Good article, including the simple fact:
In the industrial company of the future, there won’t be a separate IT department.
From: http://www.strategy-business.com/article/The-Thought-Leader-Interview-Bill-Ruh?gko=9ae51
Category: IT Outsourcing
What a slow process it is to watch jurisdictions implement “cloud first” policies. State and federal governments are all doing it and in the end they all look pretty similar. Some might say it’s a policy of considered common sense, or a policy not to exclude the obvious. At least the process is getting done.
Though as I was reading the latest commentary on the Coalition’s new “cloud first” policy it struct me that this drawn out response is hiding some of the real impacts that Cloud will have. Not just as an obvious technology choice, but as a real disruptor to business and government.
Of course, this “cloud first” mandate is always qualified – but it’s the nature of these qualifications that is telling. In the case of the latest policy, the qualifications are simply that the Cloud solution also needs to be fit for purpose, competitively priced, and met the Protective Security Policy Framework. So it’s a mandate to use the best approach even if it’s cloud. You’d wonder why you need a mandate to use the best approach so I’m sure the policy doesn’t fundamentally change the existing risk aversion, lake of knowledge and vision, or whatever else was stoping Cloud adoption in the first place.
As we know, the problem with mandates is that they tend to reduce individual accountability. So the very real data governance and privacy issues relating to Cloud are likely to lose some attention for a while; particularly when paired with the removing of the need for double ministerial sigh-off for storing data off-shore. I personally don’t see the problem with requiring double-ministerial sign-off to do something. The only problem might be if I were one of the ministers who signed off and then something went wrong… Oh, hang on, I get it.
Problem is, like everything else, decisions are not just made by getting the right sign-offs. You actually need to make the right decisions. So policy that does nothing but try to gate decisions or make somebody accountable isn’t as useful as policy that actually helps decision-making. There must be better uses for policy development effort than the use of Cloud as a technology choice. Say for example as a disruption.
The impact of Cloud on ICT strategy is that application architectures will be made up of silo’ed by highly functional applications that support a particular business function or customer touchpoint very well.
These applications will also have imbedded analytics which already cover the management and operational decision-making relevant to the area they support.
Integration will be achieved only where there is a business case to do so. Except the integration imperative will be so strong – as its absence reduces enterprise agility – that there won’t be individual business cases for each integration. Instead, a top-down approach such as enterprise information management (EIM) will be used to build a single cohesive business case for integration as part of a program of driven by information governance, analytics, business intelligence, and the recognition of what I call “core shared information”.
The impact of Could on organisational design is that the functional organisation is dead. The ability to acquire cloud-based services that provide not only the application services, but in the case of business functions the backend management of the function itself, means functional organisation is no longer viable.
The management trend where everything of value is being managed as “a cross-functional team” is now the norm. The only thing left is to remove the functional organisation that created that language in the first place. Functional organisation made it easier for managers (i.e. to shift across organisations, and also because they only had to understand how their function fits + strong stakeholder management) now managers have to be better at managing. Though they also have better [cloud-enabled] management tools to help deal with this.
Impact of cloud on information governance is that it’s time to disconnect Cloud from information governance and privacy issues. Dumping the off-shore data double-ministieral sign-off policy because it happened to be inconvenient to Cloud initiatives is simple baby-with-the-bath-water stuff.
Sending personal data off-shore is still a breech of Australian privacy legislation if this hasn’t been agreed with the individuals who own that private data. Organisations are still at risk of legal action if damages occur due to mis-handing of personal data. So this shouldn’t have ever been mixed up with Cloud.
Impact of cloud on business strategy means that your differentiation cannot be based on what is easy to acquire – because value comes from scarcity not from abundance. Actually this has always been the case but the impact of Cloud is the breadth and depth of things that are now easy to acquire.
Your ERP was never going to differentiate you from your competitors. But because it was expensive it was able to provide a competitive advantage at a pinch (as long as the business case held up after the inevitable cost overruns). Now that ERPs and significantly more valuable targeted services are available in the cloud they are much easier to aquire. So they have value, sure – but don’t have value as a differentiating feature of your organisation.
The impact of Cloud on government is that there are so many things that peer-to-peer markets can do better than government. The government shouldn’t just be shifting the services they offer to cloud-based solutions. The government’s Cloud policy should be how does a cloud-enabled market solution remove the need for this government function? How do we ensure services are more effectively targeted by using Cloud services to manage the market for services?
In a way, the impact of Cloud is nothing more than the impact of lower transaction costs played out on the acquisition of services. Sure, it’s probably bigger than that be it will be called something else by the time it become outcome-as-a-service. So for now “Cloud polices” are the place to ask the disruptive questions.
What’s interesting is that Indian outsourcing companies will one day solve these challenges…
The language of IT alignment has to end. It’s no longer serving any purpose except to isolate disciplines that no longer need to be managed in isolation.
