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October 16, 2020

Digital World Class: A New IT Performance Advantage

You would think that with businesses still trying to recover from the health and economic disruption of 2020, they wouldn’t be too worried about closing the performance gaps of the IT functions. Let’s just right the ship and get back to normal ASAP.

But in reality, when it comes to facilitating business recovery and inoculating enterprises against future disruption, the advantage of world-class IT performance is even more critical. Businesses struggling to make up for steep revenue hits desperately need the advantage of efficiency and productivity that world-class IT functions deliver. The Hackett Group’s benchmarks show world-class IT operating at 21% less cost and 17% greater productivity in 2020, compared to typical IT functions.

World-class performance isn’t just about cost and productivity. We also assess IT effectiveness – how well technology is deployed to transform business operations, improve employee performance and innovate the customer experience. In 2021, IT’s effectiveness will be crucial in improving business resiliency, supporting a hybrid office/home work environment, and innovating product and service delivery channels to meet changing customer preferences.

The graphic below shows key performance gaps across efficiency and effectiveness metrics that we track. World-class IT functions are those that perform in the top quartile in both sets of metrics. So, for example, the IT function with the lowest cost doesn’t necessarily earn world-class status – IT may be starved of resources, and this would certainly undermine performance in effectiveness areas. What rates best is a balance between cost and effective (including experience) outcomes.

Performance comparison of world-class IT versus peer group

 

Companies have made slow but steady progress closing the gap to world-class performance. However, digital transformation has raised the bar. We analyzed the potential impact on performance for IT organizations that fully digitize their operating and service delivery models. We see effectiveness and experience benefits with qualitative improvement. For example, in companies where IT had fully virtualized end-user provisioning and support, there was less operational disruption caused by the pandemic shutdown of spring 2020. As the shutdown went global, companies with effective enterprise data models were able to get access to pipeline data, minimizing shortages and supply-chain blind spots.

But how does digital transformation affect IT efficiency? We know that there is a significant investment needed to acquire digital tools and transform processes, not to mention upskilling IT staff. So many expect costs to rise during transformation and remain high. To find out the truth, we analyzed actual digital costs and efficiency data to project the investment versus savings in IT operating costs. This revealed a performance advantage we are calling “digital world class” – that is, world-class IT functions that have fully transformed their digital operating and service delivery models.

Here are the projected numbers: Digital world-class IT organizations will operate on average 34% more efficiently than typical (peer) IT functions in terms of total cost. This includes a 34% reduction in full-time equivalents. Even after the significant net-new technology investment needed for transformation, digital world-class functions cut their total cost operating cost by 17%. The graphic below shows the journey from peer IT function on the left to digital world-class function on the right. The overall operating cost decrease of 17% is based on a 27% improvement in efficiency through process optimization, as well as a 5% reduction from technology rationalization and an estimated post-pandemic 2% drop in IT facilities and travel costs. This 34% savings is offset by the net-new investment in technology and capabilities (17%) needed to digitize IT processes and broaden its capabilities.

 

The Path to Digital World Class

Achieving digital world-class performance will take more than incremental improvements and isolated advances in digital capabilities. It needs bold, accelerated action on two fronts: adopting digital capabilities and transforming IT’s operating model.

Too often, what are called digital transformations are actually made up of a series of isolated implementations of automation, analytics, cloud-based services and other technologies. These lack an overall game plan and suffer from spotty resource commitments. But world-class IT leaders address people, process and the technology landscape holistically to create and accelerate digital capabilities. We define these in the table below, along with their primary enabling technologies.

Business and IT capabilities necessary for a digital model

Source: The Hackett Group

 

The second focus for would-be digital world-class functions is the service delivery model. Today, limitations in IT’s traditional plan-build-run lifecycle operating model inhibit ability to enable the business. The process silos and application-centric nature of this model frustrate agility and innovation and perpetuate an insular perspective focused on processes rather than outcomes. Traditional models also lack emphasis on innovation, such as dedicated innovation teams or centers of excellence.

IT’s digital operating model should:

  • Emphasize fluidity, with leaner teams and more agile ways of work.
  • Standardize on rapid application development and DevOps for new solutions.
  • Aggressively decommission old systems to limit technical debt and complexity.
  • Diligently vet project requests against business goals and measure their outcomes.
  • Take a cloud-first approach to new and updated infrastructure needs.
  • Incorporate digitized stakeholder experiences in day-to-day operations.
  • Replace human tasks with analytical, intelligent process automation.
  • Invest more in emerging technologies for a competitive edge.

Organizationally, many IT functions are moving away from plan-build-run lifecycle-stage silos toward a hybrid combination of three different emerging models.

  1. Aligning IT teams with end-to-end business processes associated with specific business products or platforms.
  2. Aligning IT’s capability creators – developers, business architects and strategic relationship managers – with the business unit/function teams they enable.
  3. Brokering third-party offerings for services and infrastructure, orchestrating their operation across the enterprise, and integrating them with legacy systems.

Other trends increasingly common in digital operating models are the increase in IT resources and services allocated to global shared service groups, and also to standing horizontal teams or Centers of Excellence, typically focused on deploying advanced technologies across the enterprise. By devoting resources to these enterprise-aligned teams, IT can serve stakeholders in a more modular, agile and efficient way. They can increase or shrink in size as needs dictates. They can also include contractors and third-party employees.

The road ahead for IT organizations is no longer about striving for traditional world-class performance. Instead, the goal post has moved to digital world class. Rather than continuing to make changes on the fringes and seeking incremental performance improvement, IT’s focus should be on accelerating its own digital transformation and building the next-generation organization structures and operating model that will enable digital world-class performance levels. Below are the key steps in that process.

Establish the baseline and identify gaps

  • Create a baseline to determine IT’s efficiency, effectiveness and experience key performance indicators.
  • Assess the capabilities and maturity of the current IT operating model, resource allocation, and technology effectiveness based on leading and emerging best practices.
  • Identify and prioritize performance gaps that outline critical focus areas for accelerating digital progress and future business needs.

Design and develop capabilities

  • Develop the future state KPIs required to meet business and IT strategic objectives.
  • Define the capabilities needed within the IT organization to support the business strategy.
  • Create best-fit IT operating model scenarios to accelerate digital strategies.
  • Define the digital tools needed to enable capabilities.
  • Move beyond the current data and define the data needed to build an insight engine.
  • Determine the talent and culture needed to close gaps and build digital advantage.

Create a roadmap to digital world-class performance

  • Prioritize the desired capability “bundles” based on performance gaps.
  • Develop transformative initiatives required for agile design and deployment of IT’s next-generation operating model, sequencing technology-led execution.
  • Develop the agile transformative road map, outlining needed investments, benefits, teams/resources and ways of working.

To learn more, download the complete world-class advantage paper:  https://www.thehackettgroup.com/world-class-performance-20q3it/

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