Are You Plugged In?
from
January/February 2005
by Randy Myers
Jeff Balagna is in demand. In 2001 Medtronic, a medical-devices maker, lured the information-technology expert from General Electric’s medical-systems business to serve as its first chief information officer. This past June Medtronic’s Minneapolis neighbor Tennant Co., a manufacturer of cleaning equipment, decided that it too wanted to tap Balagna’s technology expertise. It named him to its board.
Tech is hot, as are gurus like Balagna who make it happen. Driven by the demands of the Sarbanes-Oxley Act and competitive pressures, boards are showing renewed interest in their tech budgets and—hold on to your BlackBerry—tech strategy. They’re trying to arrive at a clearer understanding of what they’re getting for their money. In some cases, that has meant turning to specialists like Balagna for help. In others, it has meant giving IT issues new prominence at board meetings. Directors at Caraustar Industries, a manufacturer of recycled paperboard products, are typical of the trend. After spending the last two years receiving regular updates on the company’s progress with Sarbanes-Oxley compliance, they recently requested that IT become a permanent item on the board agenda. The board of Health Net, a managed-care company in Woodland Hills, California, created a technology and infrastructure committee in 2000 to oversee IT initiatives. In 2003 it folded that group into the finance committee, expanding the latter’s charter to reflect the added responsibilities. At Wal-Mart Stores, chief information officer Linda Dillman is among the top-level executives who have been assigned a “board buddy”—in her case independent director Christopher J. Williams, chairman and CEO of the Williams Capital Group. The two meet at least once a month by phone and once a year in person at a Wal-Mart store or distribution center. Retired Ashland Inc. chairman and CEO John Hall, who serves on the boards of Humana, GrafTech International, and USEC, says that while interest in IT spending and strategy has grown increasingly common in boardrooms over the last few years, “it is becoming more intense as boards try to help management improve corporate performance.”
It used to be that directors and CEOs alike tended to view IT as a necessary evil—a cost center that too often failed to earn its keep. Few board members outside the tech industry paid significant attention to IT issues, unless perhaps they were asked to sign off on a big technology outlay. But as tech-driven corporate success stories proliferate—notably how Wal-Mart leverages its vaunted supply-chain and inventory-management systems to help it underprice competitors—more companies have come to see IT as a competitive weapon. To technophiles, this view is not only right, it’s organic. “Virtually every process in a modern company is enabled by information technology, whether it’s human resources, financial reporting, product development, or sales and marketing,” says Doug Busch, chief information officer at Intel. “The operational excellence of a company, and the regulatory compliance of a company, are intimately intertwined with the design and operation of its information systems. That puts the IT function right in the middle of everything that goes on.”
Sarbanes-Oxley jump-started the new focus on technical underpinnings at many businesses—particularly Section 404 of the law, which requires public companies to document and attest to the integrity of their internal controls. What many non-accountants overlooked until then, says Boston attorney Richard Stein, a director at Bruker BioSciences in Billerica, Massachusetts, was that corporate accounting had become highly tech-based. Companies without solid financial-reporting systems often found themselves struggling to comply with Sarbanes-Oxley—or worse. Interstate Bakeries, the Kansas City, Missouri-based maker of Hostess Twinkies and Wonder Bread, announced in August that it was delaying the filing of its annual report with the Securities and Exchange Commission a second time, blaming problems with data entry and training encountered as it installed a new financial-reporting system it had purchased from SAP. The problems were defeating the company’s efforts to analyze negative sales trends during its fiscal 2005 first quarter, which prompted senior executives to defer signing off on the financial statements. Interstate filed for bankruptcy in September.
Today, says Stein, he can’t go to a public-company board meeting or audit committee meeting where there isn’t some discussion about the financial-reporting system and the strategy for making sure it stays up to snuff. In many cases, of course, that’s where boardroom tech talk ends. But for a rising number of directors the discussion is more wide-ranging. At Humana, for example, Hall says the board has closely followed the development of the company’s SmartSuite product, a software-driven program that allows employers to model different benefits packages and contribution strategies to meet their health-care and savings targets, and lets employees personalize their benefits choices to match their stage of life and risk tolerance. “We’ve had a lot of discussions and presentations on this at the board level,” says Hall, “because we’re hoping to gain a competitive advantage over other managed-care companies by having a product like this.”
A new offensive weapon? Cool. But until companies find ways to measure the gains delivered by their investments in information technology, neither they nor their directors can expect to be effective stewards of the IT budget. “IT investment in most companies ranges somewhere between 1% and 6% of revenue,” Balagna says. “That is a significant amount of money, and boards need to ask how management is monitoring the return on that spending, because IT investments can in some cases be way too high or, as has been the case recently, way too low.”
