisation: An exercise in alignment Preface IT Modernisation: An exercise in alignment is an Economist Intelligence Unit briefing paper, sponsored by Oracle and HP The Economist Intelligence Unit’s editorial team wrote the report, and the findings and views expressed not necessarily reflect those of the sponsors Dan Briody was the author of the report and Katherine Dorr Abreu was the editor Mike Kenny was responsible for layout and design Our research drew on two main initiatives We conducted a global online survey in February 2009 of 170 executives from various industries To supplement the results, we also conducted in-depth interviews with executives from around the world about the challenges and opportunities they face relating to IT modernisation Our thanks are due to all who contributed to the report for their time and insight June 2009 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Executive summary A ll organisations, regardless of size, industry or location, face the constant challenge of maximising the contribution of their information technology (IT) infrastructure and applications to achieving their business goals To so, organisations must often figure out how to use existing systems more effectively, or modernise them to better perform the tasks at hand At times, this requires replacing legacy systems that no longer meet the needs of evolving business practices and expanding markets IT is an important part of any organisation and a well-planned and executed modernisation strategy is often crucial to the rapid evolution of the IT systems and skills that support strategic business functions In order for companies to stay competitive and better serve their customers, their IT systems must also be competitive, leading to simpler and more streamlined business operations, saving money and time A survey conducted in February 2009 by the Economist Intelligence Unit, sponsored by Oracle and HP, shows that in most companies both the business functions and the IT function understand the potential benefits of modernisation But that does not mean that most companies know how to it right The process itself can be complex, and requires adequate analysis of business needs and an understanding of existing systems and applications Some of the same mistakes that have dogged IT departments for decades still undermine effective IT modernisation strategies And perhaps the most debilitating mistake is improper alignment of IT modernisation efforts with strategic business goals What is IT modernisation? IT modernisation refers to major changes in a company’s technology infrastructure, applications and overall operations to replace legacy systems It requires new technologies, skills, operational practices and capabilities that are intended to improve how a company does business While it may occur in an iterative form, it is different from isolated upgrades of applications and hardware Legacy systems are those that still function but no longer support and deliver optimally against the organisation’s operational and strategic goals © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Who took the survey? One hundred and seventy senior executives from around the world took part in the online survey Thirty-three percent of respondents are located in Europe, 29% in North America, 28% in the Asia-Pacific region and 9% from the rest of the world Fifty-one percent of respondents are C-level executives They have a broad range of roles, with 41% responsible for general management, 39% for strategy and business development, 28% for IT and 23% for finance Respondents represent a broad range of industries and company size, and 46% work for organisations with annual revenue of more than US$500m For further information, see the appendix at the end of this report Where respondents are located (%) North America 29 Asia-Pacific 28 Europe 33 Rest of World 10 Source: Economist Intelligence Unit survey, February 2009 The global economic downturn is putting pressure on organisations and their investment strategies Survey results show that many companies are cutting back or delaying IT modernisation projects, and demanding faster and higher returns on their investments Yet now is the time for companies to position themselves competitively for the longer term, and an effective IT strategy may contribute to that goal The companies that are most successful with IT modernisation projects are those that let market forces drive the project, focusing on gaining new and keeping existing customers And they let the business own and direct the project, to ensure there is alignment between IT and business strategy © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Introduction T he computer systems and applications that constitute today’s information technology (IT) pervade every part of every business in every industry IT’s rapid evolution challenges businesses to extract the most benefit from their systems and applications, and to update them as the organisation’s needs evolve When they embark on a modernisation project, companies must have business needs clearly in sight, and carefully align their IT strategies with the broader corporate business strategy Survey results show that global business executives recognise the strategic value and importance of IT modernisation Across the board, companies are actively engaged in modernisation efforts Some have recently completed and others are in the midst of such projects; still others are planning to modernise their systems In fact, just 17% consider it sufficient to upgrade their systems and only 5% of companies say they have no plans to modernise The vast majority of companies currently engaged in IT modernisation are satisfied with the results, according to the survey Of the respondents whose companies have recently completed an IT modernisation project, 90% are satisfied or better Outward-facing factors such as improvements in What best describes your company’s status with regard to IT modernisation? (% respondents) Our company is in the midst of an IT modernisation project 18 Our company recently completed an IT modernisation project 12 Our company is in the planning stages of an IT modernisation project 15 Our company is selectively modernising our applications and infrastructure 28 Our company is considering an IT modernisation project Our company is constantly upgrading our systems and does not believe that IT modernisation is necessary 17 Our company has no plans to modernise IT Source: Economist Intelligence Unit survey, February 2009 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment For companies that have implemented IT modernisation projects, improved