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Companies are retooling their IT organizations to tackle an explosion of E-business opportunities.
Scott Leibs, CFO Magazine
December 1, 2000
Several weeks ago, Raymond Pawlicki, vice president and chief information officer of Novartis Pharmaceuticals Corp., was preparing for a meeting of the IT steering committee at which the company's CEO, CFO, and heads of sales and marketing would be briefed on the company's major IT projects. As he studied the agenda, Pawlicki was struck by something. "Even though these projects addressed widely divergent needs within the company," he says, "on a macro level, they had one common characteristic: four were pure E-business projects, and the other two had strong E-business implications."
Even as recently as a year ago, E-business did not dominate corporate strategy sessions to such a degree. Today, at Novartis and elsewhere, it's become hard to separate it from plain old business. But the pressure to rewire just about every business activity imaginable with Internet technologies is having considerable impact on corporate IT organizations.
Indeed, there is evidence that many companies are floundering. A survey of 53 CEOs conducted by Transition Partners Co., a Reston, Virginia-based consulting firm, found that only half the respondents consider their IT departments to be stable. The remainder said that shifting business strategies, competitive pressure, turnover, and other factors have left their technology organizations in flux.
Does the advent of E-business require substantial organizational change? Many companies now say yes, but there's no consensus on how to restructure to best advantage. "We advocate putting the development function within IT, but in a separate unit focused on E-business," says Tom Pettibone, a partner in Transition Partners and former senior vice president and CIO at Philip Morris Cos. and New York Life Insurance Co. That's one answer, and a number of companies, such as Ingersoll-Rand Co., are doing just that. Some companies are critical of this approach, while others embrace first one answer, then another, suggesting that in the Internet Age, technology isn't the only thing that changes constantly.
From IT to E-IT
While E-business often receives special treatment within the walls of organizations, some companies insist that the proper approach is to embed the necessary skills and expertise within the existing structure. At Novartis, CIO Pawlicki argues that "because E-business will soon be pervasive, we need to transform our IT department into an 'E-IT' department. We want a full convergence of E-business projects and traditional IT projects, and you can't do that with two separate IT organizations."
Making that happen depends largely on training or, more accurately, retraining. "Our approach runs counter to the way most companies are doing it," says Pawlicki, alluding to the widely held belief that the way to get a new E-business system up and running is to hire people with Java or other Webcentric skills and throw them at the task posthaste. When Novartis decided to create a Web-based order management system that would let customers check order status and related details, it took existing programmers skilled in the arcane art of RPG programming and trained them to work with new Java-based and Microsoft E-commerce software. "It's not true that mainstream IT people can't cut it in an E-business world," says Pawlicki. "Our people responded extremely well, and it was great for everyone's morale."
But if Novartis has decided to forgo a separate E-business IT unit, that doesn't mean it hasn't made fundamental changes to its organizational structure. Those veteran RPG programmers were coached by a group of what Pawlicki terms "mentors," including some new hires schooled in the latest technologies. He expects that over the next 18 months, this system will become the norm across the IT spectrum, from computer security to infrastructure issues to managing relationships with hosting providers.
"This is the way to get knowledge about new ways of doing things to permeate the entire organization," says Pawlicki. "It's how to make E-business the heart and soul of IT."
Creating Separate Units
Other companies have decided that separate units devoted to E-business, which draw on talent from across the organization, are the solution. General Motors Corp., for example, launched e-GM in August 1999, while DaimlerChrysler created DCX Net just two months ago. Both automakers hope to get traction in E-commerce by uniting a variety of efforts, from Web-based consumer marketing to participation in trading exchanges to investment in Internet technologies, in one organization. While these units employ hundreds and have money to burn (DCX Net Holdings, for example, has $500 million to invest in E-business companies and technologies), they are not stand-alone entities. Each has ties to various areas within the parent company, relying on it for core IT functionality and other forms of support.
Given such close cooperation--which includes cross-functional teams, dotted-line reporting relationships, and various forms of resource sharing--one might ask, why create a separate organization at all? Gary Dilts, senior vice president for the eConnect platform at DCX Net, says that by charging a separate unit with E-commerce success, DaimlerChrysler can "take good ideas from anywhere within the company, prioritize them, and make them happen."
Without a business unit dedicated to E-business, says Dilts, duplication of effort--or worse, paralysis--would result. "In a company as large as ours," he says, "there's a sort of highway system of processes and functions. Add to that the fact that all kinds of information must flow to and from various people and departments, and you see how an entity like DCX Net can act as a think tank, coordinating the E-business activities of all the operating units."
