Characteristics of World-Class IT Operations

— August 08, 2014

World-class IT organizations deliver services at 22% lower cost than typical companies, and operate with 9% fewer staff, partly by reducing technology complexity and realigning talent—according to findings from The Hackett Group Inc., titled, "The World-Class Performance Advantage: How Leading IT Organizations Outpeform Their Peers."

The study estimates that a typical large company (with $10 billion in revenue and about 21,500 end-user equivalents) could save up to $36 million annually by achieving world-class performance levels in IT—freeing resources to focus on higher-value activity and innovation.

Research also found that talent is emerging as a major challenge to improved IT performance. Offshoring and other factors are causing limited availability of staff with skills that are in high demand, and are likely to create a bottleneck to raising the value contribution for many IT organizations.

"The role of IT has changed dramatically in the past few years," said The Hackett Group Vice President of Research Erik Dorr. "IT has become a key driver of the innovation-based growth strategy that most companies are relying on. Digitization, the explosive growth of data volume, and the integration of technology into virtually every element of the corporate world has created a tremendous opportunity for IT to have a positive impact on the bottom line. Unlocking the value of IT throughout the entire value chain is critical for companies that wish to dominate their industry in the future. World-class IT organizations are well on their way to achieving this today, and set an example others can learn from."

Strategic Themes
In addition to operating at lower IT costs and with fewer staff, world-class organizations also allocate costs very differently than their peers.

They spend nearly 30% more of their IT budget on build activities that contribute more to improving business processes, and nearly 13% less on day-to-day run activities.

Overall, leading IT organizations universally reflect two key IT strategy themes—they operate with lower technological complexity and are better able to realign technology talent to support business strategy.

Managing Complexity
Complexity reduction is key to IT performance, and organizations have dramatically simplified and streamlined a wide range of their operations. This includes utilizing 80% fewer technology platforms and 37% fewer applications, as well as seeing dramatically lower levels of hardware and software complexity.

Besides helping achieve cost reduction goals, complexity reduction also enables companies to achieve much higher levels of IT effectiveness. This has an impact far beyond IT; it helps reduce process costs in other key business operations areas such as finance and procurement.

Also, there is a very strong correlation between low application architecture complexity and both reduced operating cost in these functions and reduced technology cost.

World-Class Practices
Companies aspiring to world-class performance should pursue several best practices to manage IT complexity:

Strengthen enterprise architecture governance to drive the use of standard technology platforms and common data definitions across operating units.

Equal emphasis should be placed on cost and flexibility/agility when evaluating solutions.

Consider ways to increase the use of cloud-based SaaS applications, enterprise versions of consumer applications (e.g., Dropbox) and BYOD policies to reduce the number of non-strategic platforms and improve end-user satisfaction. But care is required, particularly with BYOD, where many companies find it difficult to generate cost savings.

Realigning Talent
To achieve world-class performance, IT organizations also realign their technology talent—including adopting talent management best practices and mobilizing technology talent beyond the boundaries of the function's organizational silo.

In particular, as complexity is reduced and organizations increase their focus on higher-value activities, they often need to develop new skills and competencies among their IT staff.

In several key areas, skills may become difficult to acquire over the next few years—as a result of increasing demand and limited availability. The problem is accentuated by the trend towards offshoring and outsourcing, which have largely eliminated the internal "farm system" through which IT departments developed new talent.

Talent issues such as these are likely to make it more challenging for IT organizations to increase the strategic value they provide. Among traditional IT abilities, security expertise, emerging technology, and application development/configuration skills are all expected to become more difficult for IT organizations to acquire.

In other skill areas which are required for IT organizations to partner more effectively with the business, a similar trend is expected. These include data and strategic analysis, business relationship management, and technology leadership roles.

Strategic Methods
The study identified best practices world-class IT organizations use to realign talent:

Mobilize talent already residing in the business—often putting business technologists in charge of technology-based innovation.

Institute a strategic workforce planning process, which takes a long-term view that ties talent strategy to the broader enterprise strategy. Also, adopt a comprehensive set of talent management practices—including less formal techniques such as coaching and mentoring, leadership development and on-the-job training.

Optimize service placement to realign technology talent and realize "economies of skill." Service placement involves deciding where IT work is executed—such as in the business unit, in the corporate IT organization, or in a centralized shared services or global business services (GBS) organization.

While the optimal split among these options varies somewhat by company, centralizing work in an organizational entity with a core competency in service management, such as a GBS, improves IT performance and allows corporate IT and business units to realign talent toward higher-value activities.

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