IT Infrastructure
Chapters 3 & 4
INFO 410
Glenn Booker
Images are from the text author’s slides
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INFO 410
Chapters 3-4
IT Impact on Organizations
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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
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Large firms need to be agile to stay afloat
Small firms need to be networked to stand a
chance
INFO 410
Chapters 3-4
IT Impact on Organizations
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Organizational design choices affect the
flexibility and efficiency of the business
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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 3-4
Organization Design Challenge
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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 3-4
Need new capabilities
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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
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And increased use of strategic alliances and
partnerships
But hierarchy lives on!
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Chapters 3-4
Need new capabilities
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So there was motivation to reduce hierarchy
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Like GE and ABB in mid-90’s
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Yet don’t want to lose speed or efficiency
Giving up control is hard, even if you want to
empower others!
Want to be global and local, big and small
Decentralized but with central control and
reporting
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Chapters 3-4
LeapFrog
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For example, LeapFrog went from a startup
in 1995 to the #3 toy company in 2002
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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 3-4
Organization Design Challenge
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INFO 410
Chapters 3-4
Hybrid or matrix organizations
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The big/small problem was first solved with
the matrix org structure in the 60’s
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Often done by combining functional
organization with a project-based structure
Looks good on paper, but hard to control
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Want control & efficiency, flexibility & speed
Strategy too complex for actual capabilities!
Hard to tell how fast environment is changing
INFO 410
Chapters 3-4
Hybrid or matrix organizations
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So why try another hybrid organization?
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Data was often paper or verbal, hence
communication channels were slow
Now electronic and networked information
can share information fast enough to keep up
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IT can now help handle the info demands
E.g. IBM’s Business on Demand to unite info,
processes, and people
INFO 410
Chapters 3-4
Barings Bank
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Barings collapsed in 1995 due to $1.2B
in trading losses by one trader
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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 3-4
Hierarchy not all bad
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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
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Except if that point is at the top? (Madoff)
Hierarchical control systems keep processes
in line via checks and balances
INFO 410
Chapters 3-4
Contrast hierarchy vs. hybrid orgs
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Hierarchical org approach based on mgmt
making decisions to meet predefined goals
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‘Newage’ organizations want to empower
people and expand their responsibilities
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Do what you’re told!
Controls over transactions help with risk mgmt
Hard to define new rules if old ones thrown out
INFO 410
Chapters 3-4
Lessons from the ’80s and ’90s
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Speed is good, but not if you lose control
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Empowerment is not anarchy
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Need new products, fast cycle times
But bad fast decisions can quickly go awry
So need constant monitoring, and high expertise
Empowering might pass decision authority lower,
but often isn’t clear who’s in charge
Authority connected to complex org design
INFO 410
Chapters 3-4
Lessons from the ’80s and ’90s
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Org is more than just structure
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Org design features include structure, reporting
relationships, and compensation
Empowered structure needs more sr mgmt
involvement, clearer communication, and
monitoring
That’s why the matrix alone didn’t work
Need the rest of the features to change too
INFO 410
Chapters 3-4
IT impact on capabilities
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Organizations are information,
communication, & decision-making systems
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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 3-4
Frito-Lay
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In mid-80’s tried to speed product
development alone
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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
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Frito-Lay problem
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INFO 410
Chapters 3-4
Frito-Lay
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Then coordinated operating process changes
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Need to redesign processes from end to end,
with org, control, and incentive structures
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Left out org and mgmt systems to control them
Resulted in missed opportunities, overlooked
problems
Change is an enterprise function
Faster processes need faster info, more authority
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Redefining Control Systems
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INFO 410
Chapters 3-4
Con-Way, Inc
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Con-Way freight used IT to support global
org and control systems
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Consolidated into one IT platform across three
divisions, supporting shippers, receivers, carriers
Further improvements with WiFi and RFID
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Chapters 3-4
Accountability and collaboration?
