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INFO 410 Chapters 3-41
IT InfrastructureChapters 3 & 4
INFO 410
Glenn Booker
Images are from the text author’s slides
INFO 410 Chapters 3-42
IT Impact on Organizations
Some thought the computer revolution would turn hierarchical organizations into a global networked economy
While the impact of IT has been huge, maybe not quite that extreme– Large firms need to be agile to stay afloat– Small firms need to be networked to stand a
chance
INFO 410 Chapters 3-43
IT Impact on Organizations
Organizational design choices affect the flexibility and efficiency of the business– Org helps manage info complexity, uncertainty
Org must be aligned with strategy and environment to respond to opportunities and threats
IT can facilitate new and improved organizational structures and processes
INFO 410 Chapters 3-44
Organization Design Challenge
How simple or complex is the structure of our enterprise?
How stable or not is the business environment in which we’re operating?
Like we saw in the IT Impact Map, these answers can change over time for a single organization
INFO 410 Chapters 3-45
Need new capabilities
The late 20th century saw much corporate downsizing, reengineering, and general reduction of hierarchical structures, all needed to help compete with customized solutions in a newly global market– And increased use of strategic alliances and
partnerships
But hierarchy lives on!
INFO 410 Chapters 3-46
Need new capabilities
So there was motivation to reduce hierarchy– Yet don’t want to lose speed or efficiency– Giving up control is hard, even if you want to
empower others!
Like GE and ABB in mid-90’s – Want to be global and local, big and small – Decentralized but with central control and
reporting
INFO 410 Chapters 3-47
LeapFrog
For example, LeapFrog went from a startup in 1995 to the #3 toy company in 2002– Five platforms running 100+ software titles, 35+
toy products, plus educational software division
Need constant innovation to stay competitive, but use IT to control operations
INFO 410 Chapters 3-49
Hybrid or matrix organizations
The big/small problem was first solved with the matrix org structure in the 60’s– Want control & efficiency, flexibility & speed
Often done by combining functional organization with a project-based structure
Looks good on paper, but hard to control– Strategy too complex for actual capabilities!– Hard to tell how fast environment is changing
INFO 410 Chapters 3-410
Hybrid or matrix organizations
So why try another hybrid organization?– IT can now help handle the info demands
Data was often paper or verbal, hence communication channels were slow
Now electronic and networked information can share information fast enough to keep up– E.g. IBM’s Business on Demand to unite info,
processes, and people
INFO 410 Chapters 3-411
Barings Bank
Barings collapsed in 1995 due to $1.2B in trading losses by one trader – Trader also had access to the system which
reported on trades– Wiped out the capital reserves of the bank
A similar problem was averted at Societe Generale when sudden growth and profits caused suspicion
INFO 410 Chapters 3-412
Hierarchy not all bad
Both bank examples show that having limits on responsibilities and decisions, standardization of jobs, and restricting access to information can help protect org from a single point of failure– Except if that point is at the top? (Madoff)
Hierarchical control systems keep processes in line via checks and balances
INFO 410 Chapters 3-413
Contrast hierarchy vs. hybrid orgs
Hierarchical org approach based on mgmt making decisions to meet predefined goals– Do what you’re told!– Controls over transactions help with risk mgmt
‘Newage’ organizations want to empower people and expand their responsibilities– Hard to define new rules if old ones thrown out
INFO 410 Chapters 3-414
Lessons from the ’80s and ’90s
Speed is good, but not if you lose control– Need new products, fast cycle times– But bad fast decisions can quickly go awry– So need constant monitoring, and high expertise
Empowerment is not anarchy– Empowering might pass decision authority lower,
but often isn’t clear who’s in charge– Authority connected to complex org design
INFO 410 Chapters 3-415
Lessons from the ’80s and ’90s
– Org design features include structure, reporting relationships, and compensation
– Empowered structure needs more sr mgmt involvement, clearer communication, and monitoring
Org is more than just structure– That’s why the matrix alone didn’t work – Need the rest of the features to change too
INFO 410 Chapters 3-416
IT impact on capabilities
Organizations are information, communication, & decision-making systems– So how fast information is processed limits an
organization, and how fast they respond to market changes
Common mistake is to change part of org, and omit the controls and reporting aspects
INFO 410 Chapters 3-417
Frito-Lay
In mid-80’s tried to speed product development alone– Many new product variations, marketing
campaigns, promotions– Ignored supply chain, mfg, and order fulfillment– Field sales tried to adjust for local needs,
competition; without distribution support– Chaos
INFO 410 Chapters 3-419
Frito-Lay
Then coordinated operating process changes– Left out org and mgmt systems to control them– Resulted in missed opportunities, overlooked
problems
Need to redesign processes from end to end, with org, control, and incentive structures– Change is an enterprise function– Faster processes need faster info, more authority
INFO 410 Chapters 3-421
Con-Way, Inc
Con-Way freight used IT to support global org and control systems– Consolidated into one IT platform across three
divisions, supporting shippers, receivers, carriers– Further improvements with WiFi and RFID
INFO 410 Chapters 3-422
Accountability and collaboration?