quality of service and revenue-generating capabilities are top reasons for satisfaction (% respondents) On budget, on time Met or exceeded cost saving objectives 17 Infrastructure and applications environment simplified 22 Minimal service disruptions throughout the process 22 Improved revenue-generating capabilities 50 Quality of service improved 67 Source: Economist Intelligence Unit survey, February 2009 quality of service (chosen by 67% of respondents) and revenue-generating capabilities (50%) top the list of benefits Inward-facing factors, such as simplification of the infrastructure and applications environment (22%), are also important but rank lower The bottom line is that IT modernisation is well understood, widely in use, and can bring concrete results if executed properly Why modernise? Carol Rizzo, a technology consultant and former chief technology officer (CTO) of Kaiser Permanente, AIG and Citibank, equates the IT unit that does not modernise to a family living in a 200-year-old house: “The next new appliance you plug in is likely to short circuit the whole house.” Although the value is apparent, IT modernisation is not without its challenges For one thing, these projects can be costly and complex They require a great deal of planning and co-ordination, and can take many months to bring to fruition In addition, the return on the often sizeable investment sometimes takes time to kick in, and in these tough economic times that can put a strain on resources To some, IT departments should constantly upgrade their systems, incrementally improving and adapting them as the business needs change But the reality is quite different There are dozens of ways that IT systems can become suddenly and irrevocably out of date: software vendors go out of business or are acquired; global market trends shift, as with outsourcing or globalisation; and businesses are bought and sold Iterative upgrades simply cannot keep up with the rapid pace of business change “What ends up happening is you modify your existing applications to meet new user demands,” says James Riley, director of indirect client services at Wilmington Trust Corporation, a Delaware-based bank with US$36bn under management “You bolt something on here, you patch something up there, but everyone knows that you can’t keep that up forever.” When reality finally does catch up, a thoughtful and thorough IT modernisation effort is the only solution But our research shows that the single most important criterion that must be met for an IT modernisation project to be a success—alignment between IT and the strategy business direction of a company—is elusive The need for alignment is not new—it has been a challenge since IT entered the business world For the most part, however, it remains unresolved Both the survey and interviews with business executives show that if an IT modernisation effort is not properly aligned with strategic business imperatives, it is likely to fall short We believe this alignment to be the single most important prerequisite for IT modernisation success © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Key points l IT modernisation is most likely to succeed when driven by market forces l Outward-facing departments are most likely to benefit from IT modernisation l Costs and productivity are the biggest concerns for companies considering IT modernisation Heavy lifting “Either you make these investments in IT modernisation and beat the competition, or you’re going to lag behind and have to invest even more to catch up.” Robert Keefe, senior vicepresident and CIO, Mueller Water Products W hen done right, IT modernisation is valuable And it is more likely to be done right if it is driven by market forces By and large, the survey shows that these projects are not being initiated for costreduction or productivity-increasing purposes, although they often yield those improvements as well They are instead focused on outward-facing, strategic business imperatives “Either you make these investments in IT modernisation and beat the competition, or you’re going to lag behind and have to invest even more to catch up,” says Robert Keefe, senior vice-president and chief information officer (CIO) of Mueller Water Products, a US$1.8bn manufacturer of water infrastructure and flow control products based in Atlanta, Georgia “Internal drivers are opportunity costs…if I’m saving within the IT budget, that’s always nice But if my company can come out of this in better shape than the competition, that’s a much more compelling argument.” The data support this sentiment More than one-half of the survey respondents say that remaining competitive is one of the top external drivers of IT modernisation efforts in their company Forty-three percent say responding to customer requests is an important driver as well When asked what internal factors drive IT modernisation efforts, respondents also point to the factors most closely tied to the Business process changes and improvements drives IT modernisation What internal factors are most likely to drive your organisation towards an IT modernisation project? (% respondents) Regular upgrades and maintenance 20 Internal cost cutting 21 New strategic corporate direction 22 Need to improve agility 27 Business process changes and improvements 54 Source: Economist Intelligence Unit survey, February 2009 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Follow the leaders “Undervalued” IT departments struggle for attention of key business unit stakeholders (% respondents who consider engaging key business unit stakeholders the biggest challenge when aligning IT modernisation with business goals) When it comes to strategically important projects like IT modernisation, it pays to learn from the companies that it well In the survey, respondents were asked to evaluate the quality of their IT department Eleven percent identify their firm’s IT department as being world class; 33% say it is high quality; 41% identify the IT department as delivering acceptable results with adequate technology and skills; and 14% say their firm’s IT department is undervalued We then cross-referenced the responses to get a clearer picture of how the companies stack up First of all, world-class and high-quality IT departments support IT modernisation and are actively engaged in its execution Of the respondents who evaluate their IT departments as world class and high quality, more than one-half say their organisations are either planning, are in the midst of or have recently completed an IT modernisation project Of those who consider their IT departments to be undervalued, 35% either not believe IT modernisation is necessary or