Build a flexible IT department

A leading supplier of specialized aluminum and glass products for commercial and residential construction Arch Aluminum and Glass Co., once a small business, is now extremely flexible to meet user needs while simultaneously Renowned for maintaining stable cost management. This has allowed its business to expand to every corner of the US market over the past 10 years, with a turnover of $200 million.

However, this growth has also exposed some weaknesses in the company's IT infrastructure. After examining the initial set of highly integrated business applications, CIO Kevin Aubuchon pointed out that although such an IT structure requires very low operating and administrative costs, and has served Arch well for nearly 10 years, The development and operating costs of platform expansion are becoming more apparent.

Realizing these, he and project manager Claire Murphy reduced operating costs by integrating application systems and data storage on the one hand, and on the other hand, established data replication equipment and hot backup sites in another major branch office, which effectively reduced the cost of headquarters and data storage. Risks posed by data centers located in the center of the hurricane belt.

The new architecture effectively migrates internal applications to standard platforms, reducing technical risk while providing access to a larger, more cost-effective talent pool. Centralized design also reduces the investment required to build new equipment. Most importantly, it gives Arch more flexibility to deliver solutions quickly and efficiently, accelerating the efficient development of the business. For a company built on flexibility, this is a big plus.

Today, companies like Arch are realizing that their business hours are shrinking. What previously required months of planning and longer execution time was reduced to just a quarter so companies could seize fleeting market opportunities. To be competitive and create value for shareholders in such an environment, companies cannot afford to let any slack; they must actively respond to external pressures, seize market opportunities, and suppress competitors by fighting back quickly. The key to all this is a flexible IT organization.

There are two major risks to an inflexible IT department

There are two major risks to an inflexible IT department that can negatively affect the enterprise value or the future value of the business' cash flow. The first (and larger) risk is the missed opportunity; the second is the impact of IT as an increasing fixed cost.

The missed opportunity is obvious: If IT fails to meet the information needs, business decisions will be hindered or ineffective -- this is known as "IT lag." Without the necessary information support, companies can only miss the opportunity or be unable to effectively counter powerful competitors with sufficient information.

When shortening of product life cycles is the rule rather than an accident, staying nimble becomes critical for companies. In the traditional product life cycle, companies are able to overcome IT lag relatively early and have many opportunities to become fully profitable. However, as this cycle shortens, the potential profit of the product will be more concentrated in the early stage, and the possibility of achieving full profitability will become less and less: this is the urgency of reducing IT lag.

Not so long ago, the product cycles of leading automakers' major product lines could last 10 years or more. By 1996, Ford's flagship F-Series wagon had remained largely unchanged for 15 years. Today, automakers have reduced product cycles to five years or less, as rivals like Toyota's full-length vans take on Ford's vans and better use of information technology in product development.

The economic situation has clearly tightened disposable capital and has led us to focus on another major IT risk, the impact of IT as a rising fixed cost. An inflexible IT organization is likely to be inefficient, resulting in fragmented cash flow, forcing companies to reduce the size and number of operations, thereby hindering business growth.

However, simply investing more money in IT does not guarantee a positive impact on value. Interestingly, the value of IT organizations is largely independent of the resources they have. In fact, IT departments with large resources are more likely to limit value creation, because in most cases, these well-equipped IT organizations run out of cash and lose their flexibility.

Three Steps for a Flexible IT Department

The flexibility of IT can be systematically developed through the following three steps, (1) adopting project management, (2) cultivating the necessary own capabilities, (3) effectively managing IT Human Resources. Here's how to implement each step.

The first step in adopting project management is to make the IT department a project-driven organization, where every activity, cost, and resource can be grouped into a project. This integrates IT activities with the business activities of the enterprise to better manage, review and utilize IT assets and expenses. In addition, the project management structure makes it easier to calculate IT costs and more accurately list planned and actual profit margins. Many times, a business plan is approved simply because the required IT costs have not been fully taken into account.

IT organizations that do not employ project management are often in trouble because so many resources are wasted on goals that are outdated. An IT organization that implements project management is more purposeful, whenever IT is largely an extension of the business. At Quality Distribution, for example, a leading company in the transportation industry, the IT schedule is fully aligned with the business. CIO Siamak Azmoudeh maps IT initiatives to the company's strategic goals.

