Making IT "World-Class"

Benchmarking research from Hackett points to four best practices for building a top-notch information technology group

Benchmarking research from Hackett points to four best practices for building a top-notch information technology group

Atlanta — June 27, 2003 — What are the best information technology organizations doing differently? First of all, they're delivering more value to their companies without significantly increasing IT costs per end-user by focusing on and implementing best practices, according to a new study from benchmarking firm The Hackett Group.

In addition, world-class companies maximize return on investment and strategic value by beginning with a focus on process improvement and then deploying the right technology in support of proven best practice-driven processes in order to provide the right information to the right people at the right time, Hackett's analysts write in the report, "2003 Profile of World-Class IT."

World-class IT organizations are able to deliver more value to their companies by focusing in four general areas, according to Hackett. First, they unlock the business value of IT by automating routine tasks, freeing up resources for more strategic initiatives. These organizations also improve the effectiveness of their IT organization through a comprehensive governance structure that creates accountability and centralizes control of IT.

Third, they enhance management discipline and visibility by utilizing a formal project management office and other procedures to simplify and standardize everything from supplier networks and hardware and software portfolios to data formats. Finally, Hackett found that world-class IT organizations focus on more meaningful performance measures, including tracking IT costs per end-user rather than by revenue.

Better Than "Average"

The impact of the best practices is clear, and the gap separating "world-class" IT organizations from "average" technology groups is starkly evident, from IT's performance and repute at average companies. For example, Hackett found that three out of every ten major IT projects still fail at average companies.

In addition, on average, less than a quarter (21 percent) of average companies rate their IT organization as having high ability to react rapidly to changes in business goals and market conditions. Finally, only 25 percent of average companies take the time for the important step of validating the business case for projects after completion, a critical step in tracking and improving the quality of IT activities.

"Given the high cost of technology initiatives and the significant risk of their failure, it is surprising how many companies persist in managing IT as if it were a disparate collection of pieces and parts rather than a fundamental core competence," said Allan Frank, Hackett Group senior fellow and president of the benchmarking firm's parent company, Answerthink. "CEOs and CIOs are desperate for hard metrics about the strategic value IT provides and how to improve it. Today most continue to seek in vain for answers to basic questions such as 'Have our IT investments reduced administrative costs, increased productivity, enhanced decision-making or improved customer service and customer satisfaction?'"

Frank said that Hackett's research indicates that to manage their IT assets with greater confidence, companies need to view IT not as a simple cost center, but on the basis of its business value. "In this way, they can much more effectively compare potential costs and value of projects against issues such as risk and timing," he said. "World-class companies have distinguished themselves through their disciplined approach to technology, while many a would-be competitor has succumbed to pressure to commit precious funds on poorly timed, ill-conceived or simply non-strategic projects, severely impacting overall competitiveness in the process."

Hackett compiled its 2003 IT research report by identifying shared characteristics of its clients that showed the greatest overall efficiency and effectiveness in their IT organization across a wide range of metrics. "World-class" performers, who ranked as first quartile in both efficiency and effectiveness, were compared with average companies in Hackett's database. Nearly 2,000 companies have participated in Hackett benchmarking and research, including 97 percent of the Dow Jones Industrials and 81 percent of the Fortune 100.

High Failure Rates, Low Ability to React to Change

At average companies, 30 percent of all application projects lasting more than a year failed to meet business requirements, according to Hackett, which argues that such a failure rate would be untenable in virtually any other corporate function. World-class companies do significantly better, with only an 18 percent failure rate, largely due to their emphasis on a holistic, best practices-driven project discipline that provides a simultaneous and coordinated focus on people, processes, technology and information.

Very few average or world-class companies feel their IT organizations are able to adapt rapidly to change, Hackett reports. Only 21 percent of average and 38 percent of all world-class companies rate as high their IT organization's ability to react rapidly to change. All IT organizations need to improve their ability to revise or take on new priorities within short timeframes, as business needs and market conditions warrant, Hackett argues in its research report. A number of factors contribute to adaptability, the researchers found, including access to executive decision-makers, organizational structure and having the right skill sets in place and a fully integrated technology and information architecture.

Hackett's research indicates that today's risky economic environment has driven most companies to insist on formal documentation of every technology project's ability to meet business objectives and goals. But world-class companies do better across the board.