Empowerment, teams, and collaboration are hot buzzwords
Authority can be formal or informal– Includes job definitions, incentives, org, and
coordination
Traditional hierarchy balances centralization vs. decentralization
INFO 410 Chapters 3-423
Hierarchical authority
A hierarchy is designed to limit local decisions, make the big mistakes centrally
Trend to decentralization of decision authority is key to new structures– “Self-managing teams”– But coordination and control difficult; may lead
to overchecking self – Overall business goals often left out
INFO 410 Chapters 3-425
Phillips Petroleum
Phillips tried a matrix org, with ‘centers of excellence’– Didn’t get enough information to make good
decisions
Added a business intelligence system– Teams of ops managers could make decisions– Gave senior execs oversight, without slowing
processes
INFO 410 Chapters 3-426
Chapter 3 summary
Keeping up with the 21st century requires more than a token re-organization!
Leaving hierarchical structures requires complete rework of management processes
IT provides real time information needed to guide good decisions
INFO 410 Chapters 3-427
Chapter 3 summary
Need to define activities, decisions, and resources to fulfill our strategy
Determine which activities and decisions are inside organization vs outside
Integrate processes with business environment and mgmt cycle control times
Sense internal and external opportunities and threats
INFO 410 Chapters 3-428
Chapter 3 summary
Group people and partners in teams and units to coordinate and control processes
Provide tools and incentives to make good decisions today, and innovate for tomorrow
Use creativity and potential of everyone Create culture of shared values, so everyone
meets personal and shared goals
The case for IT
Carr argued in 2003 that IT is no longer a key strategic emphasis– Major IT systems, like Sabre for AA, and
Walmart’s supply chain were critical for competitive advantage
– Now IT is a common commodity due to reduced price and plenty of development tools
– You still need IT, but it isn’t likely to be a strategic competitive advantage
INFO 410 Chapters 3-429
IT overspent
Too many had been spending wildly on IT– Need more focused and thoughtful approach
Many insist compet. advantage still possible Easy availability of IT makes it valuable Carr’s idea based on old investment model of
IT – no longer true with open source, open standard infrastructures
INFO 410 Chapters 3-430
On Demand IT
So IBM created ‘Innovation On Demand’ to emphasize the flexibility that is needed for business processes and organizations
The key is that the way IT provides value to organizations has changed, and we need to be aware of how to exploit IT correctly
INFO 410 Chapters 3-431
Legacy mindset
The old way of IT was to budget IT expenses within each project– Based on IT systems supporting a single
application, e.g. HR, or manufacturing– Therefore each system ‘belonged’ to the project
that used it
Exceptions to this approach were rare Adoption of the Internet forced the change
INFO 410 Chapters 3-432
The new mindset
As the worldwide network began to emerge, app development, deployment, and integration has become much faster– So there are few isolated systems!
