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BUSINESS-IT CONVERGENCE: 5 transformation challenges every company must tackle to become technology-enabled

Authors: Floris de Bruin and Mirjam Hachem

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INTRODUCTION

Is your strategy full of terms like ‘digitalization’, ‘agile’ and ‘tech-driven’, but in reality you only experience superficial change? Rest assured, you are not alone. Large traditional organizations, especially in information intensive sectors, are now being locked into an ongoing arms race to improve their performance and offerings through new forms of digital technology. In our practice, we found five fundamental challenges that organizations have to overcome in order to compete effectively in this digital arena. At the heart of the digitalization process stands the implementation of business-IT convergence enabling companies to harness the creative power of their IT departments and turning them from a costly support station into an engine for rapid improvement, innovation and profit. The outcome is a technology-enabled organization that evolved from a company digitalizing its existing products and services to a company innovating new products and services based on digital technology.

Many incumbents struggle to become a technology-enabled company, but some turn it into great success. Why? This article shows that successful companies differentiate themselves not strictly through technological progress, but first and foremost through their understanding of human behavior, organizational structure and especially their ability to drive effective organizational change. We focus on large traditional organizations that became big long before digitalization. They were built around physical products and services and are now faced with the challenge to become agile innovators that can compete in the digital era. Historically they have developed silo structures which have become so large over the years that each department has become a company within the company. These organizations have large and complex IT systems that have been building up since the 1970s to support the business. Turning large IT departments from support stations to enablers can be a daunting endeavor. In this article we will focus on the challenges of this process and in our following article we will provide in depth examples of what a company can do to address them. This starts however with an in depth understanding.


elephantSTOP CHASING SILVER BULLETS AND START TALKING ABOUT THE ELEPHANTS IN THE ROOM

Companies that are not yet technology-enabled struggle to turn their IT units into an engine for innovation. We found that these companies don’t acknowledge the extent and complexity of the organizational change ahead of them, thereby having difficulty in openly discussing the problems they face right now. Instead these companies chase silver bullets to save the day while managers only focus on a singular aspect of the problem that mostly relates to the domain they are responsible for. The five fundamental challenges that these companies face are:

  1. The question ‘Is our business model still relevant and for how long?’ is not (sufficiently) discussed.
  2. Business people no longer understand the core processes they are working with because they don’t understand the underlying technology.
  3. The IT-landscape has become so complex that it should be understood and managed as an eco-system.
  4. The internal organization of business units, ITunits and external providers is too complicated and bureaucratic to navigate.
  5. Employees feel powerless to achieve change across organizational boundaries and therefore focus on their own turf only.

To tackle these challenges effectively, it is crucial to address them in an integral manner. Only then the change towards a technology-enabled organization can be successful.


1. The question ‘Is our business model still relevant and for how long?’ is not (sufficiently) discussed.

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Every company has to make a decision about which markets and target groups it wants to focus on, its value proposition and the way it organizes itself internally to deliver that proposition. The result of this decision is the company’s business model. The internal part is also known as the operating model. In our practice, we see that most companies have extensive PowerPoint presentations on how their market – fueled by technology – is changing and how they should position themselves in it. In contrast, there is much less clarity on the best way to organize the company internally to compete effectively in such a market. In the digital age, the question of what is the best internal organization can be a frightening one. Many companies come to the uncomfortable conclusion that drastic changes have to be made. They need to give up their silo structure, integrate business and IT units, overhaul their IT legacy systems, get different people on board, and change the style and composition of their leadership. If a company wants to make the transformation from technology-supported to technology-enabled, these discussions must take place and difficult decisions have to be made.


2. Business people no longer understand the core processes they are working with because they don’t understand the underlying technology.

