Monday, April 25, 2011

The Wall Street Journal

LEADERSHIP IN IT

Four Questions Every CEO Should Ask About IT

For starters: Are we thinking big enough?
By JEANNE W. ROSS And PETER WEILL
Mobile devices, social media, data mining, videoconferencing, virtual reality, blogs, tweets...
The list of technologies that could offer companies big-time benefits, or lead to big-time
disasters, is daunting. So daunting, in fact, that top management might be tempted to throw up
their hands and let lower-level managers referee the debate over information technology.
Leadership in IT
See the complete Leadership: Information Technology Journal report.
But that is exactly what they shouldn't do.
In a digital economy, IT is the foundation for doing business. This is easy to see at born-digital
companies like Amazon.com and Google. But companies of all types are discovering that how
they manage IT is crucial to their competitiveness. It determines whether the company's
dealings with customers and suppliers are efficient, scalable and timely; whether employees
have the information they need to do their jobs; and whether employees throughout the
company see technology as a tool to move forward, or an anchor that keeps them running in
place.
This doesn't mean that top executives should review every IT investment proposal and decision.
But it does mean that senior management must define how the company as a whole will do
business in a digital economy. It means they must lead the IT initiatives that cut across all
business lines. And it means they must resolve issues that local interests cannot resolve—like
what data and processes will be standardized companywide.
Unfortunately, too many CEOs and other top executives often don't even know where to begin
when it comes to managing IT. To that end, we offer the four IT questions that every CEO needs
to think about—and answer.
Question No. 1
Are we using technology to transform our business, or are we just adding bells
and whistles to existing processes?
There are all sorts of possibilities for, say, inserting new technologies into existing processes.
But most of these improvements are incremental. They are worth doing; in fact, they may be
necessary for survival. No self-respecting airline, for instance, could do without an application
that lets you download your boarding pass to your mobile telephone. It saves paper, can't get
lost and customers want it.
But while it's essential to offer applications like the electronic boarding pass, those will not
distinguish a company. Electronic boarding passes have already been replicated by nearly every
airline. In fact, we've already forgotten who was first.
What is far more lasting—and much more difficult—is for companies to rethink how they
deliver core customer services. The starting point for such a rethinking isn't asking, "How do I
use technology strategically?" It's, "What would be the ideal way to interact with and serve my
customers?"
When you ask what you can do with technology, you get the electronic boarding pass or the
email notice about a change in a flight. Nice, but not differentiating. When you rethink your
business, you get a new kind of airline. You make even those customers traveling economy class
feel important; you optimize schedules to effectively use equipment and help the most
customers get to where they want to go with the least amount of hassle; you develop pricing
mechanisms that take the stress out of buying a ticket; you help your customers know when to
leave their house to get to the airport in time; you tell them the fastest and the cheapest ways
to get to the airport; you tell them before they get on a plane exactly what kind of food is
available; you make flying a pleasant experience.
Doing this means you'll have to change existing systems, processes, roles and technology. In
other words, you'll have to change everything—and you'll have to do it in stages over several
years. But companies get better each step of the way. And over time they can build a huge
advantage over companies that are simply inserting technology into the way they've been
doing business for years.
USAA has been through this kind of transformation. Like most financial-services companies, the
San Antonio, Texas-based USAA traditionally served customers through distinct businesses that
specialized in a particular set of services. USAA customers had to decide whether they needed
banking, insurance or financial advice. The choice was not always obvious to a customer. For
example, the bank and the advisory-services group were both happy to sell a customer an IRA.
Rethinking its business for the digital economy, management decided to provide services
according to customers' life events (a new baby, say, or a job transfer) rather than according to
USAA's internal structure. This meant redesigning processes, integrating old systems, building
new ones and sharing data across business units. As a result, customers don't have to figure out
how USAA works before they ask for service.
Nearly everyone at USAA has been affected by this digital transformation. Recently, 12,000 call-
center employees were centralized in a new organization so they could look across the business
units to meet customer needs. This was just the most recent change in a transformation that
started nearly 10 years ago.
Question No. 2
Are you ignoring important business differences as you standardize processes
across the company?
One tenet of the digital economy is that standardizing business processes is a no-brainer: It
allows a company to operate the same way, everywhere, and creates a reliable, consistent
experience for the customer.
For example, an insurance company could standardize how its life-insurance products are sold,
processed, managed for returns, accounted for and so on. Every time a new product is
introduced, the company doesn't have to reinvent the wheel—it simply reuses the process and
the underlying system. It saves the company time and money, and makes interactions easier for
customers who have other policies with the company.
The problem, though, is that at some companies, senior management believes that if some
standardization is good, more is always better. And it isn't.
So, for instance, say a manufacturing company comes up with sales processes that require
reliable communications and transportation systems. That's fine when the manufacturing
