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Why CEOs still don't get the Net

Wharton professor Raphael Amit says when it comes to leading the digital transformation of their companies, most chief execs are content to sit on the sidelines.

Only a decade removed from the days when EDI was considered cutting edge, the subsequent digital transformation of the corporate world still remains a work in progress for Raphael Amit.

Make that a very unfinished work in progress.

Amit, who teaches entrepreneurship at the Wharton School of the University of Pennsylvania, studies this for a living. Now the shocker: Only 20 percent of CEOs recently interviewed by Wharton and McKinsey are actively promoting the "Webification" of their businesses.

The results came as a surprise to the Israeli-born professor, who directs an academic-business partnership called the Wharton e-business initiative.

"To the extent that the CEO is leader of the organization, in that context, it is surprising that the CEO would not drive an initiative that has a strategic imperative and is extremely costly and will affect in a profound way the way in which the firm does business," he said.

But Amit suggests the findings reflect a deeper problem. He says there's a widespread--and mistaken--belief that technology can magically wash away organizational obstacles that companies first need to clear away before attempting the digital conversion of their operations.

CNET News.com recently sat down with Amit, who was in San Francisco to host a Wharton forum on e-business.

Q: What's the biggest misconception about what information technology can do for a business?
A: I think it's that people get focused on the technology rather than on the business. In and of itself, technology won't make a difference. It needs to get integrated and driven by a strategic imperative. But if they just want technology because it's cool and they've heard something about it or would like to invest in it, that is a misconception.

But these people aren't stupid. How do you account for the absence of coordination between these larger business imperatives and the way they incorporate technology?
The only explanation I can give you is that they were so enamored by the technology that they went for the novelty. For example, you had all these industry consortia that talked about collaboration but were not that useful because they couldn't integrate and get the data to work with each other. You had major companies with five or six different customer databases that didn't talk to each other. All this collaboration that they do on the outside does very little good unless you first integrate and optimize.

The study Wharton did with McKinsey found that only 20 percent of the CEOs polled were really leading the charge for digital transformation in their companies. What was the biggest surprise in that research?
To the extent that the CEO is leader of the organization, in that context, it is surprising that the CEO would not drive an initiative that has a strategic imperative and is extremely costly and will affect in a profound way the way in which the firm does business. In that sense, it's surprising.

Does that say anything about the strategic foresight of people running those companies?
Well, the flip side of what I said is that CEOs have very full plates. We have been doing these interviews since last fall in North America and Europe, and these are big corporations.

"In and of itself, technology won't make a difference."
But at a time of recession and downsizing and pressures from the public markets, CEOs are very concerned about their financial performance. The pressures have been enormous, especially in high technology.

Well, do you think the case for IT as an effective way of improving ROI (return on investment) has been overstated? And perhaps that's feeding into this go-slow approach?
I think expectations got created that were unrealistic. Many of the transformations that firms have to go through take time and are organizational issues, not technology issues. And whenever you're dealing with changing peoples' behavior, peoples' attitudes, peoples' assignments--these are processes that cannot be turned overnight. My point is that I think people tried to reduce the problem to a technology problem when, in fact, it was an organizational, people problem.

And if the CEO doesn't buy in to the mission outlined by the chief technology officer or chief information officer, doesn't that make it all the more difficult to carry out what you're talking about in terms of a digital transformation?
Yes. To the extent those firms don't realize the magnitude of the organizational issues that have to be dealt with side by side with the technology issues, I think they will be facing more difficulties.

One of your Wharton colleagues, Morris Cohen, has written about what needs to be done to effect this digital transformation. But in going over the checklist, it struck me that I could have been looking at a presentation from a decade ago with the one substitution of the term Internet for EDI (electronic data interchange). Sounds like a time warp. Are we stuck in a rut?
EDI is document exchange, one to one. The Internet enables one to many or many to many.