peopleIn the traditional silo structure, there is a division of competence where everything related to business strategy is handled by the business side and everything related to technology is handled by the IT side. This has caused a fatal competence gap: the business side operates on software with an underlying technology they don’t understand. The IT side develops (or at least configures) software and infrastructure to serve strategic plans that have not been challenged from a technological perspective. This creates a dynamic where the business side develops plans and requests without being able to evaluate whether these are technologically feasible. The IT department then has to explain why most of it cannot be developed and fit into the existing architecture at a reasonable investment. This causes frustration on the business side. Business people then turn to external IT suppliers who always tell them that they can deliver in a
relatively cheap and timely fashion as they are not constrained by security, architecture or integration related issues. This reinforces the perception that the internal IT department cannot deliver. It is then the task of the IT department to integrate the outside solutions into the existing systems. When IT is not in a position to push back sufficiently, this dynamic creates excessive technological complexity and poor maintenance of existing systems. Change slows down and costs explode, resulting in the opposite of what everyone wants to achieve. Many companies try to solve this problem by investing heavily into an agile transformation and the development of multidisciplinary scrum teams. Unfortunately, many of these efforts don’t lead to a fundamental change of the organization but only to a superficial modification. Under the fancy label of agile, IT is still treated as an internal supplier that needs to deliver as the business asks. Team members who should work together as equals fall back into old hierarchies. We have encountered some situations in which IT had lost so many battles over the years that IT leadership has become far too compliant to this asymmetry. This is the opposite of what we would expect in a company that truly wants to compete in the digital era.


3. The IT-landscape has become so complex that it should be understood and managed as an eco-system.

computersAs briefly mentioned above, companies are dealing with highly complex and vulnerable IT systems. These systems are a mix of old structures at the fundament, layers and layers of structure added over several decades and new shiny applications and gadgets on top. This complexity is usually summarized under the term IT- landscape which conjures up an image of a peaceful and structured situation. In reality, these ‘landscapes’ consist of thousands and thousands of components with an intricate web of linkages between them. These components and their interfaces need to be maintained and upgraded. This is especially complicated as many of them are serviced by different suppliers who have their own maintenance and upgrading agenda. Since everything is linked, each upgrade or change in one place can cause major problems in other places of the system. The term IT-landscape is therefore misleading. IT can better be described as an eco-system or biotope (Roeltgen 2006) which is unique to each organization. It is important to be aware that a high level of complexity is to a certain extent inherent to IT and therefore unavoidable. This is because IT as a market is currently transitioning into a new phase. There are so many different standards and languages that for most software packages it is still difficult to communicate to other software packages, meaning that customized interfaces need to be build. Software packages themselves are becoming more and more complex too. Packages like SAP have so many components that anybody claiming they can reliably estimate how much time it takes to implement had either unlimited resources for an impact analysis or should be fired immediately. In the same way that the introduction of a new species into an eco-system leads to unforeseeable consequences, organizations cannot accurately predict what happens when a new software application is introduced to the existing system. They can at best make an educated guess. That being said, most organizations are dealing with a much larger amount of IT complexity than necessary. This complexity is the result of many suboptimal solutions being implemented in favor of short-term cost reduction but at the expense of simplicity and stability, which leads to a cost increase in the long run. What we see is that business leaders are reluctant to face and accept this reality and IT is unsuccessful in communicating it effectively, resulting in continued misalignment and dissatisfaction.

Large-scale project failures make business leaders shy away from IT

The complexity level of an existing IT system is usually the result of many decisions taken in the past and is not easily solved. This brings leaders into the following con ict: If they don’t modernize and simplify their IT eco-system, complexity will grow even further. Yet, most companies don’t have the time and resources to carry out such a major overhaul, especially if they haven’t allocated enough resources for maintenance and optimization in the past decades. To make matters worse large-scale IT projects pose in them- selves a major risk. Megaproject experts Bent Flyvbjerg and Alexander Budzier have shown that the explosion of large-scale IT projects is not an exception. Data from 1,471 IT-projects between $167 million and $33 billion shows that 18% of major IT-projects will spin out of control to the point that it pushes corporations towards bankruptcy (Budzier & Flyvbjerg 2012, 2011, Flyvbjerg & Budzier 2011). At the same time, maintaining the existing IT eco-system can cost up to 60-80% of the overall IT budget, which at some point has to translate back to margins and customer fees. This puts leaders in a double bind: If we don’t do anything our systems might fail and the damage caused might bankrupt us. If we do some- thing, our project might fail and the damage caused might bankrupt us. As a consequence, they shy away from IT altogether.


man4. The internal organization of business units, IT-units and external providers is too complicated and bureaucratic to navigate.