Well-functioning IT systems provide the infrastructure available for many other projects, as well as support the operation and maintenance of previous projects. In addition to the benefits generally seen, customer support and data center operations are also critical to IT service quality. A "time tracking system" is required to set up and manage projects.

In addition to these measures, the adoption of strategic cost management is very important to achieve IT flexibility. Fixed and variable costs within IT determine the degree of overall flexibility. As a business becomes more information-centric, IT-related costs will account for an increasing proportion of the overall cost structure. By effectively managing fixed and variable costs, business operations can be better controlled and risk reduced. Using this approach, company performance will be more predictable because variable costs can be cut quickly when revenue is reduced. This is especially true for companies whose revenues are subject to cycles, such as in the investment business, where substantial commission income ebbs and flows with financial markets. An IT department with high fixed and low variable costs will often be swayed by labor and infrastructure, and projects such as consulting services for software development will not be flexible enough to support business planning. Human resource issues can also draw attention to business activities.

If left alone, the fixed costs for the IT organization will be higher. New recruits are usually recruited by the IT department and take on trivial roles. The same goes for infrastructure costs. New application platforms and software packages are bought to support a project, but depreciation and operating costs remain over time. A heavy-duty manufacturer has as many as 11 separate e-mail systems in one large business unit, and neither the user nor the IT department can explain why.

Building Capabilities IT departments must excel at certain skills. Include: Strategic fit capabilities. Any change in business strategy must be quickly and accurately reflected in technology strategy. Managers must have the business acumen to assess the steps required for strategic reengineering, and they must have the leadership skills to drive IT and other departments to respond quickly and effectively to change. Many companies, including Deere and Co, have begun to develop business-savvy IT leaders for this purpose.

Technical management skills. This key competency requires managers to have a solid foundation to quickly deploy tasks that support business planning. The technical architecture integrates applications, communications, data storage, integration tools and platforms. To meet the demand for information, it requires balancing costs.

Standards and Product Stewardship. IT must keep pace with emerging standards and pay close attention to products that increase flexibility and performance while substantially reducing operating costs. Web services, for example, guarantee full efficiency and functionality. IT must continually assess the value of these changes and reap the benefits of the technology as it matures.

Outsourced management. To maximize customer responsiveness and maintain target costs, it is necessary to develop outsourced management capabilities and leverage external resources. The IT department must create a detailed inventory that clearly defines functions, technologies and operational rules. Otherwise, outsourcing will not be successful.

Clearly and effectively defined service scope, service level agreements, supplier-customer relationships, expected deliveries, change control mechanisms, compensation structures, payment plans, and other terms are all important.

Effectively Manage IT Human Resources In order to remain flexible and achieve strategic cost management, an agile IT department should be permanently staffed with fewer but more experienced, educated, and business-minded people. The technical background of the permanent staff should not be overemphasized and should be more focused on driving the business through technology use, execution and risk management, rather than the technical and mission-oriented aspects. Thus, the IT department needs a human resource management support to ensure that such employees can be attracted, retained and developed.

These personnel should be paid above average and bonuses and participation plans will be based on individual, IT and overall business goals. In addition, to retain these people, more effective career development programs are needed, because these people are both technical and business conscious, and their pursuits often take them beyond the IT department - which is a good thing. Companies should realize that these business talents with technical backgrounds will be the next generation of business leaders, and it is imperative to promote their development.

With all these requirements and competencies in place, a strong leader is needed to lead and drive this process—a process that spans all of the company's business units. The new organization will be made up of high-potential individuals, and IT leadership must effectively manage and direct these highly capable individuals to achieve the desired results.

By adopting a project management approach, developing the necessary competencies, and effectively managing human resources, the IT department will be significantly more flexible and redesigned. IT departments will be leaner and more responsive, IT lag will be changed, overall operating costs will drop, and companies will be able to thwart formidable competitors.

This original article was reproduced with permission from the September 2002 issue of Optimize magazine. CMP Media LLC, Optimize magazine registered copyright. Translated by Yu Qingkun.

John Damgaard is Vice President of Operations at CGN & Associates.