Gartner Predicts 2005: IT Management Reinvents Itself

Gartner Predicts 2005: IT Management Reinvents Itself

In 2005, the fate of the IT organization and the CIO will depend on their ability to expand their awareness of their external environment and adapt to new, permanent demands for business-based capability and performance.

During the past few years, the tendency among CIOs has been to believe that heightened performance pressures were strictly due to the economic downturn and that "they, too, would pass." The reality is otherwise. Despite the projections of renewed economic health, the business will continue to expect IT leadership to show strong financial management competencies, that IT projects realize tangible business value, and that the IT organization demonstrates competitive effectiveness. IT organizations that rise to the challenge will be rewarded with substantial opportunities to develop into a new type of service organization. Those that don't will face a grimmer future. Gartner's 2005 IT Management predictions point out the trends that are most relevant to CIOs facing these challenges.

Twenty percent of large IT organizations will rely on IT process improvement to lower operational costs by 10 percent by year-end 2005 (0.9 probability), rising to 40 percent of large IT organizations by year end 2007 (0.7 probability).

Key Findings
The observers who believed that the tightening of IT budgets was solely a result of the economic downturn were wrong. Despite the improving economy and a resurgence in IT investment (notably in security, storage and applications), most companies continue to look for improved IT efficiency. Yet, after three years spent trimming costs, many CIOs feel that there is nothing left to cut. For this reason, Gartner predicts that many IT organizations will shift their focus during the next year from traditional cost-cutting techniques to process improvement a measure that will not only affect IT costs, but also IT performance. The experience, skills and credibility gained in re-engineering IT processes can be leveraged for business process optimization, where more-significant gains can be realized.

- Despite resuming investments in IT, firms will remain relentless in pursuing IT efficiencies. IT managers will have to look for new ways to reduce the cost of routine IT functions, such as data center operations, server management and desktop support.
- In many organizations, the push to drive down infrastructure and operational costs will go hand in hand with increased investment in more-discretionary areas of IT. The net effect will be that IT budgets will remain flat or increase only modestly.
- Compliance with government regulations for accountability and privacy will be the predominant driver of new costs and investments. IT managers will often be forced to self-fund needed IT investments by reducing IT baseline costs.

- Use total cost of ownership analyses and other cost-based benchmarks to identify and justify opportunities for IT cost savings, then implement the resulting recommendations.
- Implement an IT process framework such as the Information Technology Information Library (ITIL), the Capability Maturity Model-Integrated (CMM-I) or the Control Objectives for Information and Related Technology (CobiT) to streamline performance and improve effectiveness.
- Create process-based performance metrics to define process outcomes and identify cost improvement opportunities.
- Leverage regulatory compliance efforts to improve efficiencies in affected processes.

By 2010, 30 percent of IT organizations will morph into owners of cross-business processes, 40 percent will continue to deliver traditional IT services and 30 percent will be supplanted by outsourced IT management (0.7 probability).

Key Findings
IT process and service management competencies are gaining ground as the key to IT organizational credibility and long-term survival. In IT organizations where these competencies have matured, CIOs are bearing greater responsibility, not just for IT processes, but also for cross-business processes (for example, supply chain management and customer relationship management). In IT organizations that lack credibility because their IT process and service management competencies have not matured, new CIOs are increasingly recruited from the business. At the same time, industry-leading CXOs have begun to link the tangible contribution of the IT organization to "sticky" operational innovations those that are difficult to duplicate. As a result, CIOs are deliberately identifying and investing in strategic competencies that help sustain their companies' competitive advantage. A potential drag on these positive trends is the retirement of "baby boomer" IT professionals at a pace faster than they can be adequately replaced.

- A hefty percentage of IT organizations will morph into business-process organizations, most with a streamlined portfolio of strategic services, and many shedding the label "IT organization."
- Morphed organizations will concentrate on top-line growth through business process operations and optimization, positioning themselves as tangible contributors to business innovation.
- Many of today's CIOs will lack the credibility to run the new organizations, leaving plenty of room for CIOs with operational business backgrounds to fill the gap.
- IT organizations that do not own cross-business processes will be considered shaky employers. Combined with the retirement of baby boomers, this reputation will cause such organizations to face chronic shortages of strategic competencies.

- Build a leadership team starting with the CIO that has credibility and fluency in business strategy, finance, demand management and business processes. Consider assigning people or recruiting people from operating units to develop credentials.
- Shift organizational focus from delivering technology to delivering services and, ultimately, to business process optimization and operational innovation.
- Design a differentiated service portfolio that leverages the IT organization's insight into business value. Align with it culturally.
- Plan now to bolster strategic competencies in enterprise architecture, sourcing, process design and innovation management.

Through 2006, half of U.S. companies planning offshore outsourcing will experience friction from the public-policy arena in making and executing their decisions (0.7 probability).

