Next Generation CIO: Four radical shifts transforming the CIO’s role

In this article, Norbert Kettner, Oliver Klein, Christian Bartsch, and Kris Ammann of Lodestone Management Consulting discuss the changing role of the CIO, supported by recent studies and Lodestone’s own consulting experience.

The role of the Chief Information Officer has fundamentally changed over the past years. Long gone are the days as the key responsibility of a CIO consisted of fulfilling the business’ technical requirements. His sphere of influence is expanding continuously, moves closer to the business and increases in complexity. The CIO of today has to contribute to corporate strategy and processes in line with applying new and relevant technology, in order to optimise business performance. As a consequence, the Chief Information Officer role as we know it today will undergo a radical shift to a Chief Integration Officer with a stronger business orientation and global responsibilities.  Since the 1970s, several technology leaps impacted the CIO’s role and scope of duty consistently.

 Within the ‘Mainframe Age’ – lasting until the early 1990s – the CIO was merely considered to be a data centre manager overseeing mainframes and early standard systems – such as R/2 – and processing crude accounting data. The first financial software applications enabled process automation and replaced manual accounting. With the rise of Client/ Server technology, this role changed dramatically. The next technological cycle with integrated ERP systems became available and provided consistent technological structures, stringent application logic, high performance and increased usability.

SAP R/3 started to replace its mainframe predecessors.  The ‘Client/Server Age’ triggered the commercialisation of computers and pushed process automation to the next level. Standardisation of the clients, for example by rolling out graphical user interfaces, enabled technological harmonisation across the enterprise.

The advantage of harmonisation was that companies had profound knowledge about the software employees were working with. As a consequence, system landscape consolidation was fairly easy and IT controllable.  Consolidation will not be as straightforward anymore, as the ‘Network Age’ is about to change the status quo.  The ‘Network Age’ is characterised by highly flexible and scalable architectures, multiple platforms, network-oriented organisations and technologies, collaborative processes and a CIO understanding and evaluating these technologies.  Mobile devices, apps, cloud computing, open source, blogs and social networks already have a huge impact on the way companies control and manage applications and data.  Completely new data management models are required, which has a clear consequence: the Next Generation CIO will have to find answers to more integrative and strategic questions and needs to assure that IT excellence is transformed into measurable business value.  This finding is underpinned by a variety of reviewed studies. In the following sections, the focus will be put on the latest results of the survey conducted between March 2011 and June 2011 by Ingolstadt University of Applied Sciences (UAS)1.

The representative study primarily covers the feedback of CIOs working for multinational enterprises (MNEs) in manufacturing, service and commercial industries, with a total revenue of more than one billion euros and employing more than 1000 people. The CIOs were surveyed with respect to a potential change of their role in the future. This study in particular (primary research) as well as further studies published by recognised analysts and consulting companies (secondary research) between 2007 and 20112-10 draw a clear picture about the future CIO’s role: the role of the CIO is inevitably about to change, for which the following four radical shifts are assumed to be the strongest impulses.

I. Enterprise Resource Planning shifts to Global Resource Planning
Today’s Enterprise Resource Planning (ERP) systems are increasingly replaced by Global Resource Planning (GRP) systems. In other words, the number of ERP systems within enterprises will decrease significantly over the coming five years, according to the study of Ingolstadt UAS.  Only approximately 50 per cent of surveyed companies employ less than five ERP systems, while the rest still operates 20, 30 or more systems, which in many cases are neither aligned nor integrated. One of the reasons for this tremendous number is the increasing complexity of organisation structures, with enterprises being regionally organised, consisting of divisions and subsidiaries.  In today’s closely interlinked world, corporations are strongly influenced by global processes. This requires integrated global systems, which consequently leads to a consolidation of the ERP systems landscape. Already today, a majority of IT projects aim at harmonising multiple ERPs.  The Ingolstadt UAS study quantifies the share of MNEs operating less than five ERP systems to 75 per cent.  At the same time, none of the surveyed enterprises will continue to employ more than 20 systems. Therefore, as the consolidation of multiple ERPs becomes a key success factor for strengthening competitiveness, CIOs have to focus on the integration of existing business processes – throughout all regions, divisions, subsidiaries and departments.  According to HfS Research13, 59 per cent of the companies expect an increase of in-house shared service centres over the next years, while only 15 per cent believe that services will be delivered from locally integrated providers. This trend, which will dramatically change the existing ERP landscape and drive business process transformation, can be explained with the great potential of cost savings and efficiency increases, for instance through higher degrees of standardisation across company and geographical boundaries for standardised functions such as finance, accounting or HR. A requirement for this, however, is globally integrated systems.

In highly competitive industries, as, for instance, the automotive supplier industry, services have already been outsourced to achieve additional cost savings and stay competitive. Of the companies surveyed by HfS, 73 per cent expect outsourcing to increase significantly as well. In any case, both shared service delivery as well as outsourcing fundamentally require an evaluation of the number of locations, size of the service provider portfolio, the sourcing strategy as well as the business process execution.

