IT modernisation: An exercise in alignment

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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 do 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 of 2009 with 170 executives from various industries. To supplement the results, we conducted in-depth interviews with executives from around the world about the challenges and opportunities they face with regard to IT modernisation. Our thanks are due to all who contributed to the report for their time and insights.

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IT modernisation: An exercise in alignment

  1. 1. IT modernisation:An exercise in alignmentA report from the Economist Intelligence UnitSponsored by Oracle and HP
  2. 2. 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 do 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 20091 © Economist Intelligence Unit Limited 2009
  3. 3. 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 do 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 do 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? 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 IT modernisation refers to major changes in a applications and hardware. Legacy systems are those company’s technology infrastructure, applications that still function but no longer support and deliver and overall operations to replace legacy systems. It optimally against the organisation’s operational and requires new technologies, skills, operational practices strategic goals.2 © Economist Intelligence Unit Limited 2009
  4. 4. IT Modernisation: An exercise in alignment Who took the survey? 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. One hundred and seventy senior executives from Respondents represent a broad range of industries around the world took part in the online survey. and company size, and 46% work for organisations Thirty-three percent of respondents are located in with annual revenue of more than US$500m. Europe, 29% in North America, 28% in the Asia-Pacific For further information, see the appendix at the end region and 9% from the rest of the world. Fifty-one 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.3 © Economist Intelligence Unit Limited 2009
  5. 5. 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 4 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 5 Source: Economist Intelligence Unit survey, February 2009.4 © Economist Intelligence Unit Limited 2009
  6. 6. 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 6 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.5 © Economist Intelligence Unit Limited 2009
  7. 7. 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 makethese investments 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 cost-in IT modernisation reduction or productivity-increasing purposes, although they often yield those improvements as well.and beat the They are instead focused on outward-facing, strategic business imperatives.competition, or “Either you make these investments in IT modernisation and beat the competition, or you’re going toyou’re going to lag lag behind and have to invest even more to catch up,” says Robert Keefe, senior vice-president and chiefbehind and have to information officer (CIO) of Mueller Water Products, a US$1.8bn manufacturer of water infrastructure andinvest even more to flow control products based in Atlanta, Georgia. “Internal drivers are opportunity costs…if I’m savingcatch up.” within the IT budget, that’s always nice. But if my company can come out of this in better shape than theRobert Keefe, senior vice- competition, that’s a much more compelling argument.”president and CIO, MuellerWater Products. 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 2009.6 © Economist Intelligence Unit Limited 2009
  8. 8. 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 “Undervalued” IT departments modernisation, it pays to learn from the companies that do it well. In 52 the survey, respondents were asked to evaluate the quality of their “World-class” or “high-quality” IT departments 27 IT department. Eleven percent identify their firm’s IT department Source: Economist Intelligence Unit survey, February 2009. 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 market-facing drivers, like falling behind the competition and poor undervalued. We then cross-referenced the responses to get a clearer customer service. Undervalued IT departments are more concerned picture of how the companies stack up. about rising maintenance costs and expensive catch-up processes. First of all, world-class and high-quality IT departments support And of course, IT departments identified as world class or IT modernisation and are actively engaged in its execution. Of the high quality have a much easier time engaging key, high-level respondents who evaluate their IT departments as world class and stakeholders in the IT modernisation process. The difference here high quality, more than one-half say their organisations are either is stark. When asked which is the most challenging part of aligning planning, are in the midst of or have recently completed an IT IT modernisation with business goals, 27% of world-class or high- modernisation project. Of those who consider their IT departments quality departments say engaging key stakeholders, while more than to be undervalued, 35% either do not believe IT modernisation is one-half of undervalued IT departments complain of the same thing. necessary or have no plans to do it. Unsurprisingly, undervalued All of this leads to one of the most dramatic differences between IT departments also struggle more to get an audience with senior the best and rest: budgeting. An IT modernisation