“For the past three or four years, most of the discussion about IT has been about how we can get our spending down,” says Doug Busch of Intel, which ratcheted its annual IT spending lower by 4% in 2002 and another 12% in 2003. “I think that’s going to become a very dangerous strategy. Obviously you always have to pay close attention to spending. But the operational efficiency and the quality of service we deliver to our customers is going to be largely enabled by the way we apply business-process innovation and enable that with information technology. To the extent people are strangling their IT spending, they’re likely to be putting their companies at risk in terms of their competitive position. There’s a real danger of cutting off business-innovation activity at the knees. A lot of companies are in that position today, and I think it’s going to become a board-level issue.”
Executives and directors alike harbor vivid memories of misguided tech expenditures. But Busch argues that this makes IT spending just like any other high-stakes investment. “How many commercial real estate deals haven’t returned what was expected?” he asks. “How many mergers and acquisitions have not achieved the market-share gains and efficiencies that were anticipated? How many new product developments have failed? The assumption that IT is exempt from that reality is pretty naïve.”
Boards that want to maximize the return on their IT dollars can do several things to tilt the odds in their favor. Beyond the obvious need for a sound business plan, a board can see to it that the CIO has a real seat at the executive-management table. Balagna makes a presentation to Medtronic’s executive committee each week and presents at every meeting of the board’s audit committee. Occasionally he also addresses the full board, as he did when making the case for an SAP system and later updating the board on its progress. “Boards need to hear from the CFO and the CEO on IT issues,” says Stein, “but they also need to entertain not-infrequent appearances by the chief technology officer or equivalent. The goal is not to make board members technology experts, but to help them understand whether the company has all the necessary systems in place to comply with legal and regulatory requirements.”
Perhaps the best reason to make the CIO a full member of the management team is to ensure that the company’s IT strategy is aligned with its business strategy. A company in a commodity business that thrives by being a low-cost producer, for example, needs an IT strategy focused on squeezing costs. By contrast, a company that interacts closely with its customers every day may want to focus IT spending on enhancing customer-service capabilities. “If there’s a silo out there called information technology,” warns Thomas Schoewe, chief financial officer at Wal-Mart, “I’d have a fear that it wasn’t well aligned with the business strategy.”
One way to get this alignment is to take a portfolio-management approach to running the IT business. Just as a good money manager continually reviews every piece of his or her investment portfolio, weeding out losers and juggling assets to make certain the whole affair maintains the proper risk-reward ratio, leading CIOs are seeking to track the use and performance of their IT systems. This might involve eliminating redundant or overlapping systems, upgrading or replacing those that are no longer pulling their weight, and making sure that new investments fit within the IT framework and the company’s strategic plans.
It’s an ambitious undertaking that few organizations have been able to implement fully. A key challenge: figuring out how to value the benefits any particular technology system or initiative is yielding. Calculating how many more sales calls someone can make when you give him or her a cellular phone and eliminate visits to pay phones is relatively simple. Calculating the benefit of giving employees access to e-mail is another matter entirely—but worth the effort. Intel, for example, is known for going to great lengths to measure the value it receives from IT investments. It tries to quantify not just tangible outcomes, such as how much a new system has reduced production waste, but also softer gains like improved time to market or better market access. In an interview with the technology-research firm Gartner Inc. last June, Busch credited these efforts with helping his IT organization fine-tune project designs and allowing it to build relationships with various managers around the company who then take joint responsibility for the payback of programs. While not all companies have Intel’s resources, boards clearly possess the power to drive their IT departments in that direction.
A board that isn’t sure how well the company is being served by its IT strategy might consider creating a technology committee to sort through the issues. The committee could include key managers as well as board members––and even outsiders. “If I was on the board and there was enough at stake, I would get a third party to evaluate the issue,” says Michael McKnight, a risk-management and IT-security leader at the consulting company Marsh Inc. “It can’t be your audit firm, but it should be a third party that will come in and validate what you’re hearing from your own people. It’s not that you don’t trust your own employees, but a third party will bring a different perspective to the issue.”
Plenty is at stake. “Simply keeping the business running, closing the books, and making payroll is a necessary responsibility of the IT organization, but that’s an insufficient contribution for a really successful, competitive company,” Doug Busch warns. “If it is possible for somebody to figure out how to automate, accelerate, improve their reach, or develop better procedures, they will—so fast you won’t believe it. And if you’re not trying as hard as they are, they’re going to eat your lunch.”
That’s a technical foul to avoid.