II. Network Value Chain shifts to Enterprise Value Chain
The second shift that will radically change the CIO’s role is the transformation from classical Enterprise Value Chains (EVC) towards value delivery from global networks – or Network Value Chains (NVC). 

Business functions will be  executed by customers, suppliers and business partners who can deliver professionally and at lower costs across regional and divisional company boundaries.

In the future, the IT’s business value contribution is measured by integrating customers, suppliers and business partners. The result is that the trend towards outsourcing will remain and CIOs will increasingly focus on the integration of external applications and infrastructures.  Through this, entire divisions will be outsourced and the capability to integrate all business partners and their infrastructures will become a critical success factor for businesses.

In the automotive industry, experts estimate that suppliers will become the main engine of job and value growth in the future. By 2015, 70 per cent of the value within automotive industry will be generated by suppliers14.  This high number can be explained by the producers’ acquisition of manufacturing capacities and know-how in order to decrease their own average percentage completion rate – due to cost constraints or the strive for reduced market entry barriers.

IT and logistics lead outsourcing

The US-based producer of sports apparel, Nike, is a good example for sustaining a Network Value Chain, as they outsourced the entire production and logistics to business partners and only keep marketing and project management inhouse. While a decade ago Nike was the exception, this operating model is nowadays increasingly observed among traditional companies as well. The consequences of this on IT are tremendous: ERP systems that have been customised for a value chain are “torn apart” in order to be able to exploit the full potential of synergies from completely integrated external business partners in the value chain. Highly standardised data structures, processes, contracts and service classifications are examples which contribute to the optimisation of the business value.

Looking at the current business value contribution of IT, Ingolstadt UAS demonstrates that the analysis of business processes and the processing of resulting information are attributed the highest value and accordingly, are supposed to contribute the largest share towards business profitability.

Second comes the automation and standardisation as well as the design of business processes. IT finishes fifth and sixth only for the integration of business partners as well as suppliers and customers. A possible reason for this is an incomplete integration of key stakeholders, as it is often the case. This, however, also points to a great potential to increase the IT’s value proposition.

The outsourcing landscape shows an interesting picture:
More than 65 per cent of the companies surveyed by Ingolstadt UAS outsource at least parts of their indirect processes, while IT shows the highest degree of outsourcing with 91 per cent.

Yet, also in product communication, legal, communication, HR and finance, parts of the processes are
outsourced by the companies. Only 17 per cent outsource more than 40 per cent of the functions, however, which also shows great potential for optimisation. With direct processes, the values are significantly lower, as only about half of the surveyed companies outsource, especially in logistics (86 per cent), services (71
per cent) as well as manufacturing (63 per cent). The fourth, fifth and sixth runnerup are procurement, R&D and sales processes. At the same time, only 9 per cent outsource more than 40 per cent of the functions. In both direct as well as indirect processes, the degree of outsourcing still has great potential and will increase in the years  to come. Approximately 75 per cent of surveyed companies expect a moderate to high increase through 2015, which will drive the shift towards Network Value Chains.  In the future, outsourcing and the operation of a Network Value Chain will be inherent building blocks to maximise competitiveness on a global scale. Even though this process will probably not be perceived as radical by many CIOs, its consequences certainly will. The CIOs will have to prepare for a far closer collaboration with a broader diversity of business partners, whose processes and data structures might diverge considerably. If the CIOs do not plan for this shift, parts of the IT’s business value contribution will be lost, even though outsourcing to external service providers entail cost advantages.

III. Projects shift to portfolio
In the ‘Network Age’, the complexity of emerging technologies increases dramatically. This is primarily caused by intensive use of smartphones, tablet-PCs and other mobile devices. The internet has a share in this as the use of blogs, forums and social networks establishes new forms of communication and collaboration. New technologies such as cloud computing are a consequence of this trend. In this context, more than 50 new technologies need to be analysed and evaluated with respect to their costs and benefits as well as practical feasibility.  The implication for companies and their CIOs is that their employees need to be trained in order to provide answers to the following questions in the future: who requires which business processes on the iPad or any other mobile device? What is the overall business value of mobile business processes and where can it be realised?  Are service orders to be processed by employees or bank transactions by clients on mobile devices? Is it required that the products can be ordered from the mobile device? If yes, which users are eligible to do so? How can mobile business processes be integrated into the overall system landscape?  Does a company need to pay attention to product and service comments published in social networks and can this have an impact to the business? Is a business function allowed to use a cloud-based CRM system without IT approval? IT departments have to provide sustainable and reliable answers to these questions in a standardised and demanding manner.

