What IT leaders do

Companies that rely on IT governance systems alone will come up short.

Eric Monnoyer and Paul Willmott

Web exclusive, August 2005

Something's gone very wrong with the structures, processes, and policies that govern how a business makes IT decisions and who within the organization makes them. Most companies have such frameworks—commonly referred to as IT governance—in place today. In the best cases these systems help IT and business managers work together to make smarter IT investments that deliver real value.

Despite these well-defined rules, IT and the business too often lack a common understanding of the company's basic objectives and have conflicting opinions about technology options and priorities. A good deal of research shows that this misalignment usually results in failed IT initiatives and high costs.¹

The problem is that IT governance systems have become a substitute for real leadership. Companies are relying on tightly scripted meetings, analyses, and decision frameworks to unite CIOs and business executives around a common vision for IT. But committee meetings and processes are poor stand-ins for executives who can forge a clear agreement among their peers about IT investment choices and drive the senior-level conversations needed to make tough trade-offs.

For several reasons, leadership can achieve what governance systems by themselves cannot. First, IT leaders earn the trust of their business colleagues, often by demonstrating that they understand the company in business terms, by examining IT options as business investments (rather than as technology solutions), and by managing the IT function as a business—using business metrics to quantify results, for example.

Trusted, credible leaders articulate a vision for IT's role in the company and ensure that this vision is clearly understood by managers throughout the organization. They inspire other executives to pursue new IT-enabled business opportunities and have enough clout to keep managers focused on the right issues and on making the most effective decisions.

Governance systems by their nature lack the focus, energy, and high-level attention that an individual leader can provide. Meetings and rules can't make executives trust each other—trust is built at a personal level. Processes can't command the attention executives give to trusted peers. In some companies, for instance, business leaders send delegates to technology committee meetings; they would never shrug off a meeting with a respected colleague, however. Systems alone don't forge common visions or inspire action; without a leader, governance systems are like a vehicle without an engine.

In companies with strong IT leaders, governance constitutes a much more flexible set of managerial activities, involves fewer people and fewer meetings, and is typically tailored to fit the IT leader's style, much as executive committee activities often reflect a CEO's leadership approach.

As companies turn their attention to growth and place bets on new IT investments, they can no longer allow systems to substitute for strong IT leadership. The executive team must be more creative about identifying leaders, helping them succeed, and redesigning governance systems to support these leaders rather than to compensate for their absence.

A tale of two banks

Consider the case of one large European bank: the effectiveness of its IT strategy was being undermined by a leadership vacuum. The head of retail banking was pushing hard for new systems and processes to improve customer relationships, the CEO wanted to consolidate operations across organizational boundaries, and the CIO's top priority was to renew the bank's core applications and systems.

The bank had a clearly defined IT governance structure in place for resolving exactly this kind of alignment issue. A committee of business and functional executives followed a step-by-step process for analyzing and reviewing IT options and setting priorities. But the bank still lacked a clear vision for IT's role in supporting the bank's overall strategy. The committee weighed the relative merits of the options against one another rather than using a common understanding of general priorities to assess each initiative. The committee was simply not capable of becoming the driving force in resolving these conflicting senior agendas. How could it be? It would be like asking a nation's legislative body to act as a leader. In the end, the CIO hijacked the process to push his IT agenda forward.

In stark contrast, at another European bank competing agendas are resolved by an IT leader (in this case, the CIO) with the clout to get executives to discuss options and reach a consensus—even if it isn't the decision they would make on their own. More important, the bank has fewer major conflicts over IT investments, because the CIO has effectively integrated a common vision for technology with the corporate strategy, thus avoiding lengthy debates about which investments are desirable.

The CIO has clout because he earned it. He is regarded as a peer by the other executives; he understands the bank's businesses and thinks about them in the same way the other executives do; he uses their language; he thinks about initiatives as business options (not technology ones) and assesses them with the appropriate metrics; and he understands the constraints of the businesses and works within them. For instance, he's careful to plan, sequence, and finance necessary investments within the constraints of the bottom line of each business unit.

At this second bank, IT governance is less formal and therefore far more effective than at the first one. Because the CIO has excellent working relationships with the business leaders, they use personal discussions to make quick decisions collectively rather than resorting to formal meetings. This approach has enabled the CIO and his executive colleagues to consolidate several committees at different management levels into a single executive IT council that understands the bank's IT strategy and makes investment decisions accordingly.

Our analysis of the IT decisions at these two banks highlights a very clear message. The bank with an IT leader makes business-focused IT decisions that have helped increase its earnings each quarter and are supporting revenue growth in core businesses. In contrast, the bank relying on governance processes to act as a "ghost leader" has stalled; costs are high and transformation is slow.

