The Evolution of IT Strategy

If there’s any doubt that technology plays a leading role in business today, look no further than the top 10 list of the largest companies in the world (by market cap). Tech companies occupy the top seven spots, with Apple, Alphabet (Google), Microsoft, Amazon, and Facebook in the lead. But just a decade ago, only Microsoft made the cut, and even then it came in at seventh place.

So how did IT get here, where is it heading, and why is a business-centric IT strategy more important than ever today? Let’s take a look back at the evolution of the IT strategy through the decades.

IT 1.0

In its early days, information technology (IT) was a key enabler of business efficiency. The primary role of IT was to automate back-office business processes to make them more consistent, scalable, and less labor intensive. The initial benefactor of automation was finance, but it was soon extended to human resources, sales support, manufacturing and the supply chain. This era of IT soon became dominated by a handful of systems for enterprise resource planning (e.g., SAP and Oracle), customer relationship management (e.g., Siebel), supply chain management (e.g., i2), and human capital management (e.g., Peoplesoft).

During this period, a secondary role for IT emerged—enhancing workforce productivity. Companies deployed an army of desktop (and eventually laptop) personal computers to all of their “knowledge workers.” The computers were networked, and email was the early killer application. Microsoft won the battle to bundle word processing, spreadsheet, and presentation software together and Microsoft Office was born. IT organizations were handed the responsibility of managing and maintaining this extensive array of hardware and software.

IT strategy in the IT 1.0 era focused largely on the implementation of ERP platforms, as well as its CRM, SCM, and HCM cousins. Strategies also considered the deployment of broad communications networks (both LANs and WANs) and support of the new IT “end user.”

IT 2.0

The second era of IT (and the current era for many traditional companies) grew from these early successes in leveraging information technology. However, the value associated with automation and personal productivity began to be taken for granted. Companies accepted that they needed an IT organization to manage these expensive investments, but sought to do so at the lowest cost. 

Information technology, once thought to be so transformational, was relegated to the back office once more. Reducing IT spending as a percentage of revenue became the new objective function. Very few people in either IT or the business could articulate the value that information technology created for a company, and the function began to be thought of as a necessary evil. Scaling back IT spending became the goal.

IT strategy in this era focused on major cost-cutting initiatives that often forced companies to adopt radical new organizational constructs. Outsourcing and offshoring were often at the center of these IT strategies. Simplification and rationalization were also the rules of the day. Unfortunately, during this period, the innovation muscles within IT organizations atrophied, especially with regard to finding new ways to add business value. IT and “the business” lost touch with each other, leading to this common way of talking about IT as if it were not part of the business.

IT 3.0

More recently, IT has become more critical to the business than ever before, but this time from a much different perspective. Advances in information technology now offer companies the opportunity to improve connections to their customers, better understand these customers’ preferences and buying behaviors, and differentiate their products and services accordingly. In short, the third wave of IT is focused on helping companies drive revenue growth as opposed to cost reduction (which remains important to companies).

This third wave of IT is dominated by a number of highly publicized technology trends including digital transformation, cloud computing, big data, cognitive computing, artificial intelligence, blockchain, and the Internet of Things. But as with many disruptive technologies, the applicability of these technologies to a company’s business strategy can be unclear and the value of specific initiatives ambiguous.

Unfortunately, the role of the IT department has also become somewhat uncertain in this new era of IT.  IT bureaucracy expanded during the IT 2.0 period, and long outsourcing contracts and an outdated skills base have led to inflexibility in the department’s ability to support new approaches to technology.  Business units have often worked around their own IT organizations and gone directly to IT suppliers to implement new technology. The term “shadow IT” has emerged to reflect the growing trend of business units developing information technology capabilities outside the purview of the formal IT organization. However, as most CIOs will be quick to cite, this trend toward shadow IT is not without risk and cost.

At a minimum, shadow IT initiatives are decentralized and fail to capture economies of scale across the enterprise. These initiatives tend to be poorly integrated both across business units and with central IT data repositories and systems, and can often lead to redundant and inconsistent information. Shadow IT initiatives can also expose vulnerabilities in data security and lead to increased business risk. Finally, shadow IT initiatives tend to be vendor-driven and can be designed in ways that are financially advantageous to those vendors and result in high switching costs and significant vendor lock-in. In fact, most business leaders would welcome a knowledgeable and efficient IT organization taking over responsibility for IT 3.0 initiatives but doubt their ability to support.

This potential of IT 3.0 is driving a renewed interest in IT strategy. Enlightened companies realize that the promise of these new, technology-enabled approaches is significant, but also that the value associated with these expensive initiatives can be elusive. Meaningful IT strategies need to address this potential within the context of the current business strategy. However, given the current divide between the IT organization and the business, IT strategy development will require a different, more collaborative approach.