project is not management and suffer greater budget limitations, two closely something to skimp on. Done right, it is as strategic as any other related phenomena. project. Furthermore, when an IT department is valued, and But perhaps the most telling difference between companies whose engaged with the business side, it is more likely to have sufficient IT departments are considered world class and high quality and those resources. Only 26% of worldclass IT organisations are having their that struggle is what drives their IT modernisation efforts. When IT modernisation budgets reduced, even in the midst of such a asked what they thought were the biggest risks for not modernising, challenging economy. But 68% of undervalued IT departments are world-class and high-quality IT departments are focused on external, seeing reductions in their IT modernisation budgets. What best describes your company’s status with regard to IT modernisation? (% respondenst) “World class” and “Undervalued” “high-quality” 19 Our company recently completed an IT modernisation project 0 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 1 Our company is considering an IT modernisation project 9 Our company is constantly upgrading our systems and does not believe 17 that IT modernisation is necessary 17 0 Our company has no plans to modernise IT 17 1 Don’t know/Not applicable 0 Source: Economist Intelligence Unit survey, February 2009.7 © Economist Intelligence Unit Limited 2009
  9. 9. 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.8 © Economist Intelligence Unit Limited 2009
  10. 10. 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’schallenging 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, thesebusiness projects are comprehensive, costly and time consuming. Any project with that many moving parts has a lotenvironment, a CIO of potential points of failure, and requires thorough project management. But when IT departments runmust understand into budget limitations and unrealistic time expectations, or struggle to choose the right technology, it isbusiness and the often because the costs, scope, goals and, most importantly, benefits of IT modernisation have not beenlanguage of the properly communicated to and from the business. And much of the onus for effective communication restsleadership team.” with the CIO.Ajay Dhir, Group CIO, Jindal “In today’s challenging business environment, a CIO must understand business and the language ofSteel Limited. 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 modernisation9 © Economist Intelligence Unit Limited 2009
  11. 11. IT Modernisation: An exercise in alignment There is a gap between who should and who does take part in IT modernisation projects (% respondents) Likely to be involved Involvement is “extremely” or “somewhat” important Difference 15 44 38 78 34 83 19 77 46 80 4 45 51 87 27 76 14 47 6 57 4 48 Board CEO CFO COO CIO Other C-level IT project Business line Consultants Programmers IT helpdesk member executive manager managers Source: Economist Intelligence Unit survey, February 2009. efforts that have often suffered from lack of leadership. Ms Rizzo was one of the leaders on the IT side of SOX reform efforts in three major companies. But in all three companies, business operations management had little involvement in the process. As a result, business management and users sometimes ended up with onerous workflows that 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 should take on the responsibility for deciding how the business should comply.” In addition, because IT modernisation projects are often long-term, the strategic direction of the business may shift before they are completed. That means that the executives closest to those strategic shifts must be intimately involved with the underlying IT environment being set up to support that strategy. For them to be deeply engaged in the process, those executives must understand how integral IT is to the business. Take Volkswagen AG, for example. The company has publicly stated its strategic goal of overtaking Toyota as the world’s largest carmaker by 2018. To do this, it is planning a series of improvements to its global processes over a ten-year period. IT is playing a central role, including the implementation of a global dashboard to monitor and measure the company’s progress towards its goals. To keep IT constantly aligned with the business strategy over that period, the company holds regional CIO conferences (Europe, Americas, Asia) every three months, and garners constant feedback from the central organisation. “It’s a near constant loop of feedback,” says Kay Lieberman, who heads the company’s application10 © Economist Intelligence Unit Limited 2009
  12. 12. 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 do 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. supply chain business operates. Essentially, encountered some scepticism, and had to the firm wanted to move from a distributed revalidate the savings, especially in light of operation model to a more centrally the current economic situation.” controlled one, with the ability to extract and As a result of the disruption in leadership, Ryder is a US$6bn transport and logistics leverage real-time information from the IT Ryder’s IT modernisation project was delayed company based in Miami. It provides systems that supported the business. “These yet again. But ultimately, the company commercial fleet leasing, rental, are all strategic business values,” says Mr decided to move forward with it as planned, maintenance and supply chain solution Bott. but on a somewhat reduced scale. “These services for some of the most well-known Mr Bott’s team