It’s all about technology
The Project to Portfolio Shift is a significant change compared to the ‘Client/Server Age’ where the only question to be answered used to be: do we need to roll out Microsoft, Oracle or SAP or should we use other, smaller software providers? Decision-making about tools was primarily based on the features of standard ERP systems provided as the technological basis was rather identical. Today, things are different. The email example shows that companies take strategic decisions not only about the target application itself but also on completely new technologies. It will make a difference if the company uses a client-based Microsoft Outlook or a web-based service such as Google Mail.  According to Capgemini12, virtualisation technologies are still a top priority on the CIO’s agenda. Although master data and risk management as well as integration of standard and customised software are very popular as well, the degree of implementation differs by far. A highly mature virtualisation technology implementation does not necessarily imply that an adequate master data and risk management is in place. If technologies such as cloud computing, mobile devices, user interfaces or smartphones, including different operating systems and combined with social media topics, are added on top of an IT environment, system complexity increases dramatically. To complicate matters further, the half-life of new technologies is becoming shorter and shorter (sometimes changes on a yearly basis) and some do not have the maturity level in order to meet compliance requirements: for example, the iPad is still far from fulfilling adequate security standards compared to a full-grown notebook operating system.  

Projects will therefore be managed as a portfolio of investments including the full scope of activities required to generate business value. Evaluating and managing complex global IT portfolios will replace simple project sequencing. Additionally, a portfolio is closely related to the pursued strategy (innovation, market leader, and so on). As a result, a consequent and holistic portfolio management must become the new paradigm to be able to measure, control and manage diverse and complex application and infrastructure landscapes including related processes. A multi-dimensional and holistic evaluation model (including costs, benefits and security) is required to perform adequate analysis and provide a sound basis for decision-making.  The ‘Network Age’ will require IT portfolio management to assess the value, applicability and risk of new technology.  In the future, a set of portfolios (service, application, project, vendor and so on) needs to be managed holistically and, to generate best results, measuring and communicating the value of IT investments will be very important.

IV. Secondary shifts to primary
The fourth radical shift will upgrade the status of IT within companies. Due to its increasing importance, IT must not be considered as an indirect function (cost centre) within the business value chain anymore. IT features similar characteristics to logistics, indirectly adding value to a product. In fact, IT should be considered a direct function, as it contributes directly to business value generation. As Ingolstadt UAS confirms, the change of the mindset has recently started. Approximately a quarter (27 per cent) of the interviewed CIOs consider themselves to be drivers of business process optimisation, whereas the remaining CIOs (69 per cent) see themselves in a supporting function or not contributing at all (4 per cent).

This is a remarkable finding considering that IT is a key success factor for realising business processes and increasing business value. The degree of IT penetration will increase from 59 per cent today to 88 per cent in 2015, indicating that companies will be more IT dependent in the future.  As a consequence, IT has to prove, more than ever, that IT investments deliver value to the business and gain the expected return on investment.

Measuring process costs
Due to this ‘new’ importance of IT, it will become essential to measure IT process costs effectively and efficiently. In the future, almost every activity in the primary value chain will mainly depend on IT. This is required in order to provide the right level of aggregated information for making decisions with respect to vestments in new technologies such as cloud computing. Personnel expenses used to be the main cost pool, whereas nowadays, this role has moved to IT. Hence, IT should be able to prove the increase in efficiency for every business process.
Referring to the study by Ingolstadt UAS, IT departments have no exclusive responsibility for costs within a company at all. Thirty-two per cent of the business functions have single responsible for IT costs whereas 42 per cent share cost responsibility between IT and the business. Twentysix per cent of the interviewed CIOs responded that no IT process costs are collected at all. This situation will change as soon as CIOs gain more accountability for processes.  CIOs being part of the board and reporting directly to the CEO (31 per cent) can operate more strategically than their colleagues reporting to the CFO (41 per cent) or COO (8 per cent). The overall business benefit as well as the IT contribution to the business value is higher and CIOs can act as innovation drivers more efficiently. Therefore, CIOs should directly report to CEOs in order to leverage the shift from IT being a secondary to becoming a primary process.  IT has to be shifted from a support function to a primary function in the value chain with increasing business importance. Within the value chain, IT will become a core enabler for business process integration and execution. In addition, CIOs are change request takers in almost 54 per cent of the cases. Whilst today, the fulfilment of business requirements by the IT department still is based on a formalised requirements process, the CIO’s importance in contributing to the overall business strategy will increase in the future.

Conclusion
The role of the Chief Information Officer has fundamentally changed over the past years. Long gone are the days as the key responsibility of a CIO consisted of fulfilling the business’ technical requirements. His sphere of influence is expanding continuously, moves closer to the business and increases in complexity. The CIO of today has to contribute to corporate strategy and –processes, in order to optimise the performance of the business.

References

1. Raab, A. The future CIO’s role. University of Applied Sciences, Ingolstadt, Germany, 2011.
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This paper was authored by Norbert Kettner, CEO, Lodestone Management Consulting (LMC), Germany;
Oliver Klein, director, LMC, Germany; Christian Bartsch, senior consultant, LMC, Germany; and Kris Ammann,
consultant, LMC, Switzerland. www.lodestonemc.com 

This article was first published in Inside SAP Autumn 2012

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