Monday, November 28, 2005

McKinsey & Co. on IT Investments

McKinsey & Co. is a global management consulting firm that also conducts research that they publish through McKinsey Quarterly. Over the last few years, McKinsey Quarterly has published a number of reports about effective (and ineffective) management of Information Technology (IT). A list of the MQ articles, most of which can be read in full for free, follow. While I recommend taking the time to read the longer articles (each about four pages long), McKinsey’s recommendations seem to boil down to three main points:

In order for choices about and investments in IT initiatives to be successful...

  1. They must be driven by organizational objectives
  2. Leadership must take responsibility for their success
  3. They should be combined with investments in building management capacity

#1: IT initiatives and their managers must be driven by organizational objectives.

Too often, IT is placed in a "silo" as a support function. As a result, most technology options are then examined as a solution to some problem, not as an investment in accomplishing the mission of the organization. Ideally, priorities and decisions about technology are made from a shared understanding of the general priorities of the organization.

"IT projects must be subjected to business-case assessments before launch," MQ writes, identifying:

  • Which organizational objectives & desired outcomes will be advanced by the IT initiative?
  • What are the upfront and ongoing costs?
  • What other resources and capacity are required to sustain the initiative?
  • What benefits can be expected from the IT initiative?
Managers of IT (and by extension, those of us who support them) must demonstrate an understanding of the organization’s mission, vision, goals and objectives. Such an IT leader is a senior-level peer with earned clout who:

  • understands the business of organization the same way other senior leaders do, but can also be perceived as "one of us" by IT staff;
  • uses the same language that other senior leaders do;
  • thinks about IT initiatives as business (not technology) solutions;
  • assesses IT initiatives with business metrics (i.e., organizational objectives to achieve mission).

But success also requires that program directors understand the role technology plays to support programs and take responsibility for that role:

#2: The responsibility for the success of IT in the organization lies with organizational and program directors.

In a 2003 study (4), MQ found that while 90% of directors expect their program directors to:

  • identify IT investments needed to implement programmatic strategies,
  • support, monitor and assess the implementation of IT projects,
  • help make IT investment and budget decisions, and
  • make the procedural and organizational changes that technology implementations require,
only 10% of program leaders actually do this.

Many organizational directors delegate IT policymaking to a committee system. But without authority, such systems are "like a vehicle without an engine," leading to IT investments that generate only marginal returns. In addition, if the make-up of the committee is too junior, the group risks missing key issues such as:

  • What is the role of IT in this organization?
  • How do we measure its impact on the organizational objectives?
  • What strategies are competitors pursuing?
  • What constitutes best or promising practices?

MQ insists that senior level execs must take responsibility for IT, going as far as to say that no IT project should be funded unless a senior executive is willing to take responsibility for the results up front, "to ensure their successful completion. These leaders must own decisions instead of just making them and assuming that someone else will be accountable." In an environment of such accountability, IT investments are more likely to be concentrated on a smaller number of high-impact areas, jettisoning the many "cool" but non-essential technology "baubles."

But what would this look like? To enable program directors to think about the role technology can play to achieve their desired programmatic outcomes, they must:

  • Have greater involvement in the planning and development of IT Projects.
  • Provide greater oversight and management of IT Projects
  • Draw IT managers more closely into programmatic work where they can be made more accountable for the performance of programs and where IT and Program develop joint goals.

In such an environment, IT is no longer a "support" function; it "spans business unites and functions and connects organizations to partners and customers... and fosters improvements and competitive advantage." Therefore, its role is fundamental to an organization's success. Without such involvement, IT will have "only a limited sense of what the [program] wants, inevitably suppl[ying] it with a product that is less functional than it expects or even needs."

#3: Investments in Building Technology Capacity Should be Paired with Investments in Building Management Capacity.

Several articles about managing technology are not free from the McKinsey Quarterly web site. One of them, shared with me by a colleague, summarized research conducted by McKinsey & Company on the benefits of investments made in technology capacity.

In the manufacturing sector, at least, investments in technology capacity produced far fewer increases in productivity than investments in management capacity, but investments in both significantly increased both productivity and financial returns on investment.

The researchers recommended that before a company makes a significant investment in technology, it should invest first in building the capacity of its management.

MQ found that companies that adopt these practices "are improving their return on investment and managing their IT costs more successfully."

Links to original McKinsey Quarterly articles:

(Note McKinsey Quarterly requires a free registration to access its free articles. You will also find there links to their “premium” articles which requires a paid subscription.)

Readers might also be interested in..
Building stronger IT vendor relationships, by Baljit S. Dail and Andrew S. West, Web exclusive, June 2005


VentureM said...

Jillaine, Thanks for this useful synopsis of the relevant McKinsey articles and reminder of how to make the most of IT investments. I've bookmarked for rereading often and referring my clients to read. Best, Mat Emery

omacneil said...

A definition of &qout;Management Capacity" would be very helpful.

Examples would also be helpful.

Since Management pays McKensey, it might be in McKensey's interest to say that management was important.

Jillaine Smith said...

Dan, let me take your comments in reverse order; you wrote: "Since Management pays McKinsey, it might be in McKinsey's interest to say that management was important."

Certainly we should consider that possibility, but given how many times I've seen McKinsey articles bash bad management practices, I'd say that McKinsey is not typically held hostage in this way.

You then wrote: "A definition of 'management capacity' would be very helpful."

For McKinsey in the article about investments in IT and management, the management practices were related to the manufacturing industry and thus included: lean manufacturing, performance management (setting clear goals and rewarding those who reach them), and talent management (attracting and developing high-caliber people).

If you skim the literature on nonprofit management practices, you'll find they include:

* Financial Accountability
* Program Evaluation
* Good Governance
* Sound Planning
* etc.

Two good resources I came across that explore good nonprofit management practices further are:

* The Nonprofit Good Practice Guide from the Dorothy A. Johnson Center for Philanthropy and Nonprofit Leadership

* More Theses on Nonprofit Organizational Effectiveness from the folks at ARNOVA.

-- Jillaine