How to Tune an IT Department
Information Technology is a mystery for most executives (specifically CEOs and CFOs. If you poll all C-Level executives, I would bet most of them have a story about an IT project or budget that blew his earnings. When a CEO has to explain to the board why an ERP implementation went $15 million over budget, it hurts. When a CFO has to get on an earnings call and explain technology issues, it’s uncomfortable. Mainly because they can’t understand why. They understand every facet of their business but technology is a mysterious black hole. CEO’s and CFO’s know they need to invest in technology, but the where and how much to invest is a problem. I think there are some basic steps you can follow to make your IT teams hum.
- Pick a budget and hold the line – the first exercise is to look at your budget and analyze it. Gartner, Forrester and others provides great research on IT budgets. I find there are several sources of metrics and all of them provide data points. In my travels I have used the following different metrics to provide the best benchmarks.
- IT Spending Per Employee
- IT Spending as a % of Revenue
- IT Spending as a % of Gross Profit
- IT Spending as a % of Operating Expenses adjusted for Profitability
- IT FTEs as a percentage of Total FTE’s
- IT Contractor Ratio
- Budget Distribution
- SWOT it out – For those of you that don’t know, SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and Weaknesses are internally focused and Opportunities and Threats are externally focused. This is very much a “Consulting Exercise” but the end result is important. If you have a clear vision of your SWOT then you can make good decisions on where to invest your IT budget.
- Think Critical and Outsource the Rest – Look at everything that runs your business. You have your financial applications, your operational applications, perhaps some web applications. Figure out which applications can provide you with a competitive advantage. Focus on your critical applications and outsource everything else. If you outsource your critical apps, do so very cautiously. If its critical to your business why rely on another company (whether they’re in India or right next door) and put your success in their hands. Remember, I’m only talking about applications that are critical to your competitive advantage. All companies need an accounting system but most accounting systems don’t create a competitive advantage.
- Choose your Leadership Wisely – IT leaders come in all shapes and sizes. They have backgrounds and biases that need to be understood. When selecting a leader, pick your most critical application and find a leader that knows that application. For example, if your critical application is your custom built web application. Don’t hire an Accenture consultant who knows SAP in side and out. I know that sounds pretty obvious but I have seen so many companies that have technology leaders that know very little about how to manage the most critical systems. Those leaders rely too heavily on either consultants or internal employees and he’s not qualified to manage either of them.
- Beware of Consultants – Now don’t get me wrong, consultants are critical to help you with things you know little about. That said, don’t ever put yourself in a position where you can’t replace your consultants. I have so many stories of companies that lose complete control of their technology and are prisoners to their consulting company. Big consulting companies that do large system implementations are experts at inserting themselves like a fishhook. Most people don’t realize the barb until its too late and they are afraid to rip the hook out. Some of the best companies in the world fall victim to this. If you are going to bring in consultants to build or implement your critical systems, make sure you have a good plan for scoping, selecting, contracting and removing a big consulting vendor.
- Plan your work and work your plan – Rome wasn’t built in a day so you need a plan. I suggest a 3 to 5 year plan of all the projects you need to align IT with your business. The average tenure of a CIO is 3.5 years and the GAAP accounting allows you to capitalize system development costs and depreciate them over 5 years. That said, you should have a 3 to 5 year strategic plan for IT investments. Don’t let it sit on a shelf though. You should plan it and work it just like you’d work a project plan. If you list of projects turns into a 3 page wish list for Santa, then cut it down to fit your budget. If the list is long and justified, then you might want to invest in a Program Management Office.
Although no plan is perfect, you don’t stand a chance without one. Do your homework and you’ll save yourself a lot of pain and disappointment later. Take a look in the mirror and ask yourself:
- What am I spending?
- Is aligned with the strategic direction of the business?
- Am I outsourcing the noise and focusing on the critical apps?
- Am I an effective leader or do I have effective leaders?
- Am I a prisoner to my consultants?
- Do I have a good plan and am I sticking to that plan?