Key Findings
In the first half of 2004, 40 states introduced nearly 200 pieces of legislation that would address offshore outsourcing in one way or another. At the same time, nearly 40 such bills and motions were introduced in the U.S. Congress. Although none of the federal legislation has made any serious progress, five states have passed and signed these measures into law. Sixteen other states have passed some form of legislation and are either awaiting the signature of the governor or action by another legislative body. Thus far, the introduction of anti-offshore legislation has been a mostly disorganized, grass-roots, bipartisan effort at the state level. The legislation that has passed so far is targeted at state government and is strictly limited to the use of tax dollars to support offshore activities. The anti-offshore legislative backlash has been powerful and organized, with support from national technology and business organizations. In every case where legislation has been introduced, it has been modified significantly to limit its scope and impact. In 13 cases, the legislation was defeated or vetoed.

In Europe, concern has been expressed, especially in the financial services industry and European Union (EU) Parliament, about moving jobs offshore to countries without data protection or data privacy legislation. Those opposed to offshore outsourcing have focused their attention on the enforcement of the EU Data Protection Directive and EU Data Privacy Laws. Spain has used a more-conciliatory approach, introducing legislation to give companies major tax breaks for not moving jobs offshore. France is reportedly considering similar action.

- As offshore outsourcing starts to affect accountants, engineers, paralegals and medical technologists, there are signs that some of the proposed legislation will address commercial organizations not just government with a focus on data security, employee rights and privacy issues.
- The public-policy debate over offshore outsourcing will not go away. As it grows in intensity or even if it just continues to simmer this additional friction will slow or even change some business decision and add costs.

This prediction carries with it the unusual requirement to not only examine future ramifications, but also to mitigate the results of what has already been done. In companies that embrace a global business model, the IT organization must expand its management responsibilities and processes in four principal areas:
- Monitoring the evolution of regulation that will impact global operations: Work in conjunction with business management to gather relevant information about legislation and regulations that may affect strategic plans.
- Enterprise risk management: The IT organization must join business leaders in evaluating the total risks associated with pertinent legislation and regulations, both actual and projected. These are true business risks that require the combined expertise of business and the IT organization to fully comprehend the possible ramifications.
- Project definition: Every global project must include an analysis step that accounts for the current and expected impact of laws and regulations. Because the answers are shrouded in uncertainty, scenarios should be used to test the sensitivity to project risk and to establish the necessary decision-making input for business executives.
- Business process re-evaluation: The steady evolution of these laws and regulations will force a reevaluation of what is already in place, and whether projects are needed to bring enterprise business processes into compliance.

By 2005, 40 percent of large IT organizations will take a disciplined, portfolio management approach to managing IT investments with the primary objective of improving strategic business alignment (0.7 probability).

Key Findings
Large companies, particularly in financial services, are reporting substantial success in using strategic portfolio management (SPM) an extension of project portfolio management (PPM), which focuses on the business value implications of technology projects to improve project selection, increase operational visibility and drive constructive business dialogue around the IT project portfolio. SPM captures the net business value of a project in strategic and financial terms a material evolution from PPM. However, its real impact goes beyond optimized portfolio selection and into the arena of IT/business alignment. Early adopters are realizing significant improvements in perceived business value from IT and improved IT credibility, as SPM and its associated dashboard-style tools enable them to transparently share information about key business projects and facilitate better decisions.

- The rapid acknowledgement of SPM as a necessary managerial discipline will drive heavy interest in related tools, which will represent a major new trend in IT investment.
- As SPM tools gain ground, they will, in turn, play a vital role in developing IT leadership competencies in financial management, contributing to IT's overall managerial credibility.
- Companies that do not build their own "homegrown" solutions will show strong interest in packaged applications to deliver these benefits, which will seem more compelling as vendors' product offerings mature and performance pressure on IT leaders increases.
- The ability of firms to replicate the positive experiences of larger, early adopters will generate considerable hype, but the relatively low cost of these solutions (typically between $50,000 and $250,000) will render the downside risk of investment very low compared with the benefits received.

This emerging trend is not time-critical for competitive advantage, yet can contribute significantly to business unit and executive leadership's perceptions of a CIO's success.
- Determine the existence or current maturity of your SPM processes. Augment them as necessary with financial management training and SPM tools to infuse a value-based, rather than a costbased, orientation into IT investment decision making.
- Carefully examine the actual maturity of specific SPM product offerings. Analyze the extent to which the financial and change management costs of SPM would be offset by business benefits.
- Initiate dialogue with business unit and enterprise leaders (particularly the COO and CFO) to determine their interest in and support for value-based reporting. Seek estimates of the business benefit these people would obtain from SPM processes and application solutions to support an eventual business case.
- Evaluate the readiness of the project office (or its equivalent) and capital approval body to transition to an SPM approach. Be clear about the magnitude of the transition involved.

Bottom Line: Strengthened financial management competencies particularly in total cost of ownership and project portfolio management will infuse IT leadership with new levels of credibility. Invest in the people and tools necessary to acquire these disciplines. Adoption of process- and service-based IT delivery capabilities will not only enable IT to better respond to regulatory compliance issues, lower costs and improve operational effectiveness; these capabilities will also build competencies that can position IT to assume greater responsibility for business processes. Developing the habit of scanning the external environment for changes in workforce-related issues will ensure that the risks associated with antioutsourcing
legislation and global workforce demographics are anticipated, and their downsides proactively managed. Together, these behaviors will result in a new IT organization that will have more opportunity to positively impact the business than ever before.

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