The convergence of the commoditisation of IT and the socialisation of business means that IT in its strictest purest sense has won. Paradoxically it also makes IT completely unimportant as a competitive differentiator.
IT is available cheaply to anybody who wants it. IT can be acquired easily in packaged form, or as a service, through any number of cloud or “… as-a-service” vendors. Many would argue that this doesn’t solve all problems – but to quote the old joke about alcohol, neither does milk.
For IT systems that are not easy to acquire there are strong incentives for IT service providers and outsourcing organisations to build them. You might pay more than you’d like but that’s because it’s hard to manage these guys not because of any real scarcity.
The so-called socialisation of business is a trend that slightly trails the commoditisation of IT. In fact, the consumerisation of IT appears to drive both. While it might have once been the IT departments job to drive adoption of IT to improve efficiency this is no longer the case. IT departments are now more likely to be seen as holding back the adoption of IT.
So why does this mean the end of business and IT alignment? Because there isn’t any “business” and “IT” to align! It’s always been a misnomer. Firstly, IT’s view that there was “us” in IT with all this complexity and then there was one bug lump out there called “the business” was always a farce. “The business” was just shorthand for a generic “them” that moved and shifted like bad requirements.
On the other side there was “The business” – rich and complex and important. In “the business” there were performance incentives, real customers, governance considerations, all that important people management and cultural change, etc. But this side of the fence had some delusions too. Over the last 20-30 years much of the value that business units mentored was shifted into IT systems. But unfortunately this meant managers thought it was shifting to IT.
When I asked who is responsible for the information in the IT systems during a recent meeting everybody in the room pointed to the IT guy. When I clarified and added that I meant the real details of what the information means they still – and they always do in my experience – pointed to the IT guy.
You see somewhere along the line people started believing that if something passed through an IT system it was suddenly owned by IT. But it got even worse than that. Because these “IT alignment” problems went on for so long, and nobody ever fixed them, and because IT was the service provider and “the business” was “the customer”, the IT team compensated.
So not only did everything that pasted through an IT system become owned by IT, everything that was “detailed” became an IT problem. Let me explain. The thing with IT systems is that they persist. If you have a human system you need to teach the new humans the system so the system can continue to operate when the old humans leave. This process keeps the system alive. IT systems, except for some overworked back-end humans, don’t need this. IT systems continue to operate regardless of the passing of knowledge to new humans.
Over time this has meant that where systems are built on technology the detailed knowledge of the system are lost. Nobody knows the details of the system. However, when things went wrong somebody had to find out those details. The IT groups had the keys to the back-end of the system so were able to find out how the system worked.
Even though IT people could find out how the system worked it didn’t mean that they were the cause of the problem. Sometimes the world had changed and the system didn’t work in the new world. But at the end of a long investigation the only person who could fix the problem was the one person who had spent time looking at the details.
This process had an interesting effect on the users of IT systems. Not only did they think that things that passed through IT were now owned by IT, but they thought that “the details” were owned by IT. In fact, I think that in many contexts the term “technical” and “detailed” have become interchangeable.
I’ll skip over the process where all of the people with “technical” knowledge – including detailed knowledge of “the business” – were outsourced. That’s just progress – it’s done – get over it. But it’s an important step in the story. Because it’s now possible to acquire the IT components of your business easier they are no longer a competitive differentiator. Trouble is because the IT components still have value, and your competitors can acquire them, they are a business imperative.
To actually differentiate you have to do what you’ve always had to do, build hard-to-replicate capabilities that combine people, process, information, and technology. It’s the integration of all of these that creates value. So why all the talk of “IT Alignment” in the first place? Who knows! Growing pains?
So, What’s next?
Because IT is easy to acquire, and because business units can’t seem to manage the details of how their processes operate, and because it’s integrated capabilities that drive competitiveness, a complete governance change needs to occur. It is no longer effective or necessary to have a primary governance separation between business functions and IT.
But hang on! I could also track a whole history of cross-functional collaboration within organisations. Every single problem in every single organisation appears to be solved by “a cross-functional team” right? In fact, the whole structure of management education has become about educating future managers that a. All organisations are made up of common functions (IT, HR, Finance, etc) and b. that their job as managers is to coordinate across these functions.
This process, that builds organisations in which every collaboration of value is an exception and then creates managers who are rewarded for intervening is bullshit (!). Our governance models need to change.
The thing that needs to change first is to give people responsibility for capabilities. The end-to-end responsibility for something regardless of the separation between “the business” and IT is the very first step towards “alignment”. If you haven’t done this stop working on alignment issues until you do.
“Airlines are notoriously cyclical because revenue is very sensitive to changes in demand. Profits are greatest when strong demand results in full planes (‘‘load’’) and high prices (‘‘yield’’), but they can disappear quickly when demand falls because costs are relatively fixed and flights can’t easily be cancelled.”
