Strategy is a touchy subject for many enterprises. Every executive knows that strategy matters, or at least that it’s supposed to matter. But strategy is not easy, requiring plenty of effort and creativity to complete and execute. Further, some businesses appear quite successful without a clear strategy.
So why bother with a strategy? Recent research from Gartner offers one answer: the effectiveness of an IT organization depends on it.
IT spending accounts for about 3.5% of enterprise revenue, on average, but that spending produces a majority of enterprise productivity gains. In other words, effective IT is key to increasing enterprise effectiveness—and according to our research, IT effectiveness is lower in enterprises where strategy is unclear or inconsistently executed.
Gartner recently surveyed executives inside and outside IT to explore the relationship between strategy and IT effectiveness. Each respondent was asked to rate the overall effectiveness of the IT organization, followed by questions on key enterprise activities: making and executing strategy, identifying needs and opportunities for investment, making investment decisions, bringing those decisions to fruition, and measuring initiative outcomes.
The survey results show clear differences between the top 40% of respondents (in terms of perceived IT effectiveness) and the bottom 60%. The most important correlation to perceived IT effectiveness in our data for the top 40% is execution of their initiatives for change; for the bottom 60%, the strongest correlation is to strategy and investment decision making. We believe that the difference results from the ability of the leaders to articulate and execute against strategy.
When strategy is clear and consistently applied to investment decisions, executives have confidence in the quality of their decisions, and so see capable execution as the most important leading indicator for success. When strategy is weakly articulated and managed, executives have little confidence in investment decisions, and by extension in the projects IT supports.
The lack of confidence is justified. In any enterprise, demand for resources in support of change is greater than supply. Given that almost any change in enterprise operations requires a corresponding change in IT systems and support, everyone’s demand eventually increases demand for IT. In the absence of clearly articulated strategy, not only does demand exceed supply, but there is no rational way to determine which demand is most important. In this situation, two things are certain: 1) IT will face overwhelming and increasing demand, and 2) executives will be dissatisfied with investment decisions and IT’s role in those investments.
Absence of strategy implies significant waste. Here’s a rough formula for calculating waste. The typical enterprise succeeds in about 60% of its IT-supported initiatives. Take the total IT spend and multiple by 35%, the average percentage of IT spending that’s devoted to change initiatives. Now take 40% of that figure. That’s how much waste is involved for IT alone; in a typical enterprise that spends $100 million per year on IT, $14 million is wasted.
The typical IT-supported initiative involves at least one to two additional, non-IT personnel for every IT person on the project; so double or triple the amount of IT waste to get the full amount.
It may come as a surprise to many executives that lack of clarity in their strategies produces so much waste outside IT, because too many executives think of any change in the enterprise that involves IT as an “IT project.” This attitude is a major contributor to failure; when a project is an “IT project,” executives outside IT feel free to ignore it, leading to shortages of resources like executive sponsors and subject matter experts. This produces delay if not failure.
Our research points to a way out. CIOs don’t control enterprise strategy, but can exert influence to move the enterprise in a better direction.
For enterprises in the bottom 60% of our survey, strategy comes first. The first step is to improve the executive team’s ability to create a workable strategy — one that includes a realistic diagnosis, policies to address the circumstances and opportunities exposed by the diagnosis, and an action plan.
Whether or not the CIO has the responsibility to manage strategic planning in their enterprises, he or she can influence the executive team to improve strategy making and execution. Many CIOs have taken action by studying executive and enterprise communications to create an explicit, if tentative, statement of strategy for validation or correction by senior leaders. In doing so, they emphasized the importance of strategy to IT’s plans, encouraging other executives to take enterprise strategy more seriously as well.
The second step is improving IT governance which means focusing governance on increasing yields for enterprise investments in change, incorporating strategy into every investment decision, and ensuring that all necessary resources for an initiative, not just IT professionals, are allocated and available when needed—or that the associated initiatives are cancelled before waste cascades further.
For enterprises in the top 40%, CIOs have the benefit of clear strategy to guide them in choosing and executing initiatives. Here the goal should be to increase yields from investments in change even further. Given that a very low percentage of all enterprises actually measure the yields from their IT-supported initiatives, the logical next step is to measure yields and use that data to identify opportunities for smarter investments.
Like the enterprise, IT potentially can do anything, but it can’t do everything. A clear strategy helps everyone involved to make the best possible choices about where IT and other resources can be deployed to greatest effect. Without a strategy, the enterprise has no compass. Without coherent action in support of the strategy, the compass is useless.
Thank you Richard Hunter
Richard Hunter is a vice president and research fellow at Gartner and the author of several books including “Real Business of IT” published by Harvard Business Press. Dorothy Yu is a managing vice president in consulting at Gartner specializing in the alignment and application of technology for increased business performance.