According to studies conducted by the consulting firm of A. T. Kearney, enterprises with well-developed and innovative use of IT and well-established processes are significantly more successful than other companies. Their profitability as measured by earnings before interest and taxes (EBIT) is about 10 percent higher than the average in the same industry. But the number of enterprises that use IT well and use it to add value for the enterprises themselves is comparatively small.
A current study by A. T. Kearney of leading decision makers in international companies shows that less than one-third of those interviewed saw IT as a primary source of innovation. The study also showed that IT has initiated little impetus for innovation. Many companies still underestimate its potential as a source of added value. But in light of globalization and ever-decreasing product life cycles, the innovative power of IT increasingly determines the success of an enterprise. A. T. Kearney analyzed trends and leading companies and identified success factors that help CIOs generate growth with innovative IT solutions.
Requiring and stimulating innovation
An example of how IT and its innovative power can move a company ahead is the development branch of Volkswagen AG. The automobile manufacturer has used new, global development processes to create a globally networked virtual reality system for vehicle development. Real-time ray tracing technology maps objects spatially and depicts shadows, refractions, and reflections with photographic realism. Users can move and change objects interactively and without temporal delays. Thanks to the IT architecture, developers around the world work collaborate online. VW has successfully balanced rapid product introduction with appropriate risk management, shortened development times, and responded to the pressures of high costs in the industry. Because of its approach to IT, A. T. Kearney named VW the winner of its Best Innovator Competition in 2005.
A. T. Kearney has also found that companies that work successfully with IT innovations share four success factors. First, they have a long-term innovation strategy based upon an excellent understanding of the needs of internal customers. This understanding includes the requirements and process in user departments and industry trends. The knowledge leads to a higher level of customer intelligence in the IT department – one of the core preconditions for successful innovation. Second, these companies make effective use of internal and external partnership innovation networks. The IT department cooperates with internal user departments, vendors, and external expert networks, for example, during the development of an RFID chip. Instead of isolating product development as they did in the past, these companies work more closely with partners, profit from the exchange, and work together to develop innovative products.
The third factor is the consistent organization of innovations. It ensures that ideas are generated systematically and realized successfully – with the assistance of an IT innovation team. The team regularly studies company processes (such as those in product development) in terms of the value that they add and, if needed, initiates projects aimed at improvements. Fourth, innovative companies have fixed controlling processes that provide management with an overview of ongoing innovation projects. For example, the contents include project progress, the use of resources, the expected success, and the potentials for savings. It’s important that the related KPIs cover all levels: the generation of ideas, realization, and implementation. And the IT department must remain involved, even after the start of production.
Moving from a cost factor to a competitive factor
Companies that react quickly to customer wishes and that capture influencing factors along the value chain must have integrated, flexible, and, at the same time, specialized IT application architecture. For example, a well-known manufacturer of consumer goods has developed an integrated category management tool based on the SAP NetWeaver platform. The tool automatically combines internal information like products offered, sales quantities, or targeted prices with retail market research or scanner data. This approach lets the manufacturer know about new market trends immediately so that it can capture new sales more quickly than the competition. The company can recognize latent opportunities and align them innovatively to its own goals.
The information flow can also be improved by analyzing and reporting on production data across locations and business areas – with the use of business engines, for example. These software components continuously collect company data like machines performance, the on-time performance of production, or the quality of goods. Such information allows companies to monitor processes and to make operative and tactical decisions like the allocation of production orders in something close to real time. The result? Resources are used better, production cycles are accelerated, and costs are reduced. According to A. T. Kearney, savings of up to 70 percent – in service, for example – are completely realistic, depending upon how much IT support has already been realized.
A global production factor
The separation of IT supply and IT demand gives an IT department business independence, which helps it to react more flexibly. It can make decisions independently of the technical and organizational restrictions of IT demand, such as meeting the requirements of internal customers with an optimal cost-benefits ratio.
That’s the case with Continental AG. The company has codified the contribution of IT to its success in its strategy and has given its IT department the required independence within the business. The CIO has concrete business goals for the contribution of IT to increased profitability and process integration. The company uses a system of key performance indicators (KPIs) to continuously and transparently map the performance and effectiveness of IT in the company.
This independent role of IT is often accompanied by completely new tasks for the CIO – tasks like innovation and process consulting, account management, and portfolio management. Global corporate groups quickly deal with more than 1,000 applications and several hundred projects – all of which are requested by more than 100 subsidiaries around the world. To obtain and retain a good overview, it’s worth the effort of implementing an order management system for IT. The possible bandwidth of such systems range from a simple, Microsoft Excel-based tool to an innovative, networked solution. The actual innovation consists of integrating a tool, like the profitability analysis functionality of SAP software, to monitor and map the profitability of IT performance. The idea is that IT acts as an independent company that must operate profitably by creating value for the enterprise. At the German Post Office (Deutsche Post), for example, a new, global SAP solution handles this task. It maps customer relationship management, sales and distribution, controlling, and profitability analysis functionality and delivers transparent information on IT demand and supply along with the status of the projects.
Global enterprises like Deutsche Post, Deutsche Bank, and Siemens specifically choose the locations of IT production. Services should be performed in the location that offers optimal costs, technical knowledge of the available employees, languages, environmental stability, and time zone. If a company operates worldwide and requires high availability of IT services, it makes sense to distribute computer centers around the globe according to the principle of follow the sun. Each location can then provide all the important services around the clock during normal working times.
The role of the CIO in innovative enterprises
To make an enterprise fit for the future, CIOs must focus on a central point. They should enhance the interfaces between IT and the business and systematically generate and implement IT ideas. Investment in IT innovations are also worthwhile. And it’s also important to communicate the added value of IT at the level of the CEO. Actively involving the CIOs in the development of IT visions for new business models, reflecting the requirements of the business side, and fostering innovation – including dealing with existing requirements from the business individually and in accordance with IT requirements – secure the contribution of IT to the success of the enterprise.