collected information for projects are owned and driven by the companies in the US. a year to define the scope of the project. business, and they really understand this From an IT perspective, 75-year-old Ryder As they audited the IT portfolio that would stuff. So there is still a business case there is typical of many companies its age: it has a be affected, they kept the business side for this project. That’s why we’re going ahead mix of old and new systems that support its involved, which led to additional requests for with it,” Mr Bott says. business. Kevin Bott, senior vice-president changes. What was a one-year preparatory Without such close alignment between and CIO, says that Ryder is constantly period dragged on into a second year. And Ryder’s strategic business objectives and upgrading on an as-needed basis, “always then, after getting board approval for this its IT modernisation project, the efforts driven by the business need”. And the multi-year project, the president of the to change the company’s supply chain company does not often take on sweeping supply chain business, who had championed operation would probably not have survived modernisation projects without a significant the effort, resigned. the challenges of time and changes in return on investment. “We had already spent some money to leadership. The time invested in fine- Three years ago, the company decided to do a detailed design, and we were one-third tuning the project and getting buy-in make some significant changes to the way of the way through the pilot, when they from the business side was crucial to its its Dedicated Contract Carriage division in its hired the replacement,” says Mr Bott. “We implementation.11 © Economist Intelligence Unit Limited 2009
  13. 13. IT Modernisation: An exercise in alignment“An IT upgrade finding small, easy fixes that would save money or improve efficiency. By doing this, Mr Keefe helped tohas a direct impact establish the IT function’s credibility with key business partners, and paved the way for more dramaticon organisational changes down the road.culture and Managing up is an undeniably important part of the IT modernisation process. But because thesevalues. You must projects can affect virtually every part of a company, experts warn IT leaders not to forget the end users.involve employees “The best thing I can recommend is to remember that an IT upgrade like this has a direct impact onat all levels of organisational culture and values,” says Terry Chulavachana, an IT adviser in Thailand. “You must involvethe company, employees at all levels of the company, especially the end users. That helps the project stay focused on theespecially the end ‘customers’ of the technology.”users. That helps Part of the problem is that IT and non-IT employees disagree about the level of interaction that isthe project stay needed between the two groups. For example, when asked to identify the most challenging aspect offocused on the aligning IT modernisation with business goals, 40% of IT function respondents say limited interaction‘customers’ of the between IT and high-level, strategic decision-makers. Only 29% of non-IT function respondents agree.technology.”Terry Chulavachana, IT IT and non-IT out of synch as to what impedes aligning IT modernisation with business goalsadviser. 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 6 17 Source: Economist Intelligence Unit survey, February 2009.12 © Economist Intelligence Unit Limited 2009
  14. 14. 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 one- half 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
  15. 15. IT Modernisation: An exercise in alignment Size matters driven by cost-cutting. Thirty percent of But smaller companies are far more large companies say internal cost-cutting is concerned about preserving functionality When it comes to IT modernisation, there likely to drive modernisation efforts. Only than large companies. are some significant differences between the 13% of small businesses say the same. In approaches of large and small companies. To contrast, smaller firms are more likely to be l Small businesses are more focused on highlight these differences, we compared the driven by business process change or a need customers. When asked about the biggest responses of those with annual revenue of for increased agility. risks in not modernising, large and small less than US$500m with those with revenue companies have very different things to say. of more than US$500m per year. The results l Large companies are more likely to be Large companies are far more concerned are highlighted below. stifled by a lack of interaction between IT about escalating maintenance costs. Small and strategy leaders. Perhaps unsurprisingly, businesses fear deteriorating customer l Smaller companies are less likely to larger companies have trouble cutting service and falling behind the competition scale back their IT modernisation efforts. through the bureaucratic ranks to get the most, perhaps because every customer Just over 41% of big businesses are scaling access to the high-level, strategic business counts for a small business. back their IT modernisation efforts because leaders who are so critical to making IT of the weak economy, compared with only modernisation a success. Thirty-six percent Based on our findings of what makes an 23% of small businesses. In fact, 50% of small of large companies cite this as the most IT modernisation project a success, it would businesses say the economy will have very challenging aspect of aligning modernisation appear that small businesses have a greater little or no impact on their IT modernisation with business goals, while only 24% of smaller chance of effectively modernising for two plans, while 29% of large companies agree. companies struggle with the same problem. reasons. First, there is greater interaction This may be because smaller companies between IT and strategic business leaders in are spending less on such projects, or have l Both large and small companies small companies; and second they are focused smaller projects to begin with. are concerned about cost. The cost of on the external-facing, market-driven forces. implementation ranks highest on the list of It is possible the larger companies can learn l Big businesses are more likely to be concerns for both large and small companies. 