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Empowerment, teams, and collaboration are
hot buzzwords
Authority can be formal or informal
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Includes job definitions, incentives, org, and
coordination
Traditional hierarchy balances centralization
vs. decentralization
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Chapters 3-4
Hierarchical authority
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A hierarchy is designed to limit local
decisions, make the big mistakes centrally
Trend to decentralization of decision
authority is key to new structures
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“Self-managing teams”
But coordination and control difficult; may lead
to overchecking self
Overall business goals often left out
INFO 410
Chapters 3-4
Hierarchy vs. On Demand
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INFO 410
Chapters 3-4
Phillips Petroleum
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Phillips tried a matrix org, with ‘centers of
excellence’
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Added a business intelligence system
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Didn’t get enough information to make good
decisions
Teams of ops managers could make decisions
Gave senior execs oversight, without slowing
processes
INFO 410
Chapters 3-4
Chapter 3 summary
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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
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Chapter 3 summary
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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 3-4
Chapter 3 summary
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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
INFO 410
Chapters 3-4
The case for IT
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Carr argued in 2003 that IT is no longer a
key strategic emphasis
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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
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Chapters 3-4
IT overspent
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Too many had been spending wildly on IT
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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
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Chapters 3-4
On Demand IT
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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 3-4
Legacy mindset
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The old way of IT was to budget IT expenses
within each project
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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 3-4
The new mindset
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As the worldwide network began to emerge,
app development, deployment, and
integration has become much faster
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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 3-4
How does IT provide value?
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INFO 410
Chapters 3-4
IT drives cost savings
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We saw that IBM redid its IT infrastructure,
and saved $2B/year
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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
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Chapters 3-4
IT drives cost savings
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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 3-4
IT drives revenue growth
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While controlling internal costs is great, still
need revenue to generate profit
Can use IT to streamline revenue-generating
processes
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Boston Coach optimized fleet schedules
Charles Schwab created online and self-serve
customer portals
INFO 410
Chapters 3-4
IT drives revenue growth
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IBM redid its product development processes
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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
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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
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IT can help provide business intelligence
Provide real time relevant information to
employees (e.g. sales, customer service,
marketing), thereby increasing revenue
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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
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IT can help launch new products or services,
or add value to existing ones
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Embed IT into products
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Launch new products and services
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Apple iTunes, Boeing’s MyBoeingFleet.com
Add value to existing products
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Boeing’s e-Enabled aircraft, Medtronic’s pacemakers
Nike shoe customization
INFO 410
Chapters 3-4
IT drives asset efficiency
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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 3-4
IT drives asset efficiency
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Tangible IT assets include
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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 3-4
IT drives asset efficiency
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Intangible assets fails to capture expertise,
experience, proprietary information about
customers, relationships with other
stakeholders, brand loyalty, etc.
IT intangible assets include
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IT systems that support a specific activity, and
associated people
Executive leadership and governance systems
IT drives asset efficiency
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Another key intangible asset is your people!
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Compensation, benefits, and the costs of hiring,
retaining, and incentivizing people
So calculating asset efficiency is messy!
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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
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Removing IT functions can increase costs
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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
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Tri*Source Title outsourced IT, and found
that everything having to be digital (not
faxed) improved efficiency, and reduced
workload on servers reduced crashes
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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
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So while a computer has intrinsic tangible
value as an asset, how that computer is used
can produce wildly different intangible
business values
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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
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Since most companies’ IT assets are not
lean and flexible, upgrading IT infrastructure
is often worthwhile
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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
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Sustainable advantage (i.e. competitive
edge) is based on many possible
approaches
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Strategic position (iPod)
Novel capabilities (Wal-Mart)
Once a leader, need to innovate to stay there
IT creates sustainable advantage
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Sustainable advantage comes from evolving
a fit between business model with the
opportunities and demands of the
environment
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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
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IT can create opportunities to help a
business by changing its strategy and/or
capabilities
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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
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But a business case must also tell a good
story
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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?
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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
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Feed that into risk management for later projects
Recognize that projects might have to die if
assumptions change drastically during them
Summary
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We’ve summarized the key ways IT can
support a business model to produce value
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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