When the server's up it is.
Right. When the server's up--but the reliability is getting better. (Laughing.) EDI is about exchanging documents, not about transacting and market mechanisms, which is a big difference. Also, 10, 15, over 20 years ago, when EDI was introduced and used by Wal-Mart, for example, competition was in the product market space. Today, competition is information-based. That means you need more information, more timely, better organized, and more usable information. And that information-based competition creates the need for an infrastructure and technological capability that wasn't here 10 years ago.

And you have things that weren't around 10 years ago, like Web services. Speaking of which, are you optimistic about the potential for Web services?
Whether we like it or not, Web services--which is a very poor name to describe what it does, but that is another matter--are coming online in various industries at various paces. I see a lot of companies here in the Valley which are in the business of enhancing interoperability of legacy systems.

"Many of the transformations that firms have to go through take time and are organizational issues, not technology issues."
That's one way to think about Web services--enabling communication between hardware and software, whereas the Web enables communication between people. And that's going to happen.

How fast is it going to be deployed?
There are a number of big barriers before this will be prevalent. But it's going to come, and it's going to have a profound impact on the scope of business, because eventually they'll be so reliable and good that you'll see more and more specialization.

Do you think that timetable might get delayed because of rivalry and jockeying between vendors?
That's one of the biggest problems we have, that they have different standards and they can't agree. I think that in some sense competition is good. In another sense, the fact that there's no settlement of which standard will dominate will stall the adoption of that technology.

OK. Let me turn the question on its head. Would it be better for Web services if there were just one supplier?
History has shown that monopolies are not good for consumers. Competition is healthy. But that's why you see many industries, which have boards that agree on basic standards. In telecommunications, for example, it's very prevalent to have certain standards agreed to. It will have to happen in Web services.

Still, they have made some headway on protocols like SOAP (Simple Object Access Protocol).
But SOAP is one of the protocols that competes with two others. I'm not smart enough to tell you which one will win. And by the way, it's not necessarily true that the better one will win. We have a lot of proof of that

You've quoted (former General Electric CEO) Jack Welch talking about how e-commerce will change the DNA of his company. Now, you're a professor. Give GE a grade. How well have they done in carrying out that changeover?
I don't need to give GE a grade. I will ask you back and say, you be the judge! As a result of this change in DNA, what percent of the sales are Web-enabled (at GE)? The answer is a very small percent. I always say that I don't want to pass judgment, but let's just look at the results. That was the objective; let's see what was accomplished.

And that drives home the point I wanted to make--that you need to integrate first. All these external activities that are on the edge of the firm and externally will be that much more profitable if, internally, you are first all squared away.

I'm sure that if you made that pitch to Jack Welch when he was still running GE, he would have bought into that--saying, "Yeah, I'm 100 percent behind it."
Yes, but the lesson there is that you put the cart before the horse. He should have focused first on what his successor is facing, that the internal integration of data and streamlining, and with that accomplished, go outside--as opposed to going outside first and then worrying about the inside. Thinking about connectivity and collaboration before thinking about integration and optimization may be something that (CEOs) will have to think about.

The so-called e-commerce revolution has been around since 1997, and the results have been uneven. What's your expectation of when the transformation is complete?
That's hard for me to say. The answer depends on what the starting point is and where the firm is. For some companies, it's a matter of two to three years. For others, it's a longer process. That's why we have to put things in context.

If you don't have an ERP (enterprise resource planning) system, for example, it will take two to two-and-a-half years to put one in, and then a company can think about other things. If you do have an ERP system, and you want to put in a customer relationship management or employee relationship management system, these are all going to be based on your ability to leverage an ERP system. If you don't have this building block, it's like building a roof before building the foundation or the wall.

The pendulum has swung wildly from irrational excess to irrational pessimism. When might it correct and reach a relatively sane midpoint?
To the extent that the economy is beginning to rebound, you will see a certain amount of stabilization. Do I see the economy coming back with the speed and heights that it reached before? No, I don't think so. We've learned a very important lesson about back to basics and back to fundamentals, which will, in the end, bring about more stability.