But Dilts is quick to point out that DCX Net works closely with, and depends on, the core IT operations of the company, which are overseen by senior vice president and CIO Susan J. Unger. "The IT group can't be separate," says Dilts. "That's why we named the new version 'Net.' It can't be completely off to the side, or it will fail."
Unger has made a number of organizational changes to her global IT operation over the past two years that were intended
to boost Chrysler's, and then DaimlerChrysler's, nimbleness. Many functions have been centralized, and "centers of competency" have been formed to exploit customer relationship management and other new technology initiatives. At the same time, regional IT departments have been encouraged to produce templates of new applications they develop so that they can be shared with other regions. In Europe, for example, the IT group developed an electronic-parts catalog for dealers. "We saw it, loved it, and quickly rolled it out in the [United States]," says Unger.
Even though her group began studying best practices in E-business more than two years ago, Unger welcomes the creation of DCX Net. "So many initiatives cut across all parts of the organization," she says, "that it's very helpful to have a group that can address roadblocks and boundaries." Unger believes that it's also important that such a group be kept small and essentially virtual. "Some other companies have created huge E-business units with total responsibility for all efforts," she says, "only to slowly fold certain operations back into the parent company. We plan to avoid that."
The Need for Speed
With $151 billion in worldwide revenue, DaimlerChrysler has both the need and the resources for a dedicated E-business unit. But smaller companies have taken a similar, albeit scaled-down, approach to structuring themselves for the E-business age. At diversified industrial company Ingersoll-Rand, in Woodcliff Lake, New Jersey (1999 sales: $7.67 billion), CEO Herbert Henkel and CFO David Devonshire divided the IT organization into two groups: one charged with E-business, the other focused on traditional IT issues. The prime motivator: speed.
"We had completed our long-range planning," says Devonshire, "but we missed E-commerce. It came out of the blue. Suddenly there were all these new B2B opportunities, and we risked missing them."
Hoping to not simply catch up with but leapfrog his competitors, Devonshire tapped Rone Lewis to head the E-business unit. With three successful start-ups under his belt, Lewis knew a thing or two about moving fast. But while DaimlerChrysler's DCX Net employs hundreds, Lewis's team consists of only a handful of people. "We've got 850 people in our IT department," says Devonshire. "They provide the services, while Lewis and his team talk to all the divisions within the company and see what we need to compete."
Since it was initiated 11 months ago, the system has worked remarkably well, according to Devonshire. Ingersoll-Rand is now participating in a used-equipment Web exchange, and has several other E-business efforts under way that address everything from safer schools (Ingersoll-Rand makes a wide range of access and security products) to manufacturing partnerships. "We feel good about where we are," says Devonshire. It's a sure bet that E-business will figure prominently in the company's next five-year plan.
"We've put more than 700 managers through our E-business training course," Lewis says. "We want to leverage the Web to build customer loyalty, improve productivity, and cut costs. It's become an integral part of everything we do."
Disruptive or Sustaining?
In many respects, E-business makes the same demands on corporate strategy as the "disruptive technologies" made famous in Clayton Christensen's The Innovator's Dilemma. In that 1997 book, Christensen, a professor at Harvard Business School, explored the reasons why new technologies so often catch big companies off guard--even those that possess every seeming resource needed to capitalize on those technologies.
"To a large degree, the Internet is similar," says Christensen. "But in organizing for it, companies need to understand that it is not one size fits all, because the Internet will be a disruptive technology for some companies, but a sustaining technology for others."
Christensen points to the widely divergent experiences of Dell Computer Corp. and Compaq Computer Corp. For Dell, already organized to accept orders directly via phone, fax, and mail, Web-based ordering was a logical extension of existing practices. But for Compaq, the appearance of a new distribution channel was profoundly disruptive, because the company had achieved dominance in the retail space and now had to understand how the Internet would affect its business model. The question for Compaq, therefore, was far more complex, says Christensen.
"A company in Dell's position wouldn't spin out E-business," he explains. "But a Compaq probably should. When a company needs to make a major change in operating procedures, then a heavyweight, cross-functional team or unit is needed. If E-business fits existing operating and order-fulfillment processes, then a lightweight team working within existing structures may be the right approach. When it is disruptive to a firm's business model, as it is to Compaq's, then setting up an autonomous organization is a must."
