Transforming Your IT Organization to Drive Innovation in a Digital Economy

By Kevin Benedict, Senior Analyst for Digital Transformation at Cognizant

The tempo of change in today’s business world is faster than ever. Business leaders are struggling to understand the meaning of these changes, how to manage them, and how best to increase skills and operational pace to remain competitive. Digital transformations are introducing new kinds of customer behaviors, business processes, expectations and entirely new business models. These transformations require a new kind of organization.

We see industries turned upside down due to these rapid changes. We see start-ups suddenly appear and industry titans collapse before competitive onslaughts. We hear business leaders from giant companies struggling with how to react, drive innovation and compete against small, agile digital start-ups in markets where technologies, preferences and consumer behaviors are changing at record speed.

As we research these challenges, it becomes clear many of the most successful companies are restructuring themselves and leveraging Code Halos – the digital information surrounding every customer, employee, company and product – to revamp business models and provide the best experience to customers. Companies embracing Code Halo strategies rightfully see technology and their IT department as not just part of the business, but THE business.

To address these formidable challenges, IT organizations can implement three specific steps to unlock technology-powered innovation:

1. Restructure their IT organization to better compete

2. Implement strategies to self-fund the transformation

3. Create new models of interdependence between IT and the business.

Restructure IT for Success

IT organizations across industries face a similar challenge: how to support legacy core systems while concurrently making time for innovation. For example, in the automotive industry, we’ve heard from IT leaders at car manufacturers that they are under pressure to improve the driver and passenger experience by incorporating social, mobile, analytics and cloud (SMAC) technologies into vehicles.  They are tasked with this challenge while at the same time expected to create value from their existing legacy systems.

To address this challenge, we teach a Three Horizon approach, originally developed by McKinsey & Co. consultants Merhad Baghai, Stephen Coley and David White in their 1999 book The Alchemy of Growth, to more effectively structure IT.

– Horizon One (H1) represents parts of the organization focused on mission-critical areas

– Horizon Two (H2) covers products or services established in the market that haven’t reached full maturity

– Horizon Three (H3) is comprised of next-generation business offerings that need time to take root.

In the world of enterprise IT, H1 is the foundation of IT operations and includes elements such as infrastructure, messaging systems, corporate networks and e-mail. These components are necessary, but don’t provide any manner of competitive distinction. H1 is not a catalyst of the future for IT organizations, and as such, the focus should be primarily on sourcing and managing external services.

H2 builds the business for enterprise IT, and includes profitable systems such as front-office CRM solutions, e-commerce platforms and financial systems. The focus of H2 is business effectiveness, and while H2 roles include a broader mix of technical and sourcing skills, organizations should focus on keeping technical development skills in-house.

The future of enterprise IT lies in H3, which today is driven by innovation through SMAC technologies. An H3 team should be small and agile, knowledgeable of the latest technologies and able to hunt for breakthroughs across industries and competitors.

To make this organizational shift, major changes may be required of internal IT teams, as functions tied to legacy systems become targets of consolidation, standardization and increased efficiency. Making this transition also requires buy-in from senior leadership to ensure proper allocation of resources and execution across all three horizons.

Self-Funding the Transition

One question that arises during any major IT change is “Who will pay for it?” Currently, most IT organizations reserve about 80% of their budget to fund core systems and software, and only 20% for new technologies and innovation. To succeed in the digital economy, IT leaders need to rethink that equation.

This change can be accomplished by driving efficiencies across systems that do not foster competitive advantages. There are several ways to accomplish this:

– First, by consolidating enterprise applications and streamlining multiple instances of applications, whether in ERP, CRM, HRM or SCM systems.

– Second, by moving infrastructure to the cloud to manage assets better, faster and cheaper.

Third, by externalizing services, and leveraging the capabilities and global talent pools of external service providers to reduce the cost of a legacy environment.

Although many organizations assert they are already making these changes, we find there are still huge opportunities to free up budget that can be allocated toward driving innovation through H3 competencies.

Creating a New Model of Interdependence

For years, analysts and industry observers have urged organizations to align IT more closely with other parts of their business. Our observations have lead us to go a step farther and recommend integrating the parts that focus on emerging technologies and digital competencies, into individual business units. This transition enables synergies that help established companies compete with those born in the digital age.

An organization leveraging Code Halos can keep Horizons 1 and 2 (the core infrastructure and systems of record) intact. To infuse Code Halo thinking into the business, Horizon 3 IT resources (the systems of engagement rooted in the digital world – the parts of IT related to big data and SMAC) should be embedded into key functional areas (i.e., design and packaging, customer service, sales and marketing) that help to differentiate the company from competitors.

What we preach is not simply implanting IT employees within business units, but encouraging the hiring or training of employees with skills crucial to both IT and the business. This integrated approach not only drives collaboration and efficiency, but also allows organizations to unlock new levels of value by giving IT personnel a stake in the innovation process.

Looking Ahead

In today’s digital economy, companies must give consideration to simultaneously delivering IT more efficiently, while creating new business capabilities that fuel innovation. The Three Horizon approach enables adherents to more easily make this transition. By taking this approach, IT professionals can contribute operational value and help their companies compete on code across the increasingly digital economy.

Kevin Benedict is the opinionated Senior Analyst for Digital Transformation at Cognizant. He is a world traveler, speaker, writer and mobile and digital strategies expert. In the past three years, Kevin has taught mobile and digital transformation strategies workshops in 17 different countries. He has over 25 years of experience working with enterprise applications and fourteen years in the mobile application market.  You can follow him on Twitter @krbenedict.