In part one, we examined the behavioral antipatterns that can arise when an IT function is treated as a cost center. Following on from this, in part two we’re going to look more closely at the critical shifts required to move the IT function from a cost center to a strategic function.
So, what needs to be done?
Have a seat at the leadership table
Typically, leaders of cost centers do not get a seat at the senior leadership table. This is because their functions are seen as purely operational: they are not, the assumption goes, direct contributors to business outcomes.
For an enterprise to leverage technology to gain a competitive advantage and to delight its customers, it needs to be at the core of business strategy. This makes it imperative for the IT function to become a strategic function. Its top leader must be included at the highest level of leadership. IT priorities and technology choices need to be aligned to the strategic business priorities of the enterprise at all times; this is really only possible when IT leadership not only gets a seat at the leadership table but also an equal voice at it too.
Structure the IT function into ‘Build’ and ‘Run’ sections
The activities performed by the IT function can be divided into two parts:
- Developing and delivering solutions for customers which drive business outcomes. These can be in the ‘build’ section
- Support and maintenance activities that are not directly linked to business outcomes. These include things like upgrading hardware and software, infrastructure support, and migration. These can seen as ‘run’ sections
The build section should be focused on value generating activities, while the run section focuses on operational activities. Investment in build-related activities should be evaluated according to the incremental value that those activities generate and the corresponding impact they have on business outcomes. For run activities, meanwhile, the focus should be on keeping cost to a minimum.
Move from projects to products
A project focus will typically optimize for time and cost. A product approach, on the other hand, focuses on maximizing value. A product-centric approach to solution delivery allows the IT function to align its capacity to the priorities of the business and therefore to directly contribute towards achieving the intended business outcomes.
At an advanced level, enterprises can create value streams which may comprise multiple products. For example, the value stream for a retail loan would include stages such as lead generation, loan origination, loan servicing and collections. Each stage could have an independent product to service it.
Projects may need to be carried out for activities like migration, system upgrades etc. However, these should be planned and executed under the ‘Run’ umbrella.
Fund products incrementally
A core tenet of product development is to prioritize the backlog of features and functionalities based on value and to deliver highest value first. This, combined with incremental delivery, allows teams to validate their hypotheses about the value of a given feature regularly. In turn, this provides flexibility to step up, reduce, or stop funding product development.
While the budget for a product may be determined on an annual basis, funding the product should be done based on an assessment of incremental value vs. cost. For instance, if 80% of the value has been delivered while incurring only 50% of the cost, it might not be worth spending the remaining 50% of the money on some other product/offering which has the possibility to generate greater value.
Businesses that thrive today treat IT as equal to other business functions. They see it as a critical enabler to driving value and achieving strategic outcomes.
Move the PMO to VMO
A Project Management Office (PMO) is set up to primarily enable governance for projects. The primary functions of the PMO are to check adherence to time, cost and scope constraints, to monitor process compliance, and to control changes to project scope.
With IT delivery moving from projects to products, the PMO needs to convert to VMO, viz. Value Management Office. The VMO’s responsibilities are aligned to support product development and to align it towards achieving customer and business outcomes. Specifically, the focus of VMO is on value delivered, prioritization of initiatives, lean governance and minimizing impediments to delivering value.
Redefine what success looks like for an IT function
Typically, a cost center’s performance is measured on parameters like its adherence to plans and budget. This is why efficiency and compliance are usually seen as far more important than effectiveness or value generation.
This means performance measures at an individual, team and function level for an IT function will need to be changed to reflect its change in focus. It should instead be linked to business outcomes, customer satisfaction, the ability to align to changing business priorities and feature delivery cycle time.
Businesses that thrive today treat IT as equal to other business functions. They see it as a critical enabler to driving value and achieving strategic outcomes. Businesses that aren’t doing this need to shift their perspective, seeing the IT function as an important strategic part of the organization rather than a cost center.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.