Getting a Grip on Information Technology
CEOs are learning how to manage their CIOs.
January 1 2005 by Chief Executive
Remember how a simple technology called the Universal Product Code, the zebra stripe labels now affixed to just about every product and package, powerfully streamlined the distribution and sale of goods? FedEx Chief Executive Fred Smith said radio frequency identification will become even more powerful. No more scanning with wands. Tiny, smart and cheap implantable RFID tags will send information without wires, over radio waves, directly into computers; the tags will even communicate with one another. “In an express shipment, we scan everything around 16 times,” Smith said. “I don’t know what the cost is, but you already have the wireless infrastructure in place” for RFID. That, he added, has “very big implications for all kinds of business.”
The word “technology,” which once inspired so much passion, turned sour for many business leaders after the pop of the Internet bubble and the botched installations of major information systems. Business investment in technology slowed to a crawl as CEOs became far more skeptical about new technology projects, chief information officers and technology vendors.
Judging from a roundtable discussion on the subject, sponsored by Manugistics, it appears that top executives are warming to technology once again. But this time around, CEOs will better manage the IT function. And they hope that, rather than wasting hundreds of millions of dollars, their companies will extract far more value from technology than ever before. As General Motors North America President Gary Cowger put it, “The power, the speed, the bandwidth€¦quot;they’re all allowing us to deliver what we’ve been fascinated with since the 1980s.”
But the wounds are deep. Pushed by Y2K disaster avoidance, and fueled by a technology mania, companies splurged on huge “enterprise resource planning” and “customer relationship management” software projects with results that ranged from problematic to disastrous. Lucent Technologies’ Chief Executive Pat Russo spoke for many when she said: “Do I think we got what we paid for? I’d say, not to the extent that we could have.” “I think after we went through the spending of Y2K and this technology onslaught, we took a step back,” said John Sickler, vice chairman of Teleflex. “We started to say, €˜What percentage of our capital-spending budget is this?’ It’s becoming a much larger share, yet we’re not applying the same return-on-investment principles to that area as we do with other” areas of capital spending.
At the heart of the problem was that the technology decision-making was done in isolation of business decision-making. To better integrate technology decisions into the strategy of the business, more CEOs are installing CIOs who have real business experience as opposed to being pure technocrats. And they are exposing them more directly and over a sustained period of time to leaders of their business units.
Companies also are putting heavy pressure on vendors to ensure their software pays off. “The approach where you go out and buy all this software and then you go pay for a bunch of services that you’re buying by the hour, and you’re taking all that risk before you even get a payback€¦quot;is that really the right business model?” posed John Forsyth, CEO of Wellmark Blue Cross and Blue Shield of Iowa and South Dakota. “I sense that people are wanting to see the vendors be more involved and help in guaranteeing the return on that investment.”
Changed Relationships with Vendors?
They are becoming more involved, argued Joseph Cowan, CEO of Manugistics, a supplier of supply-chain software. “I tell my people now, we’re in the business of really serving our clients better,” said Cowan. “We really want to make sure that if you sell them software, they get a return on their investment. If they don’t, we’ll have trouble selling anything else to them.”
Having vendors pay more attention to real world results and less corporatespeak about “partnerships” would please Maurice Taylor immensely. The CEO of wheel-maker Titan International said technology buyers “have more flexibility today” because hardware and software vendors are hard-pressed for business and “don’t want to lose you.” Unless a CEO can persuade a provider to make a serious commitment to his or her company’s success, however, Taylor said, “partnership is just a nice word.”
Of course, CEOs can’t blame the mistakes of the late 1990s exclusively on CIOs and their tech providers. They themselves made mistakes. The business literature has been filled with admonitions against using digital technology to automate bad processes at least since the 1980s. Yet companies repeat the same mistakes over and over again.
Perhaps the blinders are being lifted at last. General Motors was the most notorious poster child for bad process automation in the ’80s when it robotized a Michigan assembly plant on top of old-fashioned manufacturing routines ill-suited to the new technology.
Today, says GM’s Cowger, the company is assembling global information systems that combine with carefully planned manufacturing processes. “This has nothing to do with IT per se,” he said. “It has everything to do with the way you process, manufacture, organize, lay out and engineer your manufacturing system across the globe. We had to get that right first, get it all going in the same direction with the same metrics.”