Compaq did, in fact, create a separate unit when it began selling PCs on the Web, but it has since merged that function back within the company. At the same time, it reorganized its IT department for an E-business world, creating a "vice president of E-business" position to whom managers focused on B2B, B2C, B2P (partners), and B2E (employees) report. The department is responsible for delivering Compaq's E-business strategy. Robert Napier, senior vice president of Compaq's global business solutions unit and its CIO, says the new approach was needed because "as soon as you start taking orders over the Web, you encounter a host of things that affect the bricks-and-mortar part of the company," from fulfillment to customer satisfaction to new product development. But he says that creating a separate unit did help Compaq gain traction in E-commerce. "Depending on your culture, insulating a small group from the corporate bureaucracy can help you get to market faster."
Some experts believe that many companies that have created separate E-business units or teams will soon fold them back into the organization. Tom Davenport, director of Andersen Consulting's Institute for Strategic Initiatives, in Cambridge, Massachusetts, argues that "in the short run, a change in organizational structure can help focus attention on the issue, and that's useful. But ultimately, the level of integration needed works against having a separate unit." Adds Chris Gardner, a partner who leads the IT Strategy Group at PricewaterhouseCoopers: "For companies that are used to a stable environment, dropping E-commerce into the middle of existing structures can be the kiss of death. But transplanting it later, when it's mature, may make sense."
A Hybrid Approach
Integration is very much on the mind of Bernard F. "Bud" Mathaisel, vice president and CIO at Milpitas, California-based Solectron Corp., a $14 billion electronics manufacturing services firm. As a provider of manufacturing and supply-chain services, Solectron exchanges enormous amounts of data with its customers and suppliers, everything from computer-aided design diagrams to order, status, and quality information. The electronics industry is brimming with Internet trading exchanges, and Solectron participates in most of them.
As a result, says Mathaisel, "an electronic backbone is essential, because if all these connections aren't integrated, we can't function." So he has taken a hybrid approach to organization: one of his four direct reports is responsible for investigating and supporting E-business from an IT perspective, but E-business opportunities may spring up in virtually any functional unit of the company.
"Because there are so many things going on in this area that have yet to reach maturity," says Mathaisel, "we felt that a separate E-business capability within IT made sense." But companywide, he says, E-business innovations and "incubators" can spring up anywhere. "We don't manage or control them all," he says, "but we make sure they're properly organized and synchronized with our architecture."
In a sense, Mathaisel says, this approach mirrors the Internet itself: many points of knowledge integrated in (one hopes) as efficient a manner as possible. "It's an organizational structure that works well," the CIO says, "because a more definitive master plan would not hold up given how quickly things change today." In fact, the impact of E-business is so profound that some people, such as Gartner Group Inc. executive fellow Bruce Rogow, claim the traditional divide between manufacturing and service firms no longer applies. Rogow says companies can be better classified as "techno-transaction," "techno-exchange," and "techno-service" firms, and often a combination of two or even all three. As technology continues to transform the way in which business is done, organizational structures will likely remain in flux. That may frustrate those who long for stability; those who insist on it may fare worse.
Scott Leibs is technology editor of CFO.
A Matter of Contigency
As IT departments, and organizations in general, recreate themselves for E-business, one trend that is certain to accelerate is a reliance on a contingent workforce. Whether hiring a Java whiz for a single project or outsourcing the entire IT function, companies will increasingly rely on outsiders for critical contributions. Therefore, says Dan Walsh, CEO of Wakefield, Massachusetts-based consulting and research firm Darwin Partners, a separate E-business team is far less important than what he dubs a "project management office."
In Walsh's view, the most profound organizational change affecting companies today is a move toward owning managerial talent and renting other forms of talent. By training staff members to provide project guidance, a company can rebalance its portfolio of human capital and ensure that in-house skills are aligned with its overall mission.
"Only about 3 percent of companies are really good at managing contractors and other nonstaff resources," says Walsh. One big problem is cost: the use of contract workers may push a project's cost up by 40 percent. But Walsh says that the sort of penny-pinching that prompts companies to cancel or delay projects exacts a price in the form of lost opportunities.
But if companies improve the way they manage external service providers, they can thrive in the new world order. "How often have you seen a contractor sit around for two weeks waiting for a phone, a PC, or a pass card?" asks Walsh. Better in-house management of such resources can lower costs and boost productivity. "The key is not to create a center of expertise focused on a function, such as E-business," says Walsh, "but one focused on human capital. That will have the most positive impact on an organization's structure." —S.L.