Most organizations operate on a so-called federated IT structure. This means that they have one central IT department, several decentral IT departments
for the individual business units and dozens of external suppliers that deliver specific solutions. In practice, a federated-IT structure leads to a situation where a myriad of business-stakeholders puts pressure on the decentral IT department to deliver solutions as quickly as possible. These requests are communicated to someone in an intermediary role positioned between the business and the IT side. The communication from the business side is most often vague and with limited understanding of the impact on the IT ecosystem. The intermediary then tries to make sense of what the business really wants and translates it into a language IT people can understand. After this many steps need to be taken to get to a working solution, where responsibility is partly with the decentral IT department and partly with the central IT department. Given that the decentral IT department is part of a business unit, it is steered as a profit center. It strives for speed over costs in realizing business requests. Yet, to integrate their solutions into the eco-system, they have to work together with the central IT department.

Central IT is steered as a cost center and therefore focused on low costs over speed. This creates a fundamental conflict between decentral and central IT as they are both organizing themselves based on different and often conflicting principles. Decentral IT units work furthermore with many outside suppliers who have their own agenda and interests complicating the picture even more. This organizational labyrinth is impossible to navigate for the individual business employee. Each request has to go through an entanglement of rules and dependencies from idea to implementation. It is often unclear who is responsible for what and which budget is financing the solution to a request. For example, one project manager we worked with had to participate in 30 steering committees to manage one IT project which caused major inefficiencies. In another organization we worked with a CEO who informed us that only 2% of the money invested in IT came back as working software while the 98% percent went to waste, mainly as the result of extreme organizational complexity and miscommunication. Such conditions make companies highly vulnerable to disruption by technology-enabled challengers.


voice5. Employees feel powerless to achieve change across organizational boundaries and therefore focus on their own turf only.

Solving such a complex web of interrelated issues that span across all the functional boundaries of an organization is no easy feat. It requires deep insight and experience in how people and organizations can achieve breakthrough change. In most organizations, we find people who are acutely aware of the problems, but they can’t find a way of communicating their observations and ideas to the relevant leaders. The discussion between business and IT on reducing complexity and more importantly making sure that it doesn’t get worse over time is difficult and full of miscommunication. People who have an in depth understanding of business and IT are sorely needed but still hard to find. Many managers and employees have given up on change altogether because the magnitude of it is simply overwhelming. They then focus on optimizing their own part of the organization, which often leads to some improvement but not the structural and deep transformation that the company needs to become technology-enabled.


 

BECOMING TECHNOLOGYENABLED: BUSINESS-IT CONVERGENCE

Business-IT convergence is necessary to stay competitive

Companies in the financial sector are strongly aware that they have to make great efforts in digitalization to stay competitive. The crucial point is that being competitive in the digital age is not a matter of punctual big-time upgrading or restructuring. It’s not a move from A to B. It’s a move from A to a state of constant change. This state of constant change is necessary not only to keep up with technological developments but also with the expansion of technology-enabled customer expectations: fast, smooth, intuitive, interactive and highly personalized are now the basis of acceptability for a digital product or service to be used. To become technology-enabled and highly adaptable, companies must abandon the traditional silo structure and merge business and IT units together into one functioning organism. This process is known as business-IT convergence. Bringing business and IT know-how together is key to generate the necessary speed to keep up in a fast-developing environment. Most large traditional organizations are still at the beginning of this process which slows them down in comparison to their more forward-thinking competitors. We define the development towards business-IT convergence with three phases of digital maturity.

3phrases

Three phases towards business-IT convergence

We distinguish three phases of digital maturity that companies have passed through in the past 40 years:

1. Pioneering (1970 – 1990):
This is the phase where a company sets up their IT-infrastructure for the first time. The IT-department is set at a distance and managed as a support unit and cost center.

2. Industrialization (1990 – 2010):
Business and IT move from a support relationship to a customer-provider relationship where IT employees regard their business side colleagues as their customers but are not involved with the end customers of the company. IT is still mostly managed as a cost center.

3. Convergence (2010 onwards):
Business and IT converge into one functioning organizational structure where business and IT employees are teammates and both are involved with end customers. A significant part of IT is managed as part of a profit center and driver of innovation and product development.

Historically speaking, we are now at a point in time where the economy as a whole is moving towards phase 3. Companies know that they need to move along in order to survive and are willing to take the necessary steps. Where companies struggle is that they often create superficial changes and then believe they evolved to phase 3, but with their mindset and behavior they still operate in phase 2 or even 1. These companies are reluctant to go through the necessary fundamental organizational and behavioral change to move successfully into phase 3.