So the new view of IT is as a string of investments, which provide value to the organization
INFO 410 Chapters 3-433
IT drives cost savings
We saw that IBM redid its IT infrastructure, and saved $2B/year– Drastic cuts in the number of data centers,
staffing, and CIOs– Consolidation into one corporate network, not 31– Reduction of the number of applications used
Reengineering back office processes saved another $1B/year
INFO 410 Chapters 3-435
IT drives cost savings
Key vision behind IBM’s transformation was from decentralized silos to a centralized shared services model
IT serves everyone, so make it coordinated to meet those needs
INFO 410 Chapters 3-436
IT drives revenue growth
While controlling internal costs is great, still need revenue to generate profit
Can use IT to streamline revenue-generating processes– Boston Coach optimized fleet schedules– Charles Schwab created online and self-serve
customer portals
INFO 410 Chapters 3-437
IT drives revenue growth
– IBM redid its product development processes Reduced cost of abandoned projects 90% Warranty/revenue reduced 25% Time to market improved 67% Overall cost savings of $1.6B/year
– IBM redid global supply chain processes Time to complete orders went from 48 to 2.5 hours Procurement costs down 20% in one year 60% increase in procurement volume with no new staff
IT drives revenue growth
IT can help provide business intelligence Provide real time relevant information to
employees (e.g. sales, customer service, marketing), thereby increasing revenue– Canyon Ranch did this– Aflac created a CRM system for insurance agents– IBM Global Services consultants used their new
supply chain processes
IT drives revenue growth
IT can help launch new products or services, or add value to existing ones– Embed IT into products
Boeing’s e-Enabled aircraft, Medtronic’s pacemakers
– Launch new products and services Apple iTunes, Boeing’s MyBoeingFleet.com
– Add value to existing products Nike shoe customization
INFO 410 Chapters 3-440
IT drives asset efficiency
Recall asset efficiency = revenue/assets Assets include financial, tangible and
intangible assets Financial assets include cash, securities, and
accounts receivable Tangible assets include physical inventory,
facilities, equipment, and newer software
INFO 410 Chapters 3-441
IT drives asset efficiency
Tangible IT assets include– IT operating infrastructure; data centers, network
centers, call centers, middleware, – Enterprise solutions; ERP, CRM, payroll, HR, and
database management systems, email and collaboration tools
Intangible assets include ‘goodwill’, acquisitions, intellectual property
INFO 410 Chapters 3-442
IT drives asset efficiency
Intangible assets fails to capture expertise, experience, proprietary information about customers, relationships with other stakeholders, brand loyalty, etc.
IT intangible assets include– IT systems that support a specific activity, and
associated people– Executive leadership and governance systems
IT drives asset efficiency
Another key intangible asset is your people!– Compensation, benefits, and the costs of hiring,
retaining, and incentivizing people
So calculating asset efficiency is messy!– Lower assets or higher revenue improves it– Shutting down, writing off, or selling poor assets
helps efficiency– Outsourcing IT infrastructure done for this reason
Why outsourcing fails sometimes
Removing IT functions can increase costs – Fees to outsourcing partners, costs of managing
the relationship, etc.
Can reduce revenue if outsourcing partner performs poorly
About half of world-class companies didn’t benefit from outsourcing
Often due to hidden costs
But not always
Tri*Source Title outsourced IT, and found that everything having to be digital (not faxed) improved efficiency, and reduced workload on servers reduced crashes– Costs per transaction down 20%– Increased costs 25% per year for outsourcing, but
improved flexibility and productivity make up for it
Assets not so simple
So while a computer has intrinsic tangible value as an asset, how that computer is used can produce wildly different intangible business values– IT assets need to be reliable, lean, and scalable
to help lower costs and increase efficiency– When they are also agile and leverageable, they
can help create custom products more easily
Assets not so simple
Since most companies’ IT assets are not lean and flexible, upgrading IT infrastructure is often worthwhile– IBM, Proctor & Gamble outsourcing to IBM
This is a key conclusion – understanding the intangible value of IT assets can help justify improvements to IT infrastructure
IT creates sustainable advantage
Sustainable advantage (i.e. competitive edge) is based on many possible approaches– Strategic position (iPod)– Novel capabilities (Wal-Mart)
Once a leader, need to innovate to stay there
IT creates sustainable advantage
Sustainable advantage comes from evolving a fit between business model with the opportunities and demands of the environment– This is the ‘virtuous cycle’ for which we strive– IT can help your business model evolve by
controlling costs and delivering solutions, using good IT people, partners, and infrastructure
Business case for IT
IT can create opportunities to help a business by changing its strategy and/or capabilities – As we saw, cost savings, revenue growth,
asset efficiency, and sustainable advantage are all possible benefits
Lots of metrics are available to quantify these (see page 124)
Business case for IT
But a business case must also tell a good story– Why this? Is this a good opportunity to pursue?– Why now? How long will it take to implement?
How long to be financially worthwhile?– Why you? Are we the right people to be doing
this? Do we have the resources needed? Do we have the commitment and vision needed?
Project life cycle?
Strategy is implemented via projects Funding for one project is great, but more
depends on how well that project is executed Be sure to learn from each project – what
was good, what wasn’t– Feed that into risk management for later projects– Recognize that projects might have to die if
assumptions change drastically during them
Summary
We’ve summarized the key ways IT can support a business model to produce value– Integrating new technologies into leftover legacy
systems is a key challenge– Uncertainty has led to more need for lean,
flexible, agile systems, not silo’d monoliths!– The business case for IT depends on
understanding its intangible benefits