Lead IT governance—don't be led by it

In companies with strong IT leaders, the IT governance structures are more efficient and streamlined and less bureaucratic than in companies without such leaders. Over time, leaders figure out what tasks can be achieved through relationships and what must be accomplished through more formalized assessment and decision-making processes. The balance varies, of course, depending on the leader's style, the top team's chemistry, and the specific processes required to get things done.

An efficient process typically gives the executive IT committee the space to solve higher-value problems. One company's executive council, for instance, focuses on detailed analyses of how to implement new investments with maximum speed in order to reap the expected benefits as soon as possible. In particular, the council examines how to communicate its IT decisions to employees throughout the organization's business and IT-management ranks.

Some companies streamline IT governance even further, by integrating it with existing business governance processes. At one European insurance company, the executive committee that makes most of the major business decisions also handles IT. The executive team believes this approach is more effective because IT choices aren't viewed as separate and parallel to business decisions but as one aspect of them.

Unfortunately, many other companies try to solve the problems that stem from a lack of leadership—incoherent IT strategies, competing agendas, missed opportunities for the businesses to leverage IT, misalignment and miscommunication between IT and business managers—by ladling on more governance. These companies assume that greater alignment and better IT decisions would result from clearer rules, more meetings, different people at the meetings, more rigorous analysis of business cases, or more forms and checklists.

They are wrong; additional IT governance measures don't work and instead often exacerbate the problems. When one European financial-services company tightened its governance procedures, for instance, business executives became even more disaffected and participation plummeted. At another company, governance has evolved into a mammoth system of checks and balances, involving long, arduous meetings and multiple committees—a process intended to allow managers to question or defend the business case for new investments aggressively.

IT governance can always improve, but never enough to compensate for a lack of IT leadership; there is no substitute for the sheer power of having leaders who trust and respect each other. Indeed, IT leaders trump governance alone in three other important respects.

Leaders address issues that governance misses

Companies structure their governance systems to decide whether to increase or cut investments in technology. They rarely use these processes to examine the broader questions regarding IT value that leaders routinely confront: what is the role of IT? How do we measure and improve the impact of IT on the business? What innovations should we be exploring? What strategies are our competitors pursuing? And what constitutes best practice?

Leaders accommodate different executive styles; governance doesn't

Some business leaders prepare for IT committee meetings by getting input and advice from their own managers and by reflecting on how they operate in their own domains. Others prefer going over issues and potential options with the CIO. Some executives delegate responsibilities to trusted subordinates; others wish to exert total control by conducting personal reviews after the official IT committee has met and then making a decision. Leaders understand these stylistic differences and accommodate them. In many companies, however, governance is a process that doesn't allow for much flexibility—rules restrict when and how decisions are made, and business leaders are expected to fall into line.

Leaders are accountable

Executives routinely accuse IT of managing projects poorly or of failing to translate business needs into IT solutions. IT, for its part, often blames business for a lack of involvement and quality input. Leaders must be accountable where governance isn't; the buck stops with them.

The way forward

True IT leadership is rare. It results only from a deliberate effort by the executive team—and often in reaction to specific circumstances. At one company that had grown through serial acquisitions, for instance, the top team concluded that strong IT leadership was needed to bring coherence to the company's fragmented systems. In other cases, IT leaders emerged at companies that depended increasingly on performance outside their home market or where the CEO integrated IT into the company's management culture.

The common denominator is that the executive team must take responsibility for finding an IT leader and then commit to making that person successful. Three lessons emerge.

1. Hire creatively

Too often, CEOs and their top teams rely on stereotypes about who should lead IT. Finding the right person with the necessary skills isn't easy, since the role is fraught with paradox. An IT leader must be a businessperson who understands IT: an executive—like the CEO—who can create change but who individually may not have the clout within the organization to make things happen, and who is a peer of business leaders yet respected as "one of us" by the IT staff.

CEOs sell their companies short by searching solely for CIOs to fill this role. Banks in North America and Europe have asked chief financial officers or chief operating officers to lead IT. One large global energy company rotates business executives into the role for a set period to ensure both that someone with business skills runs IT and that the business units are then seeded with IT-savvy managers.

2. Help IT leaders succeed

The IT leader must be part of the executive team to get results and to build the necessary relationships and credibility within the company. CIOs who are perceived to be operating managers—not leaders—rarely sit on the management committee and often report to executives other than the CEO. The solution isn't to clear space at the table for an operating manager; instead companies should search for an IT leader who adds value to the management team.