have no plans to it Unsurprisingly, undervalued IT departments also struggle more to get an audience with senior management and suffer greater budget limitations, two closely related phenomena But perhaps the most telling difference between companies whose IT departments are considered world class and high quality and those that struggle is what drives their IT modernisation efforts When asked what they thought were the biggest risks for not modernising, world-class and high-quality IT departments are focused on external, “Undervalued” IT departments 52 “World-class” or “high-quality” IT departments 27 Source: Economist Intelligence Unit survey, February 2009 market-facing drivers, like falling behind the competition and poor customer service Undervalued IT departments are more concerned about rising maintenance costs and expensive catch-up processes And of course, IT departments identified as world class or high quality have a much easier time engaging key, high-level stakeholders in the IT modernisation process The difference here is stark When asked which is the most challenging part of aligning IT modernisation with business goals, 27% of world-class or highquality departments say engaging key stakeholders, while more than one-half of undervalued IT departments complain of the same thing All of this leads to one of the most dramatic differences between the best and rest: budgeting An IT modernisation project is not something to skimp on Done right, it is as strategic as any other project Furthermore, when an IT department is valued, and engaged with the business side, it is more likely to have sufficient resources Only 26% of worldclass IT organisations are having their IT modernisation budgets reduced, even in the midst of such a challenging economy But 68% of undervalued IT departments are seeing reductions in their IT modernisation budgets What best describes your company’s status with regard to IT modernisation? (% respondenst) “World class” and “high-quality” “Undervalued” 19 Our company recently completed an IT modernisation project 20 Our company is in the midst of an IT modernisation project 13 15 Our company is in the planning stages of an IT modernisation project 17 27 Our company is selectively modernising our applications and infrastructure 26 Our company is considering an IT modernisation project 17 Our company is constantly upgrading our systems and does not believe that IT modernisation is necessary 17 Our company has no plans to modernise IT 17 Don’t know/Not applicable Source: Economist Intelligence Unit survey, February 2009 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment market, including business process changes (54%), improved agility (27%) and new strategic corporate direction (22%) In fact, when we asked respondents which departments were most likely to benefit from IT modernisation efforts, sales (chosen by 41% of respondents), finance (38%), and customer service (36%) top the list Administrative (18%), research and development (18%), human resources (10%) and legal (2%), all traditionally inward-facing departments, rank at the bottom But there is a large disconnect between what drives IT modernisation, and the benefits derived from it, and the concerns that organisations have about it Despite all of the optimism about the capacity of IT modernisation to generate revenue and help gain market share, companies have reservations about these projects In fact, 53% of respondents claim cost of implementation as their biggest concern The next closest response in terms of number of respondents is productivity disruptions, chosen by 35%, followed by preserving functionality (32%) What are organisations’ biggest concerns about IT modernisation? (% respondents) Preserving business content 25 Integration with other systems 27 Preserving functionality of applications 32 Productivity disruptions 35 Cost of implementation 53 Source: Economist Intelligence Unit survey, February 2009 It is easy to understand why costs and productivity top the list of concerns These are fearful economic times, and big capital expenditure projects carry an extra burden “It’s difficult to talk sensibly about long-term strategic issues right now,” says Peter Whatnell, CIO of Sunoco, a petroleum and petrochemical products manufacturer and marketer based in Philadelphia, and president of the Society for Information Management “Every dollar of capital expenditure is being scrutinised now, so it’s not unreasonable that IT projects must also stand up and be counted.” For some companies, however, a global economic slowdown can be seen as a reason to modernise “This is a once-in-a-lifetime opportunity to use a real crisis to think about our business and how IT supports it,” notes Jeff Neville, CIO of Eastern Mountain Sports (EMS), a retailer of outdoor gear based in New Hampshire But what about all those expected benefits from IT modernisation, such as increased revenue? And what about the fact that survey respondents rank poor customer service and falling behind the competition as the top two risks of not modernising? This disconnect between the benefits of IT modernisation and the costs of implementing it reflects a much deeper, more fundamental disconnect between the IT function and those who decide the strategic direction of an organisation The alignment gap occurs when IT is not considered an integrated, strategic part of the business, and is not managed as such © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Key points l Lack of alignment between IT and business is the biggest barrier to successful IT modernisation l Engaged executives help ensure success if business strategies shift during project implementation l IT modernisation projects should keep end users in mind Mind the gap “In today’s challenging business environment, a CIO must understand business and the language of the leadership team.” Ajay Dhir, Group CIO, Jindal Steel Limited N early all of the obstacles that stand in the way of effective IT modernisation projects can be traced back to a single, fundamental flaw: the misalignment of business and IT Without doubt, these projects are comprehensive, costly and time consuming Any project with that many moving parts has a lot of potential points of failure, and requires thorough project management But when IT departments run into budget limitations and unrealistic time expectations, or struggle to choose the right technology, it is often because the costs, scope, goals and, most importantly, benefits of IT modernisation have not been properly communicated to and from the business And much of the onus for effective communication rests with the CIO “In today’s challenging