You have been an advocate of IT-enabled business transformation for more than a decade. Has anybody been listening?
Venkatraman: I have to say yes, but not as aggressively as I would have liked! In the late 1980s, IT was a mystery and the senior management was focused on other issues such as cost, quality, globalization and mergers and acquisitions. Ironically, today all those issues are key challenges that are best seen as being enabled and supported by information technology. For example: the proposed acquisition of Gillette by P&G will have huge efficiency benefits because of the restructured business processes inclusive logistics chain as well as reshaping of the networks with key players such as packaging companies, advertising agencies and distributors like Wal-Mart. More importantly, most businesses today are influenced by IT. Look at leading sectors such as music and entertainment; healthcare; financial services and education. Their business strategy is shaped by technology in ways that we could not have said a decade or so back.
You have developed a framework, the value center, which breaks IT-enabled business transformation into different levels. Can you explain your thinking?
Venkatraman: I found that companies lumped IT into one big bucket and asked questions such as: how much to spend on IT? What value am I getting from the IT investment? Should I do it inside or outside? Who should I benchmark against? My thinking was to highlight that IT is not one monolithic resource or activity. It is pervasive and multi-faceted and needs to be recognized as such. Management practices need to reflect the multi-faceted nature of IT. So, I laid out the different sources of value that balance today versus tomorrow; short term versus long term; minimizing risk versus maximizing opportunity. This allows us to identify different ways of assessing the role of IT, allocating resources differently, sourcing them differently and using different criteria for assessing their value to organizations. It moves us away from crude benchmarks of IT spending as a percentage of sales or some such measures, which are meaningless to compare across different companies—even within the same industry. The center of gravity of value center differs across companies and even for a single company, this center of gravity changes over time.
Can you give some guidelines on how to maximize benefits from using the framework?
Venkatraman: Every framework that I have developed is simply a way of organizing. It is not prescriptive with well-laid out action plans – like a cookbook – but allows managers to think about the role and value of IT. I have used my frameworks to engage in conversations between business and IT managers so that the two sides can better understand each other. There is still a high level of mystique about IT. The frameworks at one level help to demystify and focus on the interdependencies between business challenges and IT capabilities. Another way is to map IT’s role in the company against a competitor to see how different the approaches are and identify potential opportunities and threats.
So, I urge to convene brainstorming sessions and see how the different managers see the role of IT today versus in the future. The ensuing discussions and ways of achieving a future state is a worthy goal of using such frameworks.
You are doing research, which is exploring what businesses will require from IT over the next few years. What has your research discovered?
Venkatraman: We have barely scratched the surface of understanding how IT will impact businesses just like we did not understand the shift from agricultural era to the industrial age till much later. IT’s impact on productivity is now established and accepted without much debate. IT’s impact on global sourcing of capabilities is just starting – this means that business processes may not need to be located in expensive western cities and towns. Just as we shifted manufacturing to Asia, we are in the midst of shifting business processes to other parts of the world. This redefines the landscape of global corporations. It redefines cost structure, employment potential and so on.
The biggest challenge is: we need managers who are prepared to recognize the power of IT as an integral part of the business operations. In the past, it has been seen as separate and removed from business. Any manager who still frames business strategy and operations without considering the power of IT is myopic and will fail when competing against managers who see the power of IT and craft business strategies and plans to exploit this new source of advantage.
You believe there is an emergence of a networked era where products, processes and services are increasingly digitized and connected. This era changes the logic of business models and compels executives to rethink the role of IT. How so?
Venkatraman: Look at three examples – (1) Apple is morphing into a music company; (2) customer call centers are located halfway around the world; and (3) Faults in some of the new cars from GM can be remotely diagnosed through a telematics network. They indicate the shape of things to come—products, processes and service delivery shaped by an IT infrastructure that is digital and connected. Will we buy music or access music over the network? This simple question changes the pricing logic of not only music but could be a foreteller of entertainment. Healthcare, telecommunications and financial services could be revolutionized through global IT infrastructure—calling for new pricing strategies and customer satisfaction indices. When cars are digitized and connected, preventive maintenance and enhancements can be made at a fraction of today’s cost levels.
The main shift is that managers are used to thinking of their strategy and business models as if they are autonomous entities with full control over their destiny. But companies are embedded in a network of relationships across product, process and service dimensions. GM’s service delivery involves a network of service providers. Apple’s music strategy calls for intricate and complex interrelationships with content providers and so on.
Tell us about the competency trap and how it affects business transformation?
Venkatraman: Companies have focused a lot of their attention on core competencies as part of the massive efforts directed at reengineering in the 1990s. Core competency is not static as customers increasingly pay a premium for only distinctive core competencies that they cannot get from any other competing offerings. Under changing conditions, certain competencies become obsolete but managers fail to recognize the mismatch between their competencies (what they are good at) and market needs (what market is prepared to pay for). They continue to go with linear extensions of their current operations. Moreover, companies continue to incrementally refine their competencies (because they have “been good at it before and they have succeeded before; so, it is proven way to win”) and trap themselves into not recognizing the shifts.
In my view, business transformation is about shaping the future logic of business and developing a way to get there by navigating through different states of uncertainty. It’s not about a fixed future state but recognition of the changes in key drivers of profitability and competitive advantage. IT is an important part as we have seen in the last two decades and will see in the future.