Obviously, the IT leader needs the right resources to succeed, but an explicit mandate within the company—including a role in the decision-making process—is equally important. The management team may opt, for example, to give the IT leader veto rights over any project that isn't compatible with the company's IT architecture. One European telecommunications company made the IT leader its process architect. Business and functional leaders still operate the processes but must convince the IT leader in order to change them.

3. Create the conditions for aligning IT and business

Alignment won't come about simply from discussions between IT and business units. Instead, clear frameworks for decision making and alignment must be forged within these boundaries. The company's strategy should be specific enough for IT and business leaders to discuss trade-offs rather than debate what the strategy means, for example.

In some cases, performance frameworks help to align business and IT. One telecommunications company, for instance, uses business rather than technology metrics to review and compensate its IT leader.

The difference between companies with strong IT leaders and those that use governance as a substitute for leadership is striking (exhibit). Executive teams with a strong IT leader make better, faster decisions about technology than do companies that rely solely on a governance system—no matter how effective it is.

enlarge exhibit

About the Authors

Eric Monnoyer is a principal and leads McKinsey's IT practice in France. He specializes in IT performance management and is based in Paris. Paul Willmott is a principal in McKinsey's global IT practice and specializes in IT organization and governance. He is based in London.

This article was first published in the Fall 2005 issue of McKinsey on IT.

Notes

¹Andrew M. Appel, Amit Dhadwal, and Wayne E. Pietraszek, "More bang for the IT buck," The McKinsey Quarterly, 2003 Number 2, pp. 130–41.

Building stronger IT vendor relationships

Our research indicates that although a majority of technology executives want to have stronger relationships with their IT suppliers, they often act in ways that undermine that goal. In fact, many corporate customers lose out on the potential benefit of a closer relationship by engaging in value-destroying or inconsistent behavior—too much emphasis on costs, say—when they interact with vendors.

McKinsey interviewed IT executives at 23 companies representing a wide range of industries to learn about technology-purchasing patterns, criteria, and priorities over the next 12 to 36 months. We found not only a number of factors that subvert effective buyer-vendor relationships but also ways for both parties to increase the value they deliver and receive.

The benefits of partnership
Although 20 percent of the executives we interviewed regard costs—not added value—as the top priority, 70 percent said that they want to move away from purely transactional relationships by establishing stronger partnerships with a smaller number of preferred IT suppliers. These relationship-seeking customers want vendors that better understand their specific technical environment, offer ongoing advice, help them manage aggressive technology upgrade-and-innovation cycles, and provide solutions for their most pressing business problems. As one buyer explained, "We're looking for a vendor that can bring real insight to our business by tying together industry knowledge, technical knowledge, and knowledge of us as a customer—vendors get to see what my peers are doing and should be able to use this information to help me make better decisions." Another noted, "I want my supplier to approach my account like a good financial planner—to review my status and recent transactions, then engage me in a rich discussion around my emerging needs, market trends, and relevant new-product offerings."

Buyers and vendors alike stand to gain from a smaller number of more committed relationships. Consider the case of a telecommunications company that used tough tactics with one of its vendors when it negotiated the contract for a customer-relationship-management system. Despite the size and clout of the company, the resulting arm's-length relationship meant that when it wanted additional features, it had to invest a great deal of time and money to customize the software in house. After the company committed itself to a higher-value relationship, however, it began meeting with the vendor's CEO, sharing its development plans, and suggesting features that could minimize the need for customization—suggestions the vendor started to take.

Another case: a travel company was launching a new online system, which required a significant infrastructure upgrade involving a number of vendors. At first, the company took a very tough stance with each of them on price, but it became clear that cutting the project's implementation time was a priority and that protracted negotiations were putting it at risk. A new CIO therefore decided to enter into more open and relationship-based negotiations with a set of core vendors. This approach not only enabled the joint team to meet the project's schedule at minimal additional cost but also created the right environment for these vendors to become strategic partners over the long term, bringing new ideas and insights to the CIO. Since relationship-based negotiations with all vendors would not have been practical, it was essential to identify those that were crucial to the project's success and could be of value on a longer-run basis.

Such companies are in the minority, however. Of the 70 percent of respondents who say that they want to have close relationships with vendors, only 30 percent actually do. The rest continue to think and act in a transactional way, and many blindly seek the lowest total cost of ownership (TCO) from their vendors in all circumstances—typically by negotiating hard at the bargaining table. When an IT product is vital, however, TCO analysis is often too narrow. The cost of downtime when a hotel's reservation system crashes or when a store can't meet its inventory requirements because of IT snafus surely outweighs any incremental IT savings from tough negotiations.