business environment, a CIO must understand business and the language of the leadership team,” says Ajay Kumar Dhir, Group CIO of Jindal Steel Limited, in India “Mere technical and professional competence, and just being part of the ‘C’ suite is not enough The contemporary CIO is expected to understand the business—its purpose, goals, vision and mission—very well, and align the IT strategy of the organisation with it.” Consider these simple, telling statistics: 78% of survey respondents say that the participation of the chief executive officer (CEO) in IT modernisation projects is either extremely important or somewhat important; 83% say the same of the chief financial officer (CFO) and 77% of the chief operating officer (COO) Contrast these figures against who respondents say is likely to be involved in an IT modernisation project, and the alignment gap becomes readily apparent: CEO—38%; CFO—34%; COO—19% “There is a huge difference between what management thinks of IT modernisation, and what IT thinks of IT modernisation,” says Ms Rizzo Often each believes the other should be leading the project “IT’s role is to help guide [business], presenting options, benefits and challenges, then execute on the senior business management decisions Otherwise there is a risk of misalignment between expectations and what is implemented,” says Ms Rizzo Sarbanes-Oxley (SOX) compliance in the US has forced many companies into unplanned modernisation © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment management services department in the Americas region “We’re staying flexible on the management and technology side of the project.” At Volkswagen, IT is considered a central part executing the company’s goals But for some companies, communicating the strategic nature of IT modernisation is more of a challenge “If you can get senior management to start thinking about IT infrastructure like they their manufacturing equipment, then you can have a cogent discussion,” says Mr Keefe of Mueller Water Products “And that discussion is all about benchmarking against your competitors, getting real-time information on inventory, shipping schedules, customer service Now you’re speaking a language they can understand.” Mr Keefe recommends engaging the C-level executives early and often, but he is even more keen on recruiting their staff as advocates of an IT modernisation project He calls this process “socialising” the plan “The head of operations, head of supply chain, head of manufacturing—they need to be involved in the development of the plan, all the way from shaping the assessments to bringing the plan to top management, to actual implementation,” he says “Those are the people who keep the message going throughout the course of a multi-year project.” When Mr Keefe began his modernisation efforts, he socialised the plan even as he was executing it “This is not a single-threaded process,” he says As he audited his technology and skills portfolio, a process that took about nine months, he was already addressing the so-called low-hanging fruit, or CASE STUDY: Ryder System Inc Ryder is a US$6bn transport and logistics company based in Miami It provides commercial fleet leasing, rental, maintenance and supply chain solution services for some of the most well-known companies in the US From an IT perspective, 75-year-old Ryder is typical of many companies its age: it has a mix of old and new systems that support its business Kevin Bott, senior vice-president and CIO, says that Ryder is constantly upgrading on an as-needed basis, “always driven by the business need” And the company does not often take on sweeping modernisation projects without a significant return on investment Three years ago, the company decided to make some significant changes to the way its Dedicated Contract Carriage division in its 11 supply chain business operates Essentially, the firm wanted to move from a distributed operation model to a more centrally controlled one, with the ability to extract and leverage real-time information from the IT systems that supported the business “These are all strategic business values,” says Mr Bott Mr Bott’s team collected information for a year to define the scope of the project As they audited the IT portfolio that would be affected, they kept the business side involved, which led to additional requests for changes What was a one-year preparatory period dragged on into a second year And then, after getting board approval for this multi-year project, the president of the supply chain business, who had championed the effort, resigned “We had already spent some money to a detailed design, and we were one-third of the way through the pilot, when they hired the replacement,” says Mr Bott “We encountered some scepticism, and had to revalidate the savings, especially in light of the current economic situation.” As a result of the disruption in leadership, Ryder’s IT modernisation project was delayed yet again But ultimately, the company decided to move forward with it as planned, but on a somewhat reduced scale “These projects are owned and driven by the business, and they really understand this stuff So there is still a business case there for this project That’s why we’re going ahead with it,” Mr Bott says Without such close alignment between Ryder’s strategic business objectives and its IT modernisation project, the efforts to change the company’s supply chain operation would probably not have survived the challenges of time and changes in leadership The time invested in finetuning the project and getting buy-in from the business side was crucial to its implementation © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment “An IT upgrade has a direct impact on organisational culture and values You must involve employees at all levels of the company, especially the end users That helps the project stay focused on the ‘customers’ of the technology.” finding small, easy fixes that would save money or improve efficiency By doing this, Mr Keefe helped to establish the IT function’s credibility with key business partners, and paved the way for more dramatic changes down the road Managing up is an undeniably important part of the IT modernisation process But because these projects can affect virtually every part of a company, experts warn IT leaders not to forget the end users “The best thing I can recommend is to remember that an IT upgrade like this has a direct impact on organisational culture and values,” says Terry Chulavachana, an IT adviser in Thailand “You must involve employees at all levels of the company, especially the end users That helps the project stay focused on the ‘customers’ of the