Toward a solution: A four-step transformation process to business-IT convergence

We have provided a detailed discussion of the 5 core challenges large traditional organizations have to overcome in the race to digitalization. We
will now give an overview of a potential solution to these challenges that we have applied with our clients and that has helped them substantially in
moving forward. A detailed discussion of this solution will be provided in our next article.

Before you start: Accept the complexity and size of the task

Our discussion of the five fundamental challenges has made clear that there is no silver bullet to save the day. Therefore, it is crucial to accept the complexity and size of the task ahead before embarking on the change to business-IT convergence. Only with a realistic picture of what is ahead of you, you will make the right decisions and take the right actions. The first step is meant to aid in this awareness.

4steps

STEP 1: Create a shared understanding of the organizational eco-system and urgency of issues

The crucial first step is a thorough analysis of the situation, but in a different way that you are used to. Since ineffective behavior is mostly the result of a lack of understanding of the consequences of one’s own actions the analysis should make painfully clear how current behavior of people in the company result in problems and complexity in the organization and IT eco-system. In our experience this is an especially valuable insight for the business side. In order to achieve maximum impact the analysis should be explained using zero IT terminology and simple visualizations. This analysis is key to avoid chasing silver bullets and to align all the stakeholders around a shared understanding of the issues they need to address.

STEP 2. Start from a shared vision and fundamentally challenge your business model

A key driver of successful transformation is uniting the entire company under one shared vision from where your business model can be challenged. You have to examine both the internal organization part of your business model, your relation to your customers and your position with respect to competitors. Ask yourself: do we have the right people, culture and structure to compete in the way that we want? After getting a clear picture of where you are now, you have to determine an accurate business model based on the concept of business-IT convergence. This model then has to be translated into a clear and flexible change agenda, where the shared vision functions as a long-term guideline.

STEP 3. Use an agile approach to implementation and tackle them in focused sprints with multidisciplinary teams

Given that business-IT convergence involves change across organizational boundaries it requires multidisciplinary teams to be achieved. In our view this is a part of the transformation where the use of certain agile principles work very well to drive the change itself: multidisciplinary teams that work in iterations and continuously learn and adjust. But they only work well if the goals and boundaries (step 2) are extremely clear and being driven from a shared understanding by business and IT executives (step 1).

STEP 4. Show and share success, learn and keep moving forward

To keep the organization motivated and involved throughout the transformation, it is important to share and celebrate the successes achieved on the way together. While this is extremely obvious most organizations are in our view extremely poor in doing this effectively. Creativity is lacking, successes are not seen or not linked to the transformation. Instead try to use creative and attractive methods to go from urgency to excitement for the change. For example, we work a lot with VR and AR solutions to visualize how teams are moving forward and how the IT eco-system is changing. Every step will furthermore bring the opportunity to learn and grow allowing to go into the next step with greater competence and determination.


CONCLUSION

Companies in all industries have to embrace digital technology if they want to stay competitive in the future. In this article, we have shown that successful digitalization is dependent on successful business-IT convergence. It is through business-IT convergence that companies can evolve from being technology-
supported to being technology-enabled. It allows them to harness the creative power of their IT-departments and turning them into a key driver for innovation and profit. Large traditional organizations are struggling with the implementation of this process as it necessitates deep organizational, cultural and
behavioral changes against the background of highly complex technology. In this article we discussed the five fundamental challenges these companies have to overcome to become technology enabled:

1. The question ‘Is our business model still relevant and for how long?’ is not (sufficiently) discussed.
2. Business people no longer understand the core processes they are working with because they don’t understand the underlying technology.
3. The IT-landscape has become so complex that it should be understood and managed as an eco-system
4. The internal organization of business units, IT-units and external providers is too complicated and bureaucratic to navigate.
5. Employees feel powerless to achieve change across organizational boundaries and therefore focus on their own turf only.

We then provided an overview of a four-step transformation process that we have successfully implemented with our clients. This process will be discussed in detail in our next article.

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One Response to BUSINESS-IT CONVERGENCE: 5 transformation challenges every company must tackle to become technology-enabled

  1. Rob Bröker says:

    Mooi artikel Floris en Mirjam!

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