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Designing IT for business

How hard is it for business and computer people to put their heads together? McKinsey experts tout a new approach that's aimed at eliminating tension between these two very different cultures.

Designing IT for business
From the McKinsey Quarterly
Special to CNET
August 16, 2003, 6:00 AM PT

Business and information technology managers at some leading companies have been working together to change the way information technology supports the enterprise. As a result, they have cut costs, avoided the constraints of inflexible support systems and increased the participation of business leaders in the management of IT.

As companies that binged on new IT systems during the late 1990s know, insufficient business involvement in IT programs can depress returns. To avoid repeating this mistake, business and IT managers are starting to gather IT systems into "domains"--sets of applications and databases that are managed as units for business reasons--instead of managing them on the applications level or organizing them by the types of computers and operating systems on which applications run.

By transforming the IT architecture in this evolutionary way--rather than tackling change by patching in systems individually or replacing whole areas in "big bangs"--companies make it possible for IT and the businesses it serves to learn how to work together through a series of small, clearly defined projects. The goal is to turn something that resembles a plate of cooked spaghetti--with innumerable applications and databases dispersed across the architecture--into a system of modular and logical blocks with a minimum of interconnecting wires.

In a sense, this approach involves a "buy one, get one free" deal: You overhaul your IT architecture to cut costs and gain flexibility, and if you do it right, you gain business ownership of IT in the bargain. In large companies, the process can take more than two years to complete with an up-front cost of more than $10 million. Nonetheless, any company that's hamstrung by an IT landscape and makes the cost of adding new applications prohibitively high should remap and transform its architecture, since doing so can slash the cost of integrating them by 60 percent to 70 percent in the medium term.

A company should at least think about transforming its IT architecture if it faces an urgent business challenge--a strategic shift, a cross-border integration of business units, a merger, an acquisition, a divestiture--that must be addressed through IT support. Even companies that don?t see IT as a problem ought to consider the potential gains of readying themselves for future challenges.

The problems caused by a poor IT architecture are particularly evident in sectors such as banking, logistics and telecommunications, where IT is the musculature of the business. Many banks, for example, find that their IT units can?t efficiently support multichannel offers, because products and channels are served by separate IT systems that communicate only to a limited extent.

Business leaders in other IT-intensive industries such as manufacturing and retailing experience frustration, because IT takes too long to make changes, their cost is too high or they fail to deliver the expected features. Many such problems are rooted in the IT architecture.

This gulf between what business needs from that architecture and what IT departments can deliver without incurring huge development costs tends to exacerbate another well-known division: the one between people on the business and the IT sides of companies. Business executives, who often believe that IT managers neither understand their requirements nor deliver real value, don?t like to commit good staff members to work on IT projects. With limited input from business, IT developers struggle to deliver the best systems they can--from a technology perspective rather than from a business perspective.

You overhaul your IT architecture to cut costs and gain flexibility, and if you do it right, you gain business ownership of IT in the bargain.
For IT people, the architecture of information technology is a minefield. In most companies, IT units add new systems by patching them in, figuring out which other systems must be connected directly to them and forging the links. Patching is fine when systems don?t have to be connected to core applications or databases.

But where such connections are necessary, a typical IT department usually pays too little attention to making the new system, and its interconnections fit in with the overall IT landscape, because doing so costs time and money up front. As the company patches in more and more systems, their sheer accumulated complexity makes it increasingly difficult and costly to maintain, change or scale them. Furthermore, since patching is just a quick technology fix, it neither requires nor promotes deeper involvement by business managers in the affairs of IT.

Some companies have tried to solve their architecture problems by replacing important parts of the landscape through "big bang" implementations. This approach is exemplified by the installation of large enterprise-resource-planning systems--monolithic, integrated applications that replace a number of disparate ones typically in the areas of human resources, operations and accounting or in the supply chain.