Chief executives also keep struggling with a couple of key decisions: Should they keep technology functions in house, or outsource them? Should they customize their in-house projects, or buy them off the shelf?
Vivek Paul, CEO of the large Indian outsourcing software firm Wipro, said: “You’ve got to be able to completely focus on taking costs out of everything that’s supporting your day-to-day processes, and focusing very hard on the things that give you that extra competitive advantage. If you’re not looking at both things with equal passion, you’re missing something.” Of course, farming out technology is what butters Wipro’s bread.
But FedEx’s Smith backed him up: “We try to maintain our own secret sauce for the things that differentiate us from the competition. Everything else we buy from vendors. You don’t need to be in the email business or the payroll business or the accounting business or anything else.”
Even when it’s clear what stays in-house, the customize-or-standardize question comes up. Standard packages can be cheaper, training may be more widely available, and software may be more scalable and integrate better with existing systems.
“We would argue you need more standardization, you need more open standards, because technology is going to change even quicker in the future. You’ve got to be able to plug in technology, take it out and replace it with new technologies,” said Saul Berman of IBM Business Consulting Services. “It’s what we call a €˜spaghetti mess.’ But the more you don’t have to customize, and the more you can componentize it, then you have more flexibility as technology changes.”
Of course, standard systems might not be the right brew for a company’s secret sauces. And employees might resist. “The conflict that arose for us when our in-house experts looked at whatever standard products were out there was that nothing was quite right,” said Walter LeCroy, founder and chairman of LeCroy Corp., a scientific research equipment maker. Asked whether this was just a “not-invented-here” response, he said, “Yes, exactly€¦quot;not invented here. And sometimes, they were right. So you can’t just impose the external standards and say this is what we are going to do.”
These sorts of decisions increasingly are made with the CEO. To involve the chief, however, requires elevating information technology experts up near the top of the hierarchy. Increasingly, companies are including chief information officers in with the top executive team. FedEx’s Smith said “one of the things we did very early is (make) the CIO one of the top four or five officers in the company.”
GM’s Cowger agreed: “By putting the CIO at the table with the strategists and delivering the bottom-line results, that has driven realism back through the system.”
Of course, there are differences in the approach to the technology function, based in part on the size of the company. “We’re about a $2 billion company,” said Donald Nigbor, chief executive of Benchmark Electronics, a service provider and electronics manufacturer. “We don’t really have a CIO. The CIO and the CFO are combined. But we manufacture for other companies. We have to have low costs. And so it really ties in very well having our CFO drive our information systems, because everything has to be focused on costs and retaining costs.”
Varian Semiconductor Equipment Associates, a semiconductor manufacturing equipment maker, also doesn’t have a CIO as such but has taken a unique approach to IT, said CEO Ernie Godshalk. “We located our IT function in the customer-support area of our company. I’m not sure I’ve ever heard of anybody doing that before. And as partially the consequence of that, we’ve been No. 1 in customer satisfaction for years.”
At bigger companies, though, CIOs still exist even if their experience base has shifted. “I’ve seen a big change in the last five years from CIOs who come from a purely technical background to CIOs who have come from the business,” said Robert Ashe of Cognos. “CEOs are making sure CIOs are moving around from business to business and not becoming so technology-focused.”
One mistake many leaders make is to assume that if their top IT dogs are talented, the rest of the organization must be talented, too. “We’ve found that one of the things we lack the most is project management skills,” said Wellmark’s Forsyth. “We can have a great technology plan, and we can have CIOs at the table. But we don’t necessarily have all the people who have all the right project management skills.”
Top managers need to look beyond using technology to support their business and identify ways to use technology to provide their customers with digital services. GM’s On-Star system, for example, uses satellites to help monitor owners’ vehicles and help drivers in emergencies, while offering a menu of other travel services. “Increasingly, in all the digital businesses, whether it be a car or a washing machine, more of the value€¦quot;in fact, maybe 50 percent on a car now, with the electronics€¦quot;is coming from the bits side of the business,” Cowger said.
If CEOs have, in fact, learned how to better manage the IT function, the obvious implication is that they are going to achieve far more gains in productivity and performance in coming years than they have achieved so far. As technology spending picks up in 2005, as all indicators suggest, the overall U.S. economy could get a lift because this wave of spending will be more tightly linked to real business objectives. Less spending will be of the ephemeral flash-in-the-pan variety. All of which is good news indeed.