Wednesday, January 31, 2007

Changing of the guard

For the past couple of years everyone from Gartner to Harvard Business Review has been talking about corporate agility, where lack of the same can kill organisations. Following In the IT press SOA has been promised at the panacea for all the ills and somehow delivering the ultimate agility to the organisations. All this hype got me thinking about why there is so much demand for agile organisations.

From an Organizational history point of view large organisations (from banks to car manufacturers) where able to mass produce goods at a higher quality and lower price point than there smaller competitors (mom and pop shops). For many years this was a great thing and lots of small businesses either became bigger or absorbed into lager organisations and some went belly up.

With the advent of Internet, and efficient global logistics (UPS, FedEx and so on) cost of advertising and distribution dropped and world became flatter. Consumers got fed up with mass produced items (there are only so many IKEA coffee tables you could buy) and started to look for customize products. They wanted something different, something tailored to their needs (home loans tailored to their needs, furniture customized to their flat). An entire market emerged to satisfy this trend and slowly it is becoming the norm rather than the exception. In such a market large organisations are asked to produce items with greater variety and lower quantity per batch. Such a shift does require some fundamental shift in thinking and many organisations have successfully made the transition.

In such a rapidly changing environment large organisations finding there huge investment in IT infrastructure preventing them to move rapidly. IT investment which once was a competitive advantage for these organisations is proving to be a disadvantage, smaller competition with no legacy infrastructure or lumbering mainframes to support are able to adapt to the changing consumers needs at a much faster rate. The question that emerges is what value IT really adds to an organisation’s revenue or profitability. McKinsey recently did a study in Europe where they looked how much value IT spends was adding to the bottom line of the organisations. The graphics below is straight out of their report and I am including it without their permission for which I apologize.


From the study two things were found;

  • IT spending varied between 10 to 30 percent of operating costs.
  • Higher levels of IT spending didn't increase the effectiveness or efficiency of the business (banks that appear to get the most business value from IT spend up to 40 percent less than the weakest performers).

The four quadrants above represented following aspects of IT spend.

  • Effective business enablers, achieve the greatest business efficiency and effectiveness, from a relatively low level of IT spending.
  • High IT spenders pay out about 13% of their operating revenue on IT but don’t see the desired impact on business efficiency and effectiveness.
  • Heavy IT transformers, spend about 15 % of their operating revenue on IT, mainly for specific business transformation projects.
  • Efficient IT executors spend just 10% of their operating revenue on IT but haven't achieved a high level of operating efficiency.

The above study if definitely interesting as I then wanted to compare how Australian Banks would fare in such a scenario, banks are interesting as they are quite intensive users of IT and have made significant investment in the same for past couple of years.

The challenge was finding the right information as I did not know anyone in the banking industry. The journey started by gathering publicly available information I.e. Annual Report which outlined how much they spent of IT or Communications. Mind you as I am no Balance Sheet expert, I may have well got my figures mixed up (at least I would have them consistently mixed up). Following graph is a summary of what I found.

The above figures are based on 2005 annual reports and represent a total IT spend of AUD $3.5 Billion of AUD $24.4 Billion operating expense. One thing that emerges is Australians don’t spend nearly as much compared to their European Competition. Commonwealth Bank and Westpac both have large outsourcing models in place, hence have a limited discretionary spending. Bank of Queensland may appear to be out there, which could be due to their large BPO contract which gets added in as an IT cost. A word of caution at this point please do not fall into the simplistic metrics trap as the figures don't really represent business value being added by IT, I am using it as a mechanism to compare entities and if their size has any relation to money they spend on IT.

If we look at the above numbers from an innovation perspective it appears large IT spend does not guarantee innovation. Smaller players like Bendigo Bank are able to offer services like two factor authentication for their web client while the bigger ends are still struggling. In the last couple of months innovation has become the buzz word and everyone is looking to IT for innovative ideas that will transform the business.

The question then emerges is innovation the domain of big players with huge R&D budgets or can smaller players outmaneuver their bigger rivals. History has proved otherwise smaller startup have been able to innovate and bring new products to market and capture a bigger slice of the market. Other have been able to open up totally new markets where none existed before Google and YouTube are prime example. If smaller players can be more adaptive and innovative  will it change the model of corporations as we know it. Will this mean we are going to see smaller more nimble players banding together and forming virtual entities yet retaining their autonomous sub parts? ...........till next time.

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