Financial Forensics as a Clue to Dysfunctional IT


“To understand a crime, follow the money” is a familiar principle of detective work.  Over the years, I’ve found that principle to be extremely useful in the world of IT management.  In fact, my spin on it is, “If you want to understand dysfunctional IT behavior, follow the money!”

Of course, this principle helps detectives to not only catch criminals, it helps to get the criminals punished.  Similarly, in the IT world, I’ve used the principle to both understand what is leading to dysfunctional IT behavior, and to help correct that behavior by fixing the money-related drivers.  Let me provide an example and the application of this principle.  The example is, of course, fictitious, though based on real life situations I have worked over many years of management consulting and research.

First, a caveat.  Clearly, not all human or organizational behavior is motivated by money.  However, I have found that collective organizational behavior is significantly shaped by money – by the sources of funds, valuation of returns, and measurement inherent in financial reporting.

Scenario

Higgins-Smithbottom is a global fashion designer and retailer.  The company culture values the creative geniuses who come up with the hallmark designs, and places great freedom and authority on the heads of business units.  In common with the industry, success is seen to be all about great design, brilliant merchandising and effective management of the brand – three disciplines that seem to have little to do with IT.  As such, IT is an “expense to be minimized,” a “necessary evil,” and something that the IT organization is expected to “take care of with minimal disruption to the business” so that business leaders are “free to design, merchandise and manage the fickle fashion business unencumbered by IT.”

The executives at Higgins-Smithbottom are vaguely aware of contemporary success stories such as Zara and Li & Fung, but don’t recognize the role that information and IT have in these companies success stories.

Financial Forensic Clues

  1. All IT capital and expense is managed out of an IT budget – the IT resource is essentially “free” to the business unit leaders.
  2. There is no enterprise-wide IT prioritization and allocation process.  Resources are essentially allocated on a first-come, first-served basis, with the regulator on business demand being total supply – when all available supply is tied up, no other demand is accepted.
  3. Because IT is “free” there are no attempts to measure and track the return on IT investments.

Dysfunctional Behavior

The perspective on IT is that it costs too much and delivers too little.  Even though business heads do not “pay” for IT, they know that the bottom line is impacted by it – IT saps profits and eats into the executive bonuses.  As a result, business leaders try to minimize their involvement in IT, invest no time or energy trying to understand it, or figure out how it can improve the business.  Consequently, IT contributes relatively little to the business.  It responds as an “order taker” acting on low value requests from business silos, without an overall IT strategy or architecture.  Each response to a business order adds more complexity to the patchwork of IT systems.  More time and money is spent on inter-system interfaces than on business enablement.

When a meaningful business request surfaces for management information or business analytics, IT finds it virtually impossible to respond, due to the complex patchwork of systems and lack of data standardization.  Lack of adequate IT resourcing and responsiveness leads business units to hire their own IT resources – sometimes as consultants and contractors, other times as permanent staff.  These “shadow IT” groups exacerbate the complexity of the systems environment, and mask true IT spending levels.

IT eventually finds itself in a vicious cycle – low business demand maturity begets low IT supply maturity.  When IT does get engaged by the business for a new system, it fails to “push back” on the business demand to “automate the manual process as is – don’t make us change the process!”  IT does what it’s told, even if that means customizing the heck out of an off-the-shelf package.  The customization triples the implementation costs, and sends subsequent maintenance costs through the roof.

Lessons Learned

  1. When IT is “free,” it is not valued.  When someone else is footing the bill, there’s no sense of accountability from those who should be turning the investment into a valued return.
  2. Without enterprise-wide prioritization and allocation, IT optimization takes place at the business unit level, leading to sub-optimization at the enterprise level.
  3. Lack of enterprise-wide prioritization and allocation is typically accompanied by a lack of an overall IT strategy and road map.  This leads to islands of automation, and over time, the number of interfaces (and costs associated with building and maintaining those interfaces) increase exponentially.  After a few years, the vast majority of IT spend is related to interfaces – i.e., it’s all cost-added, without any value-added.
  4. When IT is sub-optimized for the enterprise, IT “vacuums” get created throughout the business, and nature’s abhorrence of vacuums leads them to be filled by “shadow IT” groups.  This adds to actual IT spend, even though the shadow spend is not visible in the IT budget – i.e., IT is costing you more than you think it is.
  5. Being “cheap” with IT usually ends up being very expensive!
About these ads

From ‘Supply Constrained’ to ‘Value Constrained’ Business-IT Model


One of the difficult paradigm shifts that tends to trap IT organizations in Level 2 Business-IT Maturity is the notion that business demand must be constrained by IT supply.  Demand always exceeds supply for IT capacity, so the idea (part of the Level 1 experience) is to set a limit on IT supply, then figure out some way of prioritizing demand against that supply capacity.  Sometimes the the constraining mechanism is IT budget, other times it is IT headcount – either way, the net effect is the same – a bunch of work that the business wants won’t get done, and we hope the prioritization mechanism works sufficiently well that the “right” demand is flowing through and getting address, and the “wrong” demand (low business value) is not.  I’ve rarely seen this work well.

If there is a single line of business, at least demand can be prioritized across the business line, and the mechanisms to achieve this are not too hard to implement.  Typically, however, there are multiple lines of business, and while the mechanisms in each business line may work ok, there are rarely effective mechanisms across lines of business.  This leads to all sorts of dysfunctionality, especially as the enterprise matures and shifts towards more of an integrated business, with common and shared process, compared with the more functional and stove-piped model typical at Level 1.

For example, IT resources get “walled off” against business units – sometimes actually being embedded in the unit.  There’s nothing inherently wrong with the embedding – certainly some IT capabilities (such as Relationship Management) work most effectively when they are really close to the business).  However, when analysts, designers, developers, testers, etc. get “walled off” for given business units, they are no longer available to be shared across the enterprise – they creates all sorts of inefficiencies.  And, from my experience, with the best will in the world, and with competent, well meaning people both in IT and the business, demand will fill that available “walled off” supply no matter what.  A result is that lots of relatively low value and non-essential demand gets filled, while high value demand, both within the business unit with the walled off resources, and in the other business units sits in a backlog (at best) or, more typically, just does not get surfaced because people know there is no hope of getting it filled.  A symptom of this is an IT organization with literally thousands of active projects, mostly small, and with a general sense that IT costs a lot of money and delivers little value.  Such an environment presents all sorts of challenges to real business-IT strategic alignment.

The big breakthrough comes somewhere in Level 2 where there is a shift from this supply constrained model to one that is value constrained.  Let me first describe the theoretical end state of the value constrained model – we will explore the practical realities of moving to this model later on.  At the theoretical end point, IT supply is treated as an infinite resource that can flex its capacity on demand – ramp up to meet high value demand, ramp down when that demand goes away.

The key enablers to move to this model (once the paradigm shift is understood and desired) are to:

  • Prioritize demand based upon business value (which has all sorts of implications for business cases, cost and value accountability, value measurement, portfolio management, etc.)
  • Create an agile and flexible supply capability (which typically means there is a robust global sourcing strategy and management model, key partnerships with global sourcing entities are in place, and the IT organization has become focused exclusively on “core” IT capabilities – usually encompassing relationship management, demand management, value realization, business process improvement, innovation, program management, portfolio management and global talent sourcing.)
  • Add an IT Program Management layer over IT Project Management
  • Add an IT Enterprise Portfolio Management layer over IT Program Management
  • Elevate IT Architecture to Enterprise Architecture
  • Implement an effective business-IT governance model to facilitate cross enterprise and cross business-IT decision making.

I will explore each of these enablers in subsequent posts.