IT needs to embrace complexity to take control of its own destiny
Originally published by McKinsey
Driven by customer and user expectations as well as an ever-growing array of traditional and nontraditional competitors, many institutions are trying to transform their IT to become ready for digital.
Few debate the need for IT transformations, given how essential technology has become to a business’s ability not only to grow and innovate, but also to defend itself. The problem is that many IT organizations have avoided the complex, difficult—and, let’s face it, not terribly exciting—work of a full IT transformation. Instead, they have tended to outsource or postpone the problem.
The pitfalls of IT transformations
In looking for easy ways to execute a transformation, IT leaders tend to get caught in a world of what we like to call “evil wizards” and “naive magicians.” Evil wizards offer monolithic solutions where everything will be run on “one magic platform.” This generally locks companies into an IT setup just as inflexible as their previous legacy environment, incurring considerable sunk costs and significantly increased operating costs. Naïve magicians offer simple, one-track solutions for specific problems that don’t account for other significant dependencies. How many have hoped that making IT agile would make it faster, or that “just” a data lake would turn their company into an advanced-analytics leader?
The problem is not only that these solutions rarely, if ever, deliver the promised results; it’s that outsourcing is an abdication of responsibility by the CIO and IT for the core changes required. It is a sign that IT is not providing the CEO and the executive committee with the tools to make the best decisions and is not in control of its own destiny.
Given the understandable resistance to making large investments in IT, we’re surprised at how often businesses are willing to put down serious cash for a monolithic solution or a one-track solution—or to postpone difficult decisions by undertaking incremental IT projects that add up to a significant outlay of funds but produce the same end result: underwhelming impact. The reason is that these approaches provide only a reassuring veneer of taking action without actually confronting the need for tough measures that really bring about change. We realize we’re oversimplifying things; lots of good analysis goes into these kinds of decisions. But we believe that by simplifying the issue, we can suggest a better path.
All together now: Embrace complexity
The time has come for IT to face the actual complexity and coordination required to really drive its own transformation, and therefore that of the whole business. It is therefore essential to build the internal capabilities to actively manage the transformation. That doesn’t mean that IT won’t need vendors or external solutions. In fact, an increasingly foundational capability of modern IT systems is to be able to develop an ecosystem of providers, platforms, vendors, etc. But the key point is that IT itself is responsible for the IT transformation, engages and convinces the executive committee, and does the work on the core elements.
The main reason this internal IT control of its own destiny is so crucial is that modern IT transformations require complex coordination and tough trade-offs across the IT organization and the business. What’s needed to capture substantial value is a holistic IT transformation and therefore real IT capability and decision making.
Just choosing a monolithic platform or a one-track solution (whether digital microservices, or cloud, or data lake) without addressing the core issue of overall connectedness, i.e.,interdependencies, means benefits will be limited. For example, digital customer journeys based on microservices will not be effective without being cloud based, without a serious step-up in continuous data delivery from other parts of the IT setup, or without modernization steps within the supplying product systems. The benefit chain of an IT transformation is only as strong as its weakest link. Managing this complex coordination and collaboration is not something that any external organization or solution can do; only IT can.
Our research shows that most large businesses need to put in place six primary tech capabilities (see exhibit). These capabilities are common across industries and should be considered to successfully establish an effective and differentiating IT transformation program.
- Customer- and user-journey digitization: An omnichannel technology platform for developing and running end-to-end customer and user journeys on top of the original channel solutions; and a joint business-IT operating model to continuously evolve these new journeys for the business and for IT.
- Cognitive-process automation: A platform for automating more bespoke processes (as opposed to the high-volume, more standardized journey-type processes). This includes robotics and AI solutions managed at scale, rather than as dispersed, uncontrollable bots —and again, this is a joint business-IT capability.
- Core-business applications modernization: Full range of core-business solutions (warehouse management in retailing, policy administration in insurance, credit scoring in banking, etc.), broken down into a set of manageable platforms. Set up joint business-IT teams per platform, then determine the modernization target and sequence to get there, whether upgrading, replacing, or simplifying.
- Data buildout: A full-scale data platform spanning big data, data warehousing (including data lake), data streaming, and data-access management/authentication to cater to the needs of real-time, large-scale data delivery as well as advanced analytics.
- Digital cloud-based platform: A “platform-as-service” for the journeys, automation, core applications and data management. This platform provides the underlying technical provisioning of microservices, API-integration, serverless architecture, IT automation itself, and cybersecurity.
- Perpetual-evolution architecture management (Mission Control):An architecture practice spanning business and IT with a perpetually evolving architecture target along with a three-year roadmap and budget to reach it. This is where IT takes the complexity head-on, makes the right interlinked choices (such as modernizing a core application by upgrading it, while refactoring it for cloud, and adding APIs for data management), orchestrates the full project portfolio, and coordinates the IT transformation as a “mission control” unit. Within this setup, injecting agile ways of working within IT and jointly with the business, is highly effective. Architecture management will increasingly be the big differentiator.
The fundamental difference between focusing on these six tech capabilities and the monolithic solutions of the evil wizards or the one-track solutions of the naïve magicians is that this is a highly orchestrated effort. The way to go is to choose key business areas and transform them one by one, applying the right combination of the six tech capabilities for that particular area (warehouse management in retail, payments in banking, order management in telco, for example). This strict focus on transitioning area-by-area makes it manageable and avoids being overwhelmed by never-ending big programs. This gives the CIO, CEO and executive committee the confidence to pursue the full IT transformation they know they need.
From incremental opportunism to deliberate IT spend allocation
Some companies try to fund the IT transformation through savings from increased productivity or elimination of inefficiencies. However, we have seen this approach backfire since some executive committees make the mistake of using these initial savings to reduce the IT budget. A true IT transformation requires major business funding and buy-in as part of a holistic business case. In our experience, IT transformations require large-scale investments equaling up to one year of the full IT budget (operating expenses and capital expenses). This IT spend-allocation exercise should be run by the executive committee with the same vigor as the capital allocation process and the annual budgeting cycle—and IT needs to take control of it and drive it proactively.
With IT taking ownership of its own destiny and with the business engaging strongly in what is fundamentally a business-model transformation, the road is clear for a deliberate IT transformation that delivers noticeable quantum leaps in business performance. That is what IT wants, what the executive committee wants, and what customers need.
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