CIOs Play By New Rules

The new reality facing CIOs is this,every IT initiative is under far more scrutiny than ever before. Soft ROI is out, while consolidation and centralization are in. Large, established companies no longer fear disintermediation by dot coms, once a key factor in driving fast and furious e-business initiatives. But perhaps most significantly, market valuation will no longer skyrocket every time a company has good news. Rather, it will only come the old-fashioned way,through earnings growth.

That doesn't mean CIOs are souring on the benefits technology can bring to organizations. They just want

more bang for fewer bucks, meaning a quantifiable and fast payback. And that's unlikely to change, even when the economy finally rebounds.

"Pressure on companies to deliver earnings will continue unabated, which will drive continued constraints on spending of all kinds, obviously including technology," says Gartner CEO Michael Fleisher.

That has affected customers on a number of levels. For one, companies have far less tolerance for risk.

"We're not making big bets anymore," says Rick Carey, chief technical architect at Merrill Lynch. "If something goes wrong, we want to return it. If someone says to me, 'I want something, and it has to have proprietary hardware with proprietary software, and I have to train people with skillsets that they will never use for anything else other than this project,' that's 100 percent risk. If something goes wrong, Merrill gets nothing out of it."

Carey's role at Merrill is to see that the company's autonomous business units get more out of the technology decisions that are made. "Being a decentralized business, my function is to look across all the networks," Carey says. "I look across the entire organization to make sure we are doing the right thing for our firm."

Many customers typically say IT investments were always scrutinized, and, indeed, that was often the case. But IT managers admit that the level of scrutiny is even higher now.

"We look at everything a little more closely than we did in the past, from a sense of trying to get the most efficiencies," says Vincent Morrotti, vice president and CTO at DaimlerChrysler, the world's third-largest automotive manufacturer.

For example, DaimlerChrysler,which historically has let suppliers share in any savings brought on by new systems or ways of doing business, and has always attached ROI to any major technology investment,is now upping the ante. Soft ROI, such as improved customer satisfaction, isn't enough. There must be measurable improvements within 90 days of deployment, and the system must pay for itself within one year.

"It used to be you could say, 'This would increase customer satisfaction,' and we would say, 'That's a great thing,we should do that,'" Morrotti says. "Well, that doesn't fly anymore. You have to have hard-dollar ROI, and if there's soft benefits associated with it, that's a footnote."

Another factor at play is the lack of a major shift or imperative that's driving technology investments, such as an e-business wave, Y2K deadline or push to move from one infrastructure to another. Rather, typically on the front burner are specific business imperatives, consolidation and integration with legacy systems, as needed.

"There's a much better level of coordination and much more attention to capital expenses and operating expenses tied to specific business objectives, and I don't think that will change," says Rick Hughes, who led the IT solutions practice at PwC Consulting until it was acquired by IBM in September.

Toward that end, many organizations are establishing IT governance or oversight committees where key business stakeholders and CIOs evaluate and monitor technology initiatives. Federal Express, an IT-dependent enterprise and a company regarded as one of the key innovators in its use of technology, has formed an IT Oversight Committee consisting of its board of directors and prominent outside experts that include representatives from Carnegie Mellon University. "It helps us internally, as well as the rest of the board, to understand IT investments and make sure we are getting the most for our money," says FedEx CIO Robert Carter.

At FedEx, spending will be essentially flat this year and next, Carter says. There are cases where upgrades are being pushed out. For example, in the past, the typical life cycle of an employee's desktop or notebook PC was 20 months to 24 months; now it's 30 months to 36 months, Carter says.

"As the economy has been soft, people have been willing to [use the same laptop a little longer and keep that PC on their desktop longer," Carter says. "But that hasn't been a huge issue for the business because, frankly, the life cycle of those desktops has been extended by the fact that the processing capability on them has [been outrun [by the software."

In addition, customers are more hesitant to work with start-ups these days. FedEx, for example, has avoided adding any new major suppliers. "What's changed the most is we are more reluctant to add new suppliers to the mix because of the trouble that many technology companies are in," Carter says. "Even good technologies can run aground in these tough market conditions."

Getting Centralized

The heightened level of technology scrutiny is even affecting the structures of customers' overall organizations. In the late 1990s, many IT organizations decentralized into lines of business, giving work groups autonomy to purchase servers, deploy applications and build their own Web operations, while utilizing the central network and systems infrastructure. But that has been shifting quickly. At the beginning of the year, for example, only 17 percent of the largest 3,500 companies worldwide said their IT organizations were centralized, while 40 percent said they were decentralized, according to a survey by Forrester Research. Today, 58 percent say their IT organizations are centralized, and only 9 percent say they are still decentralized, Forrester reports.

"Some of the pain these IT organizations have gone through in the past 18 months will have lasting impressions and lessons learned," says Forrester analyst Tom Pohlmann. "This centralization effect does not imply that everything IT-related is still being owned by these huge monolithic IT shops. It's much more about centralizing IT decisions."

Proactive Stance

That's the approach DaimlerChrysler is taking by standardizing on specific technologies in a drive to eliminate redundancies and incompatibilities. Called DaimlerChrysler's Proactive Infrastructure, the auto giant's IT organization prepurchases, stages and tests key infrastructure components, so, when a business unit needs an application, the infrastructure is already in place. Rather than mandate the use of the infrastructure, the company offers the technology and services free, based on business need. If a business unit wants to go off on its own, the cost comes out of its own budget.

"We don't use a heavy hand, but if we make the environment readily available, it doesn't have to be part of the overall project costs. It's already there," Morrotti says. Among those technologies that are part of the Proactive Infrastructure are IBM's WebSphere and Windows XP. Much of the work is conducted internally, but, when needed, DaimlerChrysler brings in IBM Global Services.

Similarly, at Walt Disney, gone are the days when various subsidiaries,ranging from the ESPN Network to the Walt Disney World parks,could go off and make autonomous IT decisions. Disney CIO Michael Tasooji established an IT governance committee that includes 25 IT managers, eight of whom are CIOs of the company's largest business units. The committee also comprises managers from the different lines of business, Tasooji says.

The company started building an infrastructure two years ago that lets operating units share common e-mail, network, PC and server support, and a common application infrastructure. The shared infrastructure, already operational, will be largely done by year's end, Tasooji says.

"Right now, we are writing our operational plan for shared services," he says. "It's a contract between our shared-services organization, including SLAs, performance measurements, rate cards and competitive information."

A strategic part of that architecture is called the Tomorrowland Project, based on SAP's ERP suite, which will provide shared HR, financial and accounting applications. In all, it's replacing a hodgepodge of 200 systems. While Tasooji says Disney functions as its own integrator, PwC Consulting (now IBM Business Consulting Services) rolled out the solution, officials say.

Disney is not alone in its effort to build shared-services architectures. Faced with increasing requirements and decreasing budgets, the federal government and several states are thinking along the same lines, though, unlike the corporate world, there are political barriers to overcome. Nonetheless, the outcome of these shared-services infrastructures will likely mean that projects at the department level that were put on hold will no longer need to be revived once the shared service is in place.

Still, that doesn't mean companies will standardize on one vendor to maintain that shared-services architecture. Merrill Lynch's Carey notes his company always maintains three preferred desktop PC vendors and will refresh the preferred list if a vendor pushes the envelope in price. "What Merrill Lynch pays for PCs is obscene," Carey says. "I can't tell you, but trust me, it's cheaper than the software we put on it."