Published: 28 June 2012 ID:G00236390

Analyst(s): Jorge Lopez | Tina Nunno | Steve Weber

VIEW SUMMARY

Among U.S. board members, 16% have experience in IT. While IT is 5% or less in most budgets, it is still a large budget item for most corporations. This report addresses what board members need to know about their investments in IT.

Overview

Key Findings

• Boards of directors need to know how they can use IT to gain a competitive advantage.
• Boards of directors must specify the elements of an IT strategic plan they want to review.
• The competency that a board will most want from a CIO is business competence.

Recommendations:

Board of Directors:

• Insist that the IT organization construct an IT strategic plan that the board will review once a year. Look for inconsistencies between what IT is saying is important and what the board knows to be important.
• Once a year, have your CIO provide a 15-minute briefing on the Gartner Hype Cycle of emerging technologies, as well as on any industry-specific technologies that apply. This briefing will inform the board as to whether a new technology is a reality to face, or just a bunch of hype.
• When the call goes out for a new CIO, ensure that the newly hired CIO can work with the board of directors directly to answer the questions that the board should ask IT, and can do so in a manner that can be received by the board.

Analysis

Most board members know how much the company is investing in IT as a result of the formal budget approval process. Few, however, know what that money will do for the organization. In this report, we examine the six things that the board of directors needs to ask IT. These are presented in a summary form that can be used directly in a board environment.

Question 1: What Is Being Done to Ensure We Maintain Our Competitive Advantage?

The 2012 Gartner-Forbes Board of Directors Survey showed that competitive advantage is among the top five board priorities, and half of the directors surveyed indicated they saw IT as the key to changing the rules of competition in an industry.

The most important part of this question for the board is to find out if the IT organization is in line with the manner in which the company competes. One way to measure this is to ask, "What kind of competitor is the board?"

• Benchmark player — Do you as a board mostly benchmark to your nearest competitors?

• Indicator — The IT organization offers industry benchmarks on IT spending and sets internal cost targets for the IT budget.

• Operations crew — Do you as a board focus relentlessly on operational excellence to drive your advantage?

• Indicator — The IT organization is focused on end-to-end operational process efficiencies, working with business units and operations. Together, they produce a stream of improvements that drive up productivity.

• New-idea driver — Do you as a board focus on new ideas that can be game-changers, and then execute on them?

• Indicator — The IT organization is integral to marketing and product development processes from end to end to get more new offerings into the marketplace in a shorter time.

• Breakaway potential player — Have you already mastered how to deliver new competitive offerings in an extremely efficient manner as well?

• Indicator — The IT organization looks at all the critical processes of an enterprise — from the customer to the suppliers and other stakeholders — to integrate product introductions with world-class efficiencies.

The IT organization should be as aggressive as the board in pursuing new ventures or ideas. If the board is trying, for example, to leverage innovation to create new products and markets, as P&G or Apple does, then the board needs to have an IT organization that is also thinking about how to enable the most innovative parts of the organization, while reducing the efforts that do not add value.

The clearest sign that an IT organization is aligned with board priorities on competitive advantage is an IT strategic plan that begins with those priorities on competitive advantage.

Recommendations:

• Insist that the IT organization construct an IT strategic plan that the board of directors will review once a year. Look for inconsistencies between what IT is saying is important and what the board knows to be important.
• Ask the IT organization, "Are there any areas where the board gets in the way of success?"

Question 2: What Is Being Done to Ensure We Improve Our Productivity?

The great successes of IT in the past half century were tied to raising the productivity of workers and corporations. It is easy to get complacent as a board and assume that further investments in IT are not necessary, since there is not much improvement left to be done. Recent announcements, such as the effort by P&G to reduce its operational run rate by $10 billion by 2016, show that this is not the case and that corporations are still obsessed with the ability to improve their productivity. They understand that, to do so, they must enable the IT organization to be an active player. Examples of what to watch for from the IT organization or the management team that addresses productivity:

• Global business services — Is your corporation working to consolidate the many older systems that are in operation to provide more nimble and cost-effective systems?
• Operational technology integration into IT
• Mobile computing

One other aspect of productivity is to examine efficiencies throughout the company, including energy consumption. Today, the data center operations of Facebook are considered to have the most energy-efficient operations in the world. Making direct comparisons to that should help when setting goals for IT.

Recommendation:

• Ask the IT organization to add a section on productivity into its IT strategic plan for the board's direct review.

Question 3: What Investments Should We Be Considering for the Future?

Among the most difficult discussions to have are those concerning investments in future technologies. For one thing, these tend to be in the realm of technologists, and for another, it is difficult to see or to quantify the business implications and risks of new technologies, such as mobile computing, social media, cloud computing or big data. Many boards of directors tend to ignore these issues as too complex to consider, yet in many industries, these are the vanguard as sources of competitive advantage, as well as market share losses to competitors that experiment with new ways of doing business, leveraging technology.