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 ITThe online service departments do not need to buy and maintain expensive enterprise application licences. Nor do they needmodel “has gone to buy and maintain the hardware those applications run on. “It’s gone from a gleam in someone’s eye tofrom a gleam in a real thing in a heartbeat, driven entirely by economic circumstances,” he says.someone’s eye Other companies are being more selective about what they modernise. For example, Mr Keefe of Muellerto a real thing Water Products is focusing his company’s efforts on a cost-saving transport management system. “Butin a heartbeat, instead of making it all one large project, we built language into the contract that allows us to expanddriven entirely the project later on at the same discounted rate,” says Mr Keefe. “And all along the way we’re proving theby economic return on investment, so we continue to show management the benefits, and keep the momentum going.”circumstances.” Times like these require creative approaches to IT modernisation. But most experts agree that shelvingPeter Whatnell, CIO of Sunoco plans entirely can be a disastrous route. Many point to 2001, when the last recession—the Tech Bubble—Inc. and president of the resulted in a dramatic reduction in IT spending. Many of the companies that ignored IT during that timeSociety for InformationManagement. either folded or lost their competitive edge when the economy rebounded a year later.14 © Economist Intelligence Unit Limited 2009
  16. 16. 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 do and why we do 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
  17. 17. Appendix IT Modernisation:Survey results 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 What best describes your company’s status with regard to your company? 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 Our company is in the midst of an IT modernisation project the business, and watches our costs 18 33 Our company is in the planning stages of an IT modernisation project Our IT department delivers acceptable results with 15 adequate technology and skills Our company is selectively modernising our applications and infrastructure 41 28 Our IT department is undervalued by the business and struggles to keep up Our company is considering an IT modernisation project 14 4 Don’t know/Not applicable Our company is constantly upgrading our systems 1 and does not believe that IT modernisation is necessary 17 Our company has no plans to modernise IT 5 As a percentage of revenues, how much does your Don’t know/Not applicable company spend on IT? 1 (% respondents) Less than 1% 13 What impact will the current economic environment have on your company’s decision regarding IT modernisation? Between 1% and 5% 38 (% respondents) Between 5% and 10% 25 No impact More than 10% 14 15 Don’t know 10 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 0 We are accelerating our modernisation plans 10 How satisfied are you with the progress of your IT modernisation project? (% respondents) Extremely satisfied 6 Very satisfied 30 Satisfied 54 Not satisfied 10 Extremely dissatisfied 016 Economist Intelligence Unit 2009
  18. 18. Appendix IT Modernisation:Survey results An exercise in alignment Please select the reasons for your satisfaction. Select up to two. What internal factors are most likely to drive your (% respondents) organisation towards an IT modernisation project? Select up to two. Quality of service improved (% respondents) 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 6 20 Other Implementation of new technologies 0 17 Outdated legacy applications 12 A reduction in skills base regarding legacy applications and systems 5 Please select the reasons for your dissatisfaction. Select up to two. Other (% respondents) 3 Don’t know/Not applicable Missed deadlines 2 40 Service disruptions 40 Added complexity Approximately what percentage of applications are you 40 moving, or considering moving, from the mainframe (closed Cost overruns system) to distributed, open systems, such as Unix? 0 (% respondents) Lost data 0 None, we are not considering moving to open systems Lack of benefits 30 0 1%-20% Other 14 40 21%-40% 15 41%-60% 5 What external factors are most likely to drive your 61%-80% organisation towards an IT modernisation project? 7 Select up to two. 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 9 Disaster planning 6 Other 3 Don’t know/Not applicable 217 Economist Intelligence Unit 2009