technology.” Part of the problem is that IT and non-IT employees disagree about the level of interaction that is needed between the two groups For example, when asked to identify the most challenging aspect of aligning IT modernisation with business goals, 40% of IT function respondents say limited interaction between IT and high-level, strategic decision-makers Only 29% of non-IT function respondents agree Terry Chulavachana, IT adviser IT and non-IT out of synch as to what impedes aligning IT modernisation with business goals What is the most challenging aspect of aligning IT modernisation with business goals? (% respondents) IT respondents Non-IT respondents Difference Budget limitations 53 45 Limited interaction between IT and high-level, strategic decision-makers 40 29 Lack of business case/ROI study 17 12 Source: Economist Intelligence Unit survey, February 2009 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Key points l Challenging economic times often force companies to rethink IT strategies l A sharper focus on costs makes on-demand services an attractive alternative for many companies l Proving return on investment (ROI) helps keep momentum in IT modernisation projects Economic woes bring changes in strategies and goals T he global recession is adding to these challenges Budgetary constraints make it more difficult for senior management to focus on the role IT modernisation can play in strengthening a company’s competitive stance as it emerges from the current downturn Survey data show that of companies planning or considering an IT modernisation initiative, nearly onehalf are either scaling those plans back (31%) or indefinitely delaying them (18%) Conversely, 41% say that the economic environment is having no or very little impact on their decisions, and 10% are actually accelerating their efforts There is no doubt, however, that during such uncertain times, many companies are rethinking their IT modernisation strategies A full 62% of respondents say that the economic environment has made it more difficult to get approval for IT modernisation projects in the past 12 months Other companies are trimming budgets for those plans: 44% of respondents say that funding for IT modernisation projects has been significantly reduced At the same time, companies are expecting faster implementations (61%) and quicker ROI (57%) from those IT modernisation projects To reconcile these two seemingly contradictory courses of action, IT departments are changing their strategies “I can’t go into a room with other IT leaders without at least one person talking about a move to online Economic slowdown affects IT modernisation plans (% respondents who agree with the following statements) Funding for IT modernisation projects at my company has been significantly reduced 44 Our company is more focused on determining return on investment for IT modernisation initiatives than a year ago 57 Executives expect a faster implementation cycle on IT modernisation projects than a year ago 61 Getting approval for IT modernisation initiatives has become more difficult in the past 12 months 62 Source: Economist Intelligence Unit survey, February 2009 13 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Size matters When it comes to IT modernisation, there are some significant differences between the approaches of large and small companies To highlight these differences, we compared the responses of those with annual revenue of less than US$500m with those with revenue of more than US$500m per year The results are highlighted below l Smaller companies are less likely to scale back their IT modernisation efforts Just over 41% of big businesses are scaling back their IT modernisation efforts because of the weak economy, compared with only 23% of small businesses In fact, 50% of small businesses say the economy will have very little or no impact on their IT modernisation plans, while 29% of large companies agree This may be because smaller companies are spending less on such projects, or have smaller projects to begin with l Big businesses are more likely to be The online service model “has gone from a gleam in someone’s eye to a real thing in a heartbeat, driven entirely by economic circumstances.” Peter Whatnell, CIO of Sunoco Inc and president of the Society for Information Management 14 driven by cost-cutting Thirty percent of large companies say internal cost-cutting is likely to drive modernisation efforts Only 13% of small businesses say the same In contrast, smaller firms are more likely to be driven by business process change or a need for increased agility l Large companies are more likely to be stifled by a lack of interaction between IT and strategy leaders Perhaps unsurprisingly, larger companies have trouble cutting through the bureaucratic ranks to get access to the high-level, strategic business leaders who are so critical to making IT modernisation a success Thirty-six percent of large companies cite this as the most challenging aspect of aligning modernisation with business goals, while only 24% of smaller companies struggle with the same problem l Both large and small companies are concerned about cost The cost of implementation ranks highest on the list of concerns for both large and small companies But smaller companies are far more concerned about preserving functionality than large companies l Small businesses are more focused on customers When asked about the biggest risks in not modernising, large and small companies have very different things to say Large companies are far more concerned about escalating maintenance costs Small businesses fear deteriorating customer service and falling behind the competition the most, perhaps because every customer counts for a small business Based on our findings of what makes an IT modernisation project a success, it would appear that small businesses have a greater chance of effectively modernising for two reasons First, there is greater interaction between IT and strategic business leaders in small companies; and second they are focused on the external-facing, market-driven forces It is possible the larger companies can learn some useful lessons here services,” says Mr Whatnell of Sunoco “And not just as an experiment They are really doing it, with a large number of seats, and doing it quickly.” Mr Whatnell is referring to the shift to on-demand applications, where the software is hosted by the application provider and offered as a service over the Internet The appeal of this model is that IT departments not need to buy and maintain expensive enterprise application licences Nor they need to buy and maintain the hardware those applications run on “It’s