company is operating in developed countries. But in a developing country, those standardized
processes could wreak havoc.
Or consider a consumer-product company that has created a digital system for its biggest
customer—Wal-Mart. What happens when those processes are forced on the company's
distribution centers that service local convenience stores? Here global standardization is a naive
impediment to local business effectiveness.
In other words, senior management can't just evangelize about the desirability of standardized
processes. They need to first define what should and shouldn't be standardized.
Campbell Soup Co. offers a telling example. From 2006 to 2008, the company implemented
three standardized processes that redesigned customer service, accounting, reporting and
supply-chain processes across 25 North American facilities. But then management found that
one of its businesses, Pepperidge Farm, had unique requirements because baked goods are
more perishable than canned soups.
So some standards were relaxed and some systems were changed for Pepperidge Farm.
Similarly, when Campbell started to implement these processes in Australia and New Zealand,
unique business conditions in those countries demanded changes in the standards. Selective
standardization allowed Campbell to reap significant cost savings without tying the hands of
local managers.
Question No. 3
Who is making sure the company's digital strategy is being implemented?
If a telecommunications company wanted to become more competitive by improving customer
service, top managers might bring together the heads of the company's regions, product lines
and functions and ask them to identify how their individual units could work together to
improve service for global business customers.
These leaders might identify new companywide technology systems that could make the
company more efficient and better serve key customers. Good idea.
But senior management might then be inclined to rely on that committee to implement those
enterprise processes. Bad idea.
Many managers assume that a good technology can ensure effective execution. It can't. That's
because most managers work within a business unit, function, region or product line.
Companywide systems, by definition, are executed across organizational units. Local managers
can't take responsibility for the design or improvement of such enterprise processes.
Somebody needs to own this responsibility. Thus, top executives must name an executive who
will be accountable for every enterprise process, and who has the political clout to overcome
resistance. A committee is not capable of such oversight.
Say that managers from a telecommunications company agreed that they could better serve
large business customers if they could track the customers' orders from the salespeople or
website through fulfillment, delivery, invoicing and payment. The company then needs to
assign one person—call him or her the process owner—who would interact with people all
along the line to design the process and underlying systems.
The process owner will also design initial training on the system. After implementation, the
process owner would monitor performance and work with people executing the process to
identify opportunities to improve it.
Tetra Pak International SA, a Swiss-based packaging and processing company, has a business-
transformation department, which consists of executives responsible for each of its seven core
processes, including customer management, product creation and supplier management. These
process owners at Tetra Pak take responsibility for developing process and data standards,
establishing metrics and ensuring continuous improvement. They then work with local business
managers to execute the standardized processes and maintain data integrity. The head of the
business-transformation department reports to the chief financial officer.
Question No. 4
Is electronic data empowering your people or controlling them?
For most companies, the great advantage of the digital revolution is the data they can now
collect. They know the minute-by-minute electricity usage and the names and buying patterns
of shoppers who buy diapers; they know how much more soup gets sold if they drop the price
by 10 cents, or what arguments work best when a life-insurance agent cold-calls a prospective
customer.
All that data can lead companies down two very different paths. First, it can help push decision
making down to front-line employees. Alternatively, it can be used to centralize decision
making and monitor employee performance.
Evidence indicates that the former approach offers benefits for both companies and
employees.
When companies use data to control people, the assumption is that all the good thinking
happens at the top of the organization. By contrast, relying more on operating-level people to
make fact-based decisions creates smarter, more innovative organizations.
Seven-Eleven Japan Co., which runs 7-Eleven convenience stores in Japan and the U.S.,
centralizes the purchasing and logistics to gain efficiencies. But it pushes buying decisions down
to the salesclerks at its 13,000 Japanese stores. That's more than 200,000 salesclerks. They all
receive data on what's been selling in their store for the categories they manage, along with
information on weather conditions and new products.
Each salesclerk then makes "hypotheses" about what kinds of products will sell on a given day.
Salesclerks place orders each morning according to their hypotheses, and starting that evening
receive feedback on their business results. Counselors visit each store twice a week to help
salesclerks interpret the results and improve their hypotheses going forward.
By placing ordering decisions in the hands of individual store clerks, Seven-Eleven Japan ensures
that the inventory in each store will be customized to the demands of that store's clientele. The
result is constant innovation in local customer offerings and, more important, extraordinarily
rapid inventory turnover, the single most important metric at the company. It also results in
highly motivated employees.
Dr. Ross is the director of the MIT Sloan Center for Information Systems Research in Cambridge,
Mass. Dr. Weill is the chairman of the center. They can be reached at reports@wsj.com.