The most constructive thing that a board can do is to ask, "What is happening out there that will disrupt our industry or our way of doing business?" The IT organization should be the advance team seeking out these technologies that put the business at risk. IT should explain not only what that technology is, but also why customers or competitors would find it to be a differentiator and a window of opportunity ahead on which the board can act.

Recommendation:

• Once a year, have the CIO provide a 15-minute briefing on the Gartner Hype Cycle of emerging technologies, as well as on any industry-specific technologies that apply. This briefing will provide a "sanity check" for the board on whether a new technology discussed in airline magazines or the news is a reality to face, or just a bunch of hype. It will also let the board know how much time the company has before the new technology could become a factor in business results.

Question 4: As We Look to the Future, Where Are We at Risk?

This is a critical question to ask, but it raises questions that, many times, the board would prefer not to address. For example, companies that have been in operation for 10, 40 or more years are likely using underlying infrastructure that is equally old. This means that many costs of operations are embedded into the infrastructure and growing, since the skills and training for many older technologies do not exist. Randy Mott, now the CIO of General Motors, described the situation publicly in these terms: "… a company who has old infrastructure is like a very muddy lake. If you go for a walk into a muddy lake, at first, you walk almost freely. After a short while, you begin to sink into the mud, until finally, you are up to your chest and cannot move at all." The risks to a company of inflexibility and high costs of change permeate through many decisions.

Additionally, there are crucial areas that raise enormous questions about risk, such as information security. With much publicized failures of security at large corporations like T.J.Maxx, CardSystems Solutions and Sony, boards understand that there are risks, but they may not know how well they are protected.

It is important to the business to know these risks, and for many boards, these risks are well below the radar until the day they explode as a serious issue that can permanently damage the business.

Recommendation:

• Have the CIO include a section on risks in the IT strategic plan. Get a briefing at least once a year on the risk exposures to the business and the actions to contain them. Follow up with a briefing showing progress toward improvement.

Question 5: Where Are We on the Basics?

Every year, CIOs lay out their priorities, and the order of these priorities reflects their perception of the business's overall direction. The list also shows the basic needs of the business and the IT organization just to operate daily. According to the 2012 Gartner CIO Survey, the top five priorities for this year are:

1. Delivering business solutions
2. Reducing the cost of IT
3. Developing or managing a flexible infrastructure
4. Expanding the use of information and analytics
5. Improving IT management and governance (see Figure 1)

Figure 1. Top CIO Priorities

Number of respondents = 2,338
Source: Gartner (June 2012)

Do these priorities align with the priorities of the board? In most of our work, we find this is not the case, so CIOs must find ways to ensure the underlying basics are aligned with board priorities. The top priorities from the 2012 Gartner-Forbes Board of Directors Survey were:

1. Attracting new customers
2. Retaining and enhancing existing customers
3. Focusing on core competencies
4. Maintaining competitive advantage
5. Fostering innovation

Whatever the top priorities of the board are, it is important that the investments being made in IT reinforce them.

The rest of the basics include the critical hygiene and industry-specific issues. For example, how is the IT organization on information and network security, availability of systems, and the response times for workers in meeting customer needs? Answers to these show that, if the basics are not met, the higher-order actions are made less possible, if they can get done at all.

Recommendations:

• When reviewing the strategic plan for IT, ask how it is doing against the basics of IT, and use this list as a preliminary guide for questioning. Adjust the list to your company's specific priorities as needed.
• Capture the metrics for performance, and insist on the CIO reporting on these metrics quarterly for potential review and action.

Question 6: What Should the Board Look for in Its CIO?

The qualifications for a CIO are rapidly changing, as two trends are converging. One trend is the realization by major corporations that having the CIO role in the executive suite as a member of the management team is important to sustaining competitive advantage. Reported survey results from NACD show that only 16% of board directors have any IT experience at all. The knowledge about how a capable CIO can drive competitive advantage is valuable.

What the board wants is a capable executive who can take on the challenges and opportunities presented by both the company and the IT organization. Is the company in a turnaround situation? Is it trying to grow by acquisition? Is it scaling up organically? Does it need a strategy for the long term? Is it large or small?

The second trend is also worth noting. Gartner research shows that CEOs consider the most oversold capability of a CIO is technical knowledge. In addition, when asked what capability CIOs lacked, CEOs identified a lack of business understanding and expertise.

The CIO role is one of only three positions in the entire company (the other two being the CEO and the CFO) in which the role has a responsibility across the entire company and all units. As a result, the new criteria for a CIO in many companies will be that of someone who has substantial executive experience in business and who understands what IT must do.

Finally, the ability of the CIO to build a strong team is a key measurement of the IT organization. The team members who report to the CIO should be of the highest caliber for people in the company. By this, we mean that the company should leverage its own internal standards for performance that would be required of any other executive in the business.

Recommendation:

• When the call goes out for a new CIO, ensure that the newly hired CIO can work with the board of directors directly to answer the questions that the board should ask IT, and can do so in a manner that can be received by the board.