gone from a gleam in someone’s eye to a real thing in a heartbeat, driven entirely by economic circumstances,” he says Other companies are being more selective about what they modernise For example, Mr Keefe of Mueller Water Products is focusing his company’s efforts on a cost-saving transport management system “But instead of making it all one large project, we built language into the contract that allows us to expand the project later on at the same discounted rate,” says Mr Keefe “And all along the way we’re proving the return on investment, so we continue to show management the benefits, and keep the momentum going.” Times like these require creative approaches to IT modernisation But most experts agree that shelving plans entirely can be a disastrous route Many point to 2001, when the last recession—the Tech Bubble— resulted in a dramatic reduction in IT spending Many of the companies that ignored IT during that time either folded or lost their competitive edge when the economy rebounded a year later © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Conclusion: Doing IT right T he challenges facing IT modernisation are not unlike the challenges facing the IT function as a whole IT has often had to fight to be seen as an integrated, strategic part of a company In the best of times, IT has a seat at the strategic table In the worst, it is seen as a cost centre IT modernisation is intrinsically expensive, complex and time consuming It is exactly the kind of endeavour that gets close scrutiny in challenging economic times But when carefully planned, IT modernisation can be an opportunity, not a burden “This is a chance for us to ask questions about what we and why we it,” says Mr Neville of EMS “This is an opportunity to shape our future, to identify or reaffirm our reason for being, and decide what this IT department and this company really want to be great at.” To get the most from their systems and applications, companies should: l Under difficult economic conditions, keep an eye on the longer term and structure IT modernisation plans to provide a competitive advantage when the upturn begins l Let the business lead modernisation to ensure a proper strategic alignment If an IT modernisation project originates from the IT department, it has a greater chance of failure All IT modernisation should directly support a business need, and be owned by the business, not the IT function l Keep communications between IT and business functions constant These projects are lengthy, and in a dynamic economy business strategy can change over the course of the job Building flexibility into the plans from the start, and constantly checking back with the business will help to mitigate instant obsolescence l Address market-facing needs like revenue generation and customer service, rather than internal concerns like maintenance costs Those companies that let external forces shape and drive their IT modernisation efforts are more likely to succeed 15 © Economist Intelligence Unit Limited 2009 Appendix Survey results IT Modernisation: An exercise in alignment Appendix: Survey results Please note that totals may not equal 100% due to rounding Which of the following best describes the IT philosophy of your company? What best describes your company’s status with regard to IT modernisation? (% respondents) (% respondents) We are world class and invest aggressively in IT Our company recently completed an IT modernisation project 11 12 We have a high-quality IT department that supports the business, and watches our costs Our company is in the midst of an IT modernisation project 18 33 Our company is in the planning stages of an IT modernisation project Our IT department delivers acceptable results with adequate technology and skills 15 41 Our IT department is undervalued by the business and struggles to keep up 14 Our company is selectively modernising our applications and infrastructure 28 Our company is considering an IT modernisation project Don’t know/Not applicable Our company is constantly upgrading our systems and does not believe that IT modernisation is necessary 17 Our company has no plans to modernise IT As a percentage of revenues, how much does your company spend on IT? Don’t know/Not applicable (% respondents) Less than 1% 13 Between 1% and 5% 38 What impact will the current economic environment have on your company’s decision regarding IT modernisation? (% respondents) Between 5% and 10% 25 More than 10% 14 Don’t know 10 No impact 15 Very little impact 26 We are scaling back our original plans 31 We are indefinitely delaying modernisation plans 18 We are abandoning our modernisation plans We are accelerating our modernisation plans 10 How satisfied are you with the progress of your IT modernisation project? (% respondents) Extremely satisfied Very satisfied 30 Satisfied 54 Not satisfied 10 Extremely dissatisfied 16 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment Please select the reasons for your satisfaction Select up to two What internal factors are most likely to drive your organisation towards an IT modernisation project? Select up to two (% respondents) (% respondents) Quality of service improved 67 Improved revenue-generating capabilities Business process changes and improvements 50 54 Infrastructure and applications environment simplified Need to improve agility 22 27 Minimal service disruptions throughout the process New strategic corporate direction 22 22 Met or exceeded cost saving objectives Internal cost cutting 17 21 On budget, on time Regular upgrades and maintenance 20 Other Implementation of new technologies 17 Outdated legacy applications 12 A reduction in skills base regarding legacy applications and systems Please select the reasons for your dissatisfaction Select up to two (% respondents) Other Don’t know/Not applicable Missed deadlines 40 Service disruptions 40 Added complexity 40 Cost overruns Approximately what percentage of applications are you moving, or considering moving, from the mainframe (closed system) to distributed, open systems, such as Unix? (% respondents) Lost data None, we are not considering moving to open systems Lack of benefits 30 1%-20% Other 40 14 21%-40% 15 41%-60% What external factors are most likely to drive your organisation towards an IT modernisation project? Select up to two 61%-80% 81%-100% (% respondents) 13 Don’t know Competition and cost reduction 16 51 Response to customer requests to improve service 43 New market demands 32 Regulatory requirements 14 Merger or acquisition 12 New outsourcing initiatives Disaster planning Other Don’t know/Not applicable 17 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment Approximately