Such big-bang efforts may be necessary at times--for example, when companies implement global accounting systems based on enterprise-resource-planning software--but should be avoided if at all possible. Throwing out old systems and the messy connections between them is tempting, but this is a costly, risky strategy that delivers mixed results and usually doesn?t help narrow the gulf between business and IT. We have seen several cases in which the business side started out directing immensely complex programs only to become exasperated by time and budget overruns and then decided to delegate control to IT. As problems worsened, projects were canceled or left to wither.

So while it is high time that many companies overhauled their IT architecture, it is equally important to bridge the divide between the cultures.

Working together
Companies that have overhauled their IT architecture through the kind of managed evolution have achieved these two objectives. By "modularizing" a maze of legacy IT systems into logical and transparent business-driven domains, they make it possible for business managers to control the direction of information technology. The domains provide a foundation for business ownership of and accountability for IT.

This broad evolutionary methodology doesn?t rely on random change or on risky big-bang revolutions, though it does permit the selected patching and focused replacement of obsolete systems. We believe that it is not only less risky but also more cost-efficient than the usual approaches, because it starts by using existing assets and transforms them step by step. The trick is to win short-term benefits while creating a consistent IT landscape that is flexible enough to support evolving business needs without expensive overhauls.

Leading companies in many industries--including banking, energy, insurance, logistics, manufacturing, retailing and telecommunications--have gone down this road, following a common process.

Grouping applications and databases into business-driven domains and deciding how they should interface requires extensive knowledge of a company?s business processes and potential strategies. Business leaders must take charge of this part of the project. Getting the job done by proxy--having IT experts interview the business leadership as they sometimes do when designing applications to support business processes--just won?t work. If IT people rethink the architecture from their own operational perspective, they are likely to cut the domains along technology boundaries.

Taking information technology strategy as the starting point, a company must ask what it wants from IT.
Ideally, the team that tackles these issues should be set up, supported and overseen by a board member--for instance, the chief operating officer--and include senior executives, managers of business units and IT and process specialists.

Taking information technology strategy as the starting point, a company must ask what it wants from IT, assess its actual IT capabilities and decide what direction it wishes to take.

Several hundred standardized business services can replace tens of thousands of tailored interfaces between applications and databases. These services offer important benefits to the business and IT sides alike: They must usually be implemented only once, are available to all domains and help root out duplication, thus making it possible to reduce costs and complexity and to make businesses more flexible. Services "decouple" changes to the business from changes in technology.

Although IT systems within a domain may have to be modified or replaced (as a result, for instance, of technological change or a merger), the services reflect stable business relationships between domains and usually remain the same. IT managers in a domain can therefore change an IT system without having to rewire hundreds of interfaces to other systems.

The impact of overhauling the IT architecture has been substantial for companies in a wide range of sectors.

A European cable telephony operator overhauled its legacy IT landscape by creating invoicing and customer information services that could be reused to support new products and succeeded in cutting their time to market from months to weeks. And an Internet service provider that was spending 70 percent of its application development budget to modify features and only 30 percent to develop actual products adopted the managed-evolution approach and is now well on its way to reversing those proportions.

Delegate ownership
Business leadership of IT can easily evolve into business ownership, even as the first domains are being overhauled.

Business leaders are solidly in charge of IT decision making--the system of governance ensures that they continue to own IT decisions, even after projects are well under way--instead of delegating tasks to IT. The CIO usually continues to have operational responsibility for the development of applications and their IT infrastructure and for managing the overall IT budget. But business managers and leaders have more control over the IT assets that directly affect their businesses and a far greater understanding of what it takes to manage, change and invest in technology for business results.

The era of business ownership of IT is in its infancy. Some leading companies in a wide range of sectors have taken important steps down that road by managing the evolution of their IT architecture, and the results so far will surely encourage others to follow. The next challenge is to make the transformation stick--and to prevent a return to the bad old days of crossed wires between business and IT.

For more insight, go to the McKinsey Quarterly Web site.

Copyright © 1992-2003 McKinsey & Company, Inc.

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