Companies aspiring to better relationships with their vendors should approach the challenge on two fronts. First they must analyze their portfolios of IT vendors to determine which ones are the best candidates for closer partnerships. Then they must change their behavior to close the gap between themselves and their vendors.

Analyzing the vendor portfolio
If only because resources are limited, no company can afford to have strong relationships with all of its IT vendors. To decide which of them are most important, the company should begin by breaking down its portfolio into critical and noncritical vendors and focus its efforts accordingly.

A critical vendor provides the integral products that support crucial technology needs or the noncommodity products that eat up a large part of a company's IT budget. These are the vendors for tight relationships. Storage products, for example, are a big-ticket purchase for telecom companies, which must log data on every call placed or received, for both legal and operational (billing) reasons. Thus, storage vendors would be on the critical list. A hotel's most critical vendor might provide and support the mainframe that runs the core reservation system.

For noncritical vendors, which supply more standard products (such as ordinary desktop systems), transactional relationships are fine. Companies can treat these products as commodities, shop for the best price, seek bids from more than one supplier, and use a standard TCO approach to purchasing.

Once a company has ranked its vendors, it should compare the skills of the critical ones with those of its internal IT organization to see how well the two complement each other and which capabilities of which vendors it might further leverage to meet its needs. Ask yourself what you hope to achieve through each critical vendor. Many companies, for instance, want insights into the way competitors use the products of a certain vendor; others may want a larger say in its R&D or engineering function to ensure that its products better suit their needs.

Next, explore which vendors have the skills and commitment to exert the greatest impact on your company. Consider, for example, the value that a vendor now delivers as reflected in the quality of its products, its responsiveness, its knowledge, and its expertise. How well does the vendor understand your business and how do its offerings fit your needs? Is the vendor willing to commit extra resources to ensure your company's success? Since a critical vendor may fall short on one or more of these dimensions, it's important to consider vendors you don't currently use.

The next step is to identify the gaps between your current and desired vendor relationships. Since a mix of transactional and high-impact ones is usually the goal, this analysis will show where your company is over- or underinvesting in its vendors; thus it may choose to pull away from some and move closer to others (exhibit). Focus time and resources on undercapitalized yet critical relationships.


enlarge exhibit
Close the gaps
Our research shows that to achieve higher-value relationships, most companies must change their behavior and the way they communicate with vendors. Certain kinds of behavior on the customer's part—focusing conversations on TCO, for instance, or using a vendor's openness about potential product defects as a negotiating weapon—promote transactional relationships, and vendors may respond by committing fewer resources and engaging less fully. Other companies sabotage their relationships with vendors by withholding information and regular feedback and by behaving inconsistently—in effect, sending mixed messages about the type of relationship they desire. The following forms of behavior promote closer relationships.

Be explicit about expectations. A good portfolio analysis helps companies identify what, specifically, they want from their key vendor relationships. A company's needs—tactical knowledge about competitors, influence over a vendor's R&D, a high degree of responsiveness or expertise in specific areas—must be communicated clearly, and the vendor must explicitly agree to meet them. Be clear, too, about what your company is willing to pay for added services; although higher value doesn't necessarily come at a higher cost, trade-offs are often necessary. Finally, make sure that the vendor shares your desire for a closer relationship.
Involve senior management. Assigning an executive sponsor (such as the CIO or the chief marketing officer) to build, monitor, and sustain ties with a vendor tells it that its relationship with your company is important. Yet even when sponsors are on board, they may not spend enough time with key vendors. An executive sponsor should hold quarterly meetings with their top managers.
Share information. When a company shares details about its IT infrastructure, business plans, priorities, or technology road map, its vendors can provide more effective solutions and insights. Moreover, the sharing of information often allows companies to leverage their vendors' R&D and can thereby prevent major customization expenses. Clearly, withholding information is counterproductive.
Provide regular feedback. Constructive, systematic feedback demonstrates a high level of commitment and provides a forum for resolving issues. Companies should stick to fact-based evaluations and avoid off-the-cuff or anecdotal criticism.
Building higher-value relationships is a two-way street, of course, and the actions of vendors are equally important. Those that are open about product issues build trust and provide insights that can guide the purchasing decisions of buyers; sharing information about a forthcoming product can, for example, help buyers better plan their own IT architectures. Moreover, vendors that listen to what key customers need and then respond accordingly may spare them the high costs of correction and customization—and make them less likely to stray.

To get more from IT investments, companies must understand the types of relationships they seek from their vendors, decide which vendors can offer those relationships, and then act on this evaluation. By avoiding value-destroying behavior, companies and their vendors can build a foundation of trust—and closer relationships that deliver a far greater impact than mere transactional ones.