what percentage of your organisation’s IT applications, infrastructure and IT skills would you characterise as outdated? (% respondents) None, our IT assets are state-of-the-art 1%-20% 21%-40% 41%-60% 61%-80% 81%-100% Don’t know/Not applicable Applications 11 36 23 14 11 5 Infrastructure 12 37 25 12 IT skills 10 35 26 15 How important are each of the following elements of the IT modernisation planning process? Rate on a scale of to 5, where 1=Most important and 5=Least important (% respondents) Most important Least important Performing IT audit 18 34 27 12 Aligning scope of project with business needs 51 32 12 Reviewing the strategic direction of the company 34 35 22 4 Identifying key stakeholders and assembling project management team 19 34 29 13 19 15 Researching new technologies 19 29 28 Proof of concept or pilot projects 18 32 30 Determining return on investment 32 34 18 10 What is the most challenging aspect of aligning IT modernisation with business goals? Select up to two What are your organisation’s biggest concerns about IT modernisation? Select up to three (% respondents) (% respondents) Cost of implementation Budget limitations 53 46 Limited interaction between IT and high-level, strategic decision-makers Productivity disruptions 35 30 Preserving functionality of applications Constantly shifting technology trends 32 27 Constantly shifting business strategy Integration with other systems 27 19 Lack of business expertise in IT Preserving business content 25 18 Lack of IT expertise in the business units Determining ROI 23 18 Lack of business case/ROI study Quality and performance of the new environment 22 16 Other Disappointing performance improvement 15 Don’t know/Not applicable The uncertain economic environment 13 Mid-project budget reduction Other Don’t know/Not applicable 18 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment What you consider the biggest risks for your organisation of not engaging in IT modernisation? Select up to two Which of the following are the most challenging when aligning IT modernisation with business goals? Select up to two (% respondents) (% respondents) Poor customer service Selecting technology that supports business strategy 42 Falling behind the competition 51 Planning for unexpected changes in strategic business direction 41 Steadily increasing maintenance costs 37 Budget restrictions 36 36 Expensive catch up process later on Engaging key business unit stakeholders 29 30 Widespread system failure Communicating business requirements 24 26 Other Shifting macro-economic trends There is no risk Other 1 Don’t know/Not applicable Don’t know/Not applicable 2 In your view, how important is the participation of the following stakeholders to the success of an IT modernisation project at your organisation? Rate on a scale of to 5, where 1=Extremely important and 5=Not at all important (% respondents) Extremely important Somewhat important Neither important nor unimportant Somewhat unimportant Not at all important Board member 17 27 27 16 12 CEO 42 36 16 CFO 38 45 15 1 COO 39 38 18 16 CIO 56 24 Other C-level executive 15 29 35 10 10 IT project manager 62 25 10 Business line managers 31 45 17 Consultants 19 27 30 14 Programmers 22 35 26 13 IT helpdesk 14 34 26 23 IT vendors 19 35 28 14 Customers 15 39 26 13 Shareholders 19 21 28 18 27 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment Which of the following stakeholders are most likely to be involved in an IT modernisation project in your organisation? Select up to three Which best describes your IT organisation’s capabilities? (% respondents) We could modernise all of our systems using only in-house skills IT project manager We could modernise most of our systems using only in-house skills (% respondents) 12 51 CIO 33 We would require significant outside help modernising our systems 46 CEO 32 We would not be able to modernise without outside help 38 CFO 34 17 We outsource the majority of our operations as part of our modernisation strategy Business line managers 27 COO Don’t know/Not applicable 19 Board member 15 Consultants 14 Programmers IT helpdesk Does or will your company consider non-traditional means of software delivery as part of your organisation’s IT modernisation strategy (eg, cloud computing, software as a service, open source)? (% respondents) Other C-level executive, please specify Customers Don’t know/Not applicable Yes 57 No 43 Shareholders 20 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment Which types of software delivery would you consider for the following applications? Select all that apply (% respondents) Research and development Back office Core applications 45 45 43 Front office 38 35 35 35 35 27 21 33 31 31 26 26 23 Cloud computing Software as a service Open source 24 23 23 31 Shared services Custom built Do you agree or disagree with the following statements? (% respondents) Agree Disagree Don’t know/Not applicable Getting approval for IT modernisation initiatives has become more difficult in the past 12 months 62 30 Executives expect a faster implementation cycle on IT modernisation projects than a year ago 61 27 12 Funding for IT modernisation projects at my company has been significantly reduced 44 42 14 Our IT department lacks the manpower and tools to implement IT modernisation initiatives 40 49 11 Our company is more focused on determining return on investment for IT modernisation initiatives than a year ago 57 What is the approximate annual rate of return on investment 27 16 What you consider to be the biggest benefits from IT modernisation for your organisation? Select up to150 two 100 your organisation considers necessary50 from an IT modernisation project? (% respondents) (% respondents) More functionality 1%-5% 39 Improving agility 6%-10% 34 19 Greater business insight 11%-15% 27 25 Speeding time to market 16%-20% 25 14 Less complexity 21%-30% 21 10 Reducing maintenance costs Other 16 Easing integration Don’t know/Not applicable 14 25 Risk mitigation Other Don’t know/Not applicable 21 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment How important are the following benefits to achieving a satisfactory return on investment of an IT modernisation project? Rate on a scale of to 5, where 1=Most important and 5=Least important (% respondents) Most important Least important Don’t know/Not applicable Reduction in maintenance costs 28 31 25 4 Improved productivity through application performance 49 35 10 2 Increased agility in adapting IT to business changes 44 28 18 3 Speedier time to market 32 32 20 4 Increasing the budget for applications to support business innovation 16 20 37 15 In which region are you personally located? Which business