I’m currently working on the very edges of the airline industry (via IT outsourcing). I can relate to the ‘aeroholic’ tag. It’s a very compelling industry and while I don’t invest money in it I certainly invest time in it.
So, somebody important let me under his umbrella this morning. I spoke briefly to him and it got me thinking about Boston Consulting Group (from where he had worked as an adviser to Qantas for 10 years).
I think the airline industry’s highs and lows have been managed through sophisticated financial devices (fuel hedging, for example, or deferred losses). This is by necessity, but I think this process might have had it’s own unintended consequences.
I’m currently focusing on what those unintended consequences might have been… because that is where I will be able to have the greatest impact. There are some non-optimal behaviors and outcomes I have noticed. I think if I understand them in terms of the necessities above things will make sense …
I often read a lot of bitter comments on news articles – such as this one – when a new IT outsourcing arrangement hits the press. The reader comments often appear to miss the whole point of outsourcing and in turn what could have been done to avoid it. I’ve always taken the approach the IT Outsourcing has value, isn’t in any way morally wrong, and is here to stay – so I’ve eventually learnt to understand it and therefore understand the opportunities in the industry.
Firstly, it’s important to understand that almost all cost savings provided by outsourcing are through increased visibility of spend and therefore more careful selection of which initiatives are pursued. It may be that certain outsourcing relationships offer access to specific capabilities, or that certain outsourcing relationships can be managed as a source of differentiation or innovation. But that’s not generally the value of outsourcing; that’s just outsourcing as a pillar to strategy and innovation management.
Outsourcing is often a last ditch effort to get costs – or visibility of costs – under control. It’s a recognition that portfolio management processes aren’t working, nobody fills out their timesheets, it’s very difficult to get IT departments to think in terms of business services or capabilities, it’s very hard to ensure documentation is kept up-to-date, and in general that mismanagement of IT has burnt out IT resources.
Outsourcing solves a number of these problems by simply putting a contract process in the middle of everything. Outsourcing basically means that in order to get anything done you need to procure a service – which means you have to justify the spend, assign it to cost codes, and be clear about the outcomes right up front. All of these things can be achieved without outsourcing but they simply aren’t. There isn’t enough discipline to do things consistently so the management team simply can’t run the IT department ‘like a business’ because they don’t know what is going on.
By putting a procurement process in the middle of everything it forces proper allocation of costs for everything. The outsourcing partner gets to choose between doing things for free, or being paid for it and thereby having to commit to certain outcomes and to be part of a managed procurement process which gives visibility of spend. Eventually, outsourcing partners decide they want to get paid for services. Eventually, things get better…
Unfortunately, being able to come to a contractual arrangement, to actually procure services, is a capability of the client organisation. It requires an ability to define outcomes, to cost and transfer risks as appropriate, and to perform service definition and orchestration. At the new finer granularity of the services to be procured the client organisation that has just outsourced may not have these capabilities.
So outsourcing arrangements suffer from an inability to come to contractual arrangements. And the reason they do is that they have never had to do those sort of contractual arrangements before. All of the portfolio management disciplines, solution and enterprise architecture processes, cost allocation, and even basic IT strategy process, haven’t been working. The fact that they weren’t working is the very reason the outsourcing had to occur. But they are still required in order to come to contract agreements once outsourcing is in place.
A common mistake is to try and roll-back the disipline in coming to contractual agreements. Because the supporting capabilities aren’t in place it’s very time consuming to come to agreements. The cost of spend visibility is seen as too high. But rolling back the requirements to come to contractual arrangements shouldn’t be the solution. Also, the contractual arrangements also allow the flexibility to procure ‘outcomes’ once the diciplines are in place to know what outcomes you actually want to procure.
In theory, you can avoid outsourcing by putting certain things in place to ensure full visibility of costs to the executive team. In theory, you can implement all of the portfolio management processes, enterprise architecture processes, cost allocation, etc and avoid the need to outsource at all. But in practice you can’t because there will always be comparative advantages in different countries / regions, and advances in communication and collaboration technologies that make off-shoring a valuable strategy. And while your company could build their own off-shore capabilities there are political and cultural considerations that make this a risky strategy. To off-shore you generally need to outsource.
So in the end, outsourcing is here to stay. The only thing you can do is understand how it delivers value so that you can understand how work is different in an outsourced environment. Here, the key messages to the ‘retained organisation’ are: things will change, new people will not have the same experience with your systems, new people will take longer as first. Most importantly, the message to the retained organisation is that for most people outsourcing isn’t actually for them – outsourcing is for the CFO or CEO.
The key message to outsourcing service provided is simple. Get much much better at providing the services you have been procured to provide.
There will be a number of new skills that you need to aquire when you first experience outsourcing. However, it’s worth learning them because this isn’t going away and some of them are skills you may have been missing for a long time.