For the initial stage of submitting project requests, world-class and average companies rank closely, with 88 percent of world-class and 86 percent of average having a formal process in place. The gap between world-class and average widens as companies build and specify projects and put together a business case: 100 percent of world-class companies see formal processes in both of these areas as a "must-have," while average companies have formal processes to build and specify projects only 80 percent of the time, and only 84 percent require a formal business case to be developed.

Both world-class and average companies do significantly worse in the critical area of validating a project's business case after its completion. Fewer than half (43 percent) of all world-class companies take this important step, while only 25 percent of average companies do. The low overall use of post-project business case validation, and the larger gap between world-class and average companies, is very significant. Without this step, accurate documentation of return on investment is impossible.

Four Key Areas Where World-Class Companies Excel

The first of four key area where Hackett found that world-class companies out-perform average companies is that they utilize automation to reduce the cost of routine processes in human resources, finance and elsewhere. Cost savings in these areas can then be reallocated to strategic decision-making systems.

World-class companies rely on electronically enabled transactions and procurement dramatically more often than average companies. In 10 areas, including time and expense reporting, purchase orders and various procurement processes, world-class companies were from 71 to 578 percent more likely to use electronically enabled transactions, according to Hackett's research. As a result of this automation, world-class companies show dramatically lower costs. Hackett found that world-class companies spend 38 percent less than average companies on finance transaction and process controls. Technology-driven self-service capabilities are helping companies yield savings of 69 percent on health and welfare costs per employee.

This automation significantly improves the ability of world-class companies to focus on strategic initiatives. Hackett found that world-class companies are able to spend 30 percent less than average companies on process and labor costs by focusing on the implementation of best practices. This funding is then dedicated to strategic systems that directly contribute to business performance.

The second area identified by Hackett is IT governance: delivering IT business value and mitigating risk. World-class companies are 32 percent more likely than average to have a global IT executive, and chief information officers at world-class companies are 30 percent more likely to report to the CEO than at average companies. This improves the IT chiefs' ability to design, deploy and manage IT strategy at an enterprise level. In addition, sponsors are significantly more likely to be held accountable for the success of their IT projects at world-class companies.

Improved management discipline and visibility is the third area identified by Hackett where world-class companies clearly excel. Here, Hackett found that a strong emerging best practice is the creation of a formal project management office (PMO). Hackett urges all companies to embrace this practice for business-critical projects and initiatives. But while 100 percent of world-class companies have formal PMOs, only 37 percent of average companies do. Without a formal PMO, a company is likely to have only limited ability to oversee its portfolio of technology initiatives, manage risk, prioritize projects, monitor standards and policy compliance, and capture and communicate learnings about project successes and failures, the benchmarking firm argues.

As part of this management discipline, world-class IT organizations focus on standardization in a diverse array of areas. They have 78 percent fewer finance systems per billion in revenue. They utilize vendor rationalization more effectively, cutting the number of vendors for hardware, software and other high tech services by 30 percent or more. They are up to 163 percent more likely to enforce software standards than average companies, and 194 percent more likely to use data standards to a high degree, according to Hackett. As a result of this standardization, world-class companies see fewer help-desk requests per end-user, and a higher percentage of requests are resolved on the first call.

The final area of excellence identified by Hackett is a focus on more meaningful IT performance measures. Hackett's research found that the number of end-users is a much more effective indicator of IT costs than total corporate revenue. The researchers argue that IT costs are an outgrowth not of a company's size but rather of the IT organization's complexity. This makes setting budgets based on annual revenue an arbitrary and potentially damaging approach. The population of internal and external end-users is the more powerful indicator of the demand for IT services and thus a better indicator of the extent of overall IT spending.

"To reach world-class status requires sound decision-making, clear processes, enlightened governance and the development of a working partnership with corporate management to shape the direction of IT strategy," Frank said.

Frank said that Hackett was seeing progress at companies of every size, sector and operating model, but enterprises still have a long way to go. "Certainly the slowdown in new technology spending over the last two years has provided the most forward-looking managers with a wonderful opportunity to retool their management processes and revisit past implementations to ensure that full value is being extracted," Frank said. "Much remains to be done, however, to apply the lessons of the recent past to the creation of a roadmap for managing future growth."

For more information on what top companies are doing right, read the February 19, 2003, iSourceonline article "The Efficiency Gaps in Corporate Finance" on Hackett's research report "2003 Profile of World-Class Finance," released earlier this year.

Where should companies be focusing their efforts today to remain competitive tomorrow? See "What's Still Missing in B2B?," cover story in the June/July 2003 issue of iSource Business, for views on this issue from Procter & Gamble Chief Information Officer Stephen David.