functions you expect to benefit most from IT modernisation? Select up to three (% respondents) (% respondents) North America Sales 29 41 Asia-Pacific Finance 28 38 Western Europe Customer service 28 36 Eastern Europe Logistics and operations 30 Africa Production 28 Marketing Latin America 24 Research & development Middle-East 18 Administrative 18 Human resources 10 In which region is your company headquartered? (% respondents) Legal Other Don’t know/Not applicable North America 35 Western Europe 28 Asia-Pacific 25 Latin America Africa Eastern Europe Middle-East 22 Economist Intelligence Unit 2009 Appendix Survey results IT Modernisation: An exercise in alignment What is your primary industry? Which of the following best describes your title? (% respondents) (% respondents) Board member Financial services 16 CEO/President/Managing director IT and technology 23 16 CFO/Treasurer/Comptroller Professional services 11 CIO/Technology director Energy and natural resources Other C-level executive Education 10 SVP/VP/Director Healthcare, pharmaceuticals and biotechnology 11 Head of Business Unit Consumer goods Head of Department Manufacturing 6 Manager Entertainment, media and publishing 15 Other Government/Public sector 10 Telecoms Automotive What are your main functional roles? Retailing Please choose no more than three functions (% respondents) Agriculture and agribusiness General management 41 Construction and real estate Strategy and business development 39 Transportation, travel and tourism IT 28 Chemicals Finance 23 Logistics and distribution Marketing and sales 20 Operations and production 17 Customer service What are your organisation’s global annual revenues in US dollars? 14 Risk (% respondents) Information and research $500m or less 54 $500m to $1bn 13 $1bn to $5bn $5bn to $10bn $10bn or more 17 Legal R&D Supply-chain management Human resources Procurement Other 23 Economist Intelligence Unit 2009 Cover images: iStockphoto.com Design: MikeKenny@mac.com Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com [...]... your company’s status with regard to IT modernisation? (% respondents) (% respondents) We are world class and invest aggressively in IT Our company recently completed an IT modernisation project 11 12 We have a high-quality IT department that supports the business, and watches our costs Our company is in the midst of an IT modernisation project 18 33 Our company is in the planning stages of an IT modernisation. .. resulted in a dramatic reduction in IT spending Many of the companies that ignored IT during that time either folded or lost their competitive edge when the economy rebounded a year later © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Conclusion: Doing IT right T he challenges facing IT modernisation are not unlike the challenges facing the IT function as a whole IT. .. challenging aspect of aligning IT modernisation with business goals, 40% of IT function respondents say limited interaction between IT and high-level, strategic decision-makers Only 29% of non -IT function respondents agree Terry Chulavachana, IT adviser IT and non -IT out of synch as to what impedes aligning IT modernisation with business goals What is the most challenging aspect of aligning IT modernisation. .. between IT and business functions constant These projects are lengthy, and in a dynamic economy business strategy can change over the course of the job Building flexibility into the plans from the start, and constantly checking back with the business will help to mitigate instant obsolescence l Address market-facing needs like revenue generation and customer service, rather than internal concerns like maintenance... focus on the role IT modernisation can play in strengthening a company’s competitive stance as it emerges from the current downturn Survey data show that of companies planning or considering an IT modernisation initiative, nearly onehalf are either scaling those plans back (31%) or indefinitely delaying them (18%) Conversely, 41% say that the economic environment is having no or very little impact on... limitations 53 46 Limited interaction between IT and high-level, strategic decision-makers Productivity disruptions 35 30 Preserving functionality of applications Constantly shifting technology trends 32 27 Constantly shifting business strategy Integration with other systems 27 19 Lack of business expertise in IT Preserving business content 25 18 Lack of IT expertise in the business units Determining... had an impact on productivity, affected customer satisfaction, and increased operations and IT costs According to Ms Rizzo, compliance is a business issue “The people who understand compliance are not in the IT organisation Business operations should always be presented with the possible solution approaches and implications IT should execute in accordance with their wishes and neither compliance nor IT. .. fight to be seen as an integrated, strategic part of a company In the best of times, IT has a seat at the strategic table In the worst, it is seen as a cost centre IT modernisation is intrinsically expensive, complex and time consuming It is exactly the kind of endeavour that gets close scrutiny in challenging economic times But when carefully planned, IT modernisation can be an opportunity, not a burden... leasing, rental, maintenance and supply chain solution services for some of the most well-known companies in the US From an IT perspective, 75-year-old Ryder is typical of many companies its age: it has a mix of old and new systems that support its business Kevin Bott, senior vice-president and CIO, says that Ryder is constantly upgrading on an as-needed basis, “always driven by the business need” And... modernisation with business goals? (% respondents) IT respondents Non -IT respondents Difference Budget limitations 53 45 Limited interaction between IT and high-level, strategic decision-makers 40 29 Lack of business case/ROI study 6 17 12 Source: Economist Intelligence Unit survey, February 2009 © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Key points l Challenging economic ... this alignment to be the single most important prerequisite for IT modernisation success © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment Key points l IT modernisation. . .IT Modernisation: An exercise in alignment Preface IT Modernisation: An exercise in alignment is an Economist Intelligence Unit briefing paper, sponsored by Oracle and HP The Economist Intelligence... companies into unplanned modernisation © Economist Intelligence Unit Limited 2009 IT Modernisation: An exercise in alignment There is a gap between who should and who does take part in IT modernisation