  19. 19. Appendix IT Modernisation:Survey results 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 1 5 Infrastructure 12 37 25 12 9 1 5 IT skills 10 35 26 15 7 2 5 How important are each of the following elements of the IT modernisation planning process? Rate on a scale of 1 to 5, where 1=Most important and 5=Least important. (% respondents) 1 Most important 2 3 4 5 Least important Performing IT audit 18 34 27 12 9 Aligning scope of project with business needs 51 32 12 5 1 Reviewing the strategic direction of the company 34 35 22 4 4 Identifying key stakeholders and assembling project management team 19 34 29 13 5 Researching new technologies 19 29 28 19 5 Proof of concept or pilot projects 18 32 30 15 5 Determining return on investment 32 34 18 10 6 What is the most challenging aspect of aligning IT What are your organisation’s biggest concerns about modernisation with business goals? Select up to two. IT modernisation? Select up to three. (% respondents) (% respondents) Budget limitations Cost of implementation 46 53 Limited interaction between IT and high-level, strategic decision-makers Productivity disruptions 30 35 Constantly shifting technology trends Preserving functionality of applications 27 32 Constantly shifting business strategy Integration with other systems 19 27 Lack of business expertise in IT Preserving business content 18 25 Lack of IT expertise in the business units Determining ROI 18 23 Lack of business case/ROI study Quality and performance of the new environment 16 22 Other Disappointing performance improvement 2 15 Don’t know/Not applicable The uncertain economic environment 4 13 Mid-project budget reduction 7 Other 3 Don’t know/Not applicable 318 Economist Intelligence Unit 2009
  20. 20. Appendix IT Modernisation:Survey results An exercise in alignment What do you consider the biggest risks for your organisation Which of the following are the most challenging when aligning of not engaging in IT modernisation? Select up to two. IT modernisation with business goals? Select up to two. (% respondents) (% respondents) Poor customer service Selecting technology that supports business strategy 42 51 Falling behind the competition Planning for unexpected changes in strategic business direction 41 37 Steadily increasing maintenance costs 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 2 7 There is no risk Other 1 1 Don’t know/Not applicable Don’t know/Not applicable 2 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 1 to 5, where 1=Extremely important and 5=Not at all important. (% respondents) 1 Extremely important 2 Somewhat important 3 Neither important nor unimportant 4 Somewhat unimportant 5 Not at all important Board member 17 27 27 16 12 CEO 42 36 16 4 2 CFO 38 45 15 1 1 COO 39 38 18 3 2 CIO 56 24 16 3 2 Other C-level executive 15 29 35 10 10 IT project manager 62 25 10 2 1 Business line managers 31 45 17 4 3 Consultants 19 27 30 14 9 Programmers 22 35 26 13 4 IT helpdesk 14 34 26 23 3 IT vendors 19 35 28 14 4 Customers 15 39 26 13 7 Shareholders 6 21 28 18 2719 Economist Intelligence Unit 2009
  21. 21. Appendix IT Modernisation:Survey results An exercise in alignment Which of the following stakeholders are most likely to be Which best describes your IT organisation’s capabilities? involved in an IT modernisation project in your organisation? (% respondents) Select up to three. (% respondents) We could modernise all of our systems using only in-house skills 12 IT project manager We could modernise most of our systems using only in-house skills 51 33 CIO We would require significant outside help modernising our systems 46 32 CEO We would not be able to modernise without outside help 38 17 CFO We outsource the majority of our operations 34 as part of our modernisation strategy Business line managers 4 27 Don’t know/Not applicable COO 2 19 Board member 15 Consultants Does or will your company consider non-traditional means of 14 software delivery as part of your organisation’s IT Programmers modernisation strategy (eg, cloud computing, software as a 6 service, open source)? IT helpdesk (% respondents) 4 Other C-level executive, please specify 4 Customers Yes 57 3 No 43 Don’t know/Not applicable 3 Shareholders 220 Economist Intelligence Unit 2009
  22. 22. Appendix IT Modernisation:Survey results 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 Front office 45 45 43 38 35 35 35 35 33 31 31 31 27 26 26 23 23 23 24 21 Cloud computing Software as a service Open source 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 8 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 27 16 What is the approximate annual rate of return on investment What do you consider to be the biggest benefits from IT 0 organisation considers necessary50 IT your from an modernisation for your organisation? Select up to two. 100 150 modernisation project? (% respondents) (% respondents) More functionality 1%-5% 39 5 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 2 Easing integration Don’t know/Not applicable 14 25 Risk mitigation 7 Other 2 Don’t know/Not applicable 221 Economist Intelligence Unit 2009
  23. 23. Appendix IT Modernisation:Survey results 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 1 to 5, where 1=Most important and 5=Least important. (% respondents) 1 Most important 2 3 4 5 Least important Don’t know/Not applicable Reduction in maintenance costs 28 31 25 8 4 4 Improved productivity through application performance 49 35 10 2 1 2 Increased agility in adapting IT to business changes 44 28 18 4 3 3 Speedier time to market 32 32 20 8 4 4 Increasing the budget for applications to support business innovation 16 20 37 15 7 5 Which business functions do you expect to benefit most from In which region are you personally located? 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 5 30 Africa Production 5 28 Latin America Marketing 2 24 Middle-East Research & development 2 18 Administrative 18 Human resources In which region is your company headquartered? 10 (% respondents) Legal 2 North America Other 35 1 Western Europe Don’t know/Not applicable 28 3 Asia-Pacific 25 Latin America 4 Africa 4 Eastern Europe 3 Middle-East 222 Economist Intelligence Unit 2009

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