Does your company suffer from an outdated understanding of the role and value of information technology (IT)? Today, IT is pervasive in the modern corporation and, if any part of your business or supply chain is “online”, IT is the infrastructure of the business. Yet, too many companies still treat IT as a standalone entity and cost structure.
Two events came to my attention that hit home on these points. The first was a recent blog post by my friend Vinnie Mirchandani called “The back office [is] crowding out the front office”. In the post, Vinnie points to the suffocation of IT value-added investments because large-scale back-office systems such as ERP are disproportionally consuming the allocated funds, but more importantly the IT resources. The second event was a conversation with a leading global company whose IT organization stated that they were mandated by the executive team to cut IT expenses to 2% of revenue. This insidious thinking came from a company benchmarking exercise.
At best, both instances represent laggard thinking. However, I believe it is even worse when you consider global supply chain leaders. To understand how absurd this kind of traditional thinking is, take the extreme case of a pure-play on-line retailer or distributor. Would they ever consider limiting their IT spend to 2%? Absolutely not, because they could never get their businesses up and running with such paltry and unrealistic funding. Instead of viewing IT as an expense “line item” global supply chain leaders view IT as a utility – like electricity and an essential part of supply chain operations or enabling business capability such as a manufacturing plant or distribution center.
The challenge to breaking this broken paradigm is get executives and finance to think differently about IT and for IT to think differently about how it is organized. Some of the challenge is perception and some of it is outdated organization models. It’s hard for most senior executives to understand the value of IT if all they are really looking at is a cost line item on the P&L. Those “dog and pony” shows that IT organizations put on to demonstrate to management that they are worth the money don’t actually work. Just look at the number of companies that are still constantly looking to cut their IT costs. From an organizational perspective, IT has put itself in cost-rationalization situation under the banners of centralization, standardization and synergy. What ends up happening, is that monolithic organizations and cost lines are created with little support from the business units.
Most IT costs and resources need to be shifted to the operating budgets and organizations. There, IT becomes an investment or variable expense where the business unit (BU) or supply chain can make its own decisions on equal footing such as building a new warehouse, expanding the fleet or using a 3PL. At the BU or operating level, a dollar invested or spent shouldn’t be constrained to some arbitrary corporate objective if the value is there. This is why I am a big proponent of IT becoming an operating expense item.
Today’s technology landscape is much better situation to support this “utility” strategy. One of the biggest reasons cloud-based supply chain technology is becoming so prevalent is that it can easily be incorporated as an operating expense and isn’t necessarily IT resource constrained (See my previous post on cloud technology). You would be amazed how many companies I know that say they have been adopting cloud-based logistics systems because they were constrained by the lack of tradition IT funds and resources. With the highly evolving nature of supply chains and competitive capabilities of today’s supply chain technology, time-to-value is today’s most important metric. Waiting in line behind the back office ERP upgrade doesn’t cut it for leading companies that want their supply chains to deliver differentiated customer value. The good news is that the breadth supply chain capabilities that can be delivered via cloud technology is rapidly expanding and giving supply chain organizations more options to address their challenges and opportunities on their own terms.
This isn’t an IT versus the business/supply chain discussion, but a better way to recognize today’s role and value of IT and how it needs to fit into the enterprise. It may sound counter-intuitive, but to purely centralize and cost-line focus IT is actually diminishing its real value to the enterprise. If you needed more electricity to ship more product and make more money, you wouldn’t think twice about it. The same goes for IT and why adopting cloud-based solutions make more sense. Do you agree? Let me know.