Ruthless Strategies
It's been a rough few years, but some companies have managed to thrive. Why? Because their leaders know how to steer their enterprises out of adversity. Best-selling author and turnaround artist Amir Hartman tells you how you can come out on top.
Q&A
AMIR HARTMAN
VIRTUALLY NO COMPANY or industry has
been spared during the brutal economic slump of the past
few years. With a recovery seemingly at hand, it's tempting
to breathe a sigh of relief and get back to business as
usual.
Bad idea.
All companies periodically face obstacles in both good
times and bad, says Amir Hartman, who's a consultant and
cofounder of Mainstay Partners, professor at Berkeley's
Haas School of Business and author of the 1999 best-seller
Net Ready. His new book is Ruthless Execution: What Business
Leaders Do When Their Companies Hit the Wall (Financial
Times Prentice Hall, 2004). In it, Hartman says that turnaround
starts with managers ("benevolent dictators,"
he calls them) who ruthlessly execute strategic decisions
and have voracious appetites for change. Leaders who are
always satisfied with performance become complacent, leading
to stalled growth, says Hartman. Equally important is excellence
in "operational governance," the formal and informal
practices and rules that shape how decisions get made and
work gets done within an organization. CIO contributor Lauren
Gibbons Paul asked Hartman how the principles in his new
book apply to IT organizations.
CIO: Can you expand on your vision of a ruthless
leader? What characterizes a benevolent dictator?
Amir Hartman: Focus and accountability. Those are
the key themes. These folks are relentless about focusing
on initiatives that are going to drive results that matter.
They are also very keen on driving accountability—delivering
on your word or promises, and dealing with the consequences
when one doesn't.
When I think of accountability, Larry Bossidy, the former
chairman of Honeywell and Allied Signal, comes to mind.
He's an operator, a COO-type CEO. He clearly communicates
expectations. Given the room to perform, if results aren't
delivered, he looks elsewhere. When the Honeywell-Allied
Signal merger was happening [Bossidy had left by then],
Honeywell lost its direction. The board asked Bossidy to
come back to get stakeholder confidence back up. He found
key personnel. He committed to Wall Street that the company
would become profitable and drive specific working capital
reduction targets. That commitment and communication translated
into clear directives to the management team, which in turn
drove very specific IT investments to increase productivity
and reduce working capital.
What do ruthless leaders do when faced with adversity?
They recalibrate their strategies. Recalibration is a fact-based
process by which we assess and determine which strategy
we're going to pursue. Every company goes through that process,
but not every company does it in a fact-based manner.
What does that mean for a CIO?
From an IT perspective, strategy-setting is usually not
fact-based. Ruthless companies are fact-based. They find
out exactly where they're making their money. The process
forces a clear understanding of which customers and businesses
are profitable. Most times, IT organizations are in a very
reactive mode. They should shift more toward fact-based
portfolio management. If top-line growth is the major imperative,
they need to figure out how to reduce the dollars spent
running the business systems and reallocate some resources
toward top-line growth initiatives.
"IT is often in a very reactive
mode.
They should shift toward fact-based
portfolio management."
—AMIR HARTMAN
Portfolio management is the essence of recalibration. Every
company has a portfolio, but most companies don't understand
that they have a portfolio. Cisco is a great example [of
being fact-based]. Everyone knows Cisco was a young company
that was in hypergrowth mode until 2001. All of a sudden
the bottom drops out. Where they had been in growth and
acquisition mode, very swiftly and convincingly Cisco CEO
John Chambers was able to shift the strategy to focus on
things that more mature companies do, such as cost and productivity
management. They look at things in a very fact-based way:
[Looking at our] portfolio of initiatives, as well as the
attention and resources that we're allocating, is this an
optimal portfolio?
The benevolent dictator part comes in around operational
governance: What do we measure? [Operational governance
is about] roles, responsibilities, how we're going to play
the game and make decisions. [Being a benevolent dictator
means having] a very clear, fact-based discussion and setting
of expectations. This is positive because it's very well-respected
amongst the troops. They really appreciate the clear setting
of expectations. These principles are very applicable to
CIOs. [Editor's note: Hartman has worked at Cisco.]
How can a CIO aid in recalibration of strategy?
CIOs have a lot to bring to the table: leadership, portfolio
management and recalibrating the strategy. There's a lot
the CIO can do there—validating the direction the
organization is taking and relentlessly focusing on that
direction. Analyzing and assessing whether IT investments
are being optimized. Are we allocating those in the right
way? But if you look at IT budgets and spending, a very
small percentage of the spend is for discretionary initiatives
that create value for the organization.
Most investments are for fixed assets that are meant to
run the business. CIOs need to ask, Where are my IT dollars
going? Are they focused on the right areas? How variable
are those dollars?
If you were to ask most CIOs, Are the senior-most leaders
actively involved in the prioritization and selection of
IT initiatives? most CIOs would say no. A good CIO needs
to be able to drive participation because IT is, in my opinion,
a business-driven line issue—or it should be. According
to my data, less than 12 percent of companies can accurately
measure the impact of their IT investments. They'll measure
things like percentage of projects that were completed on
time and on budget—that's a classic measure. I'm not
saying that blowing away the budget and the time line is
a good thing, but it's not necessarily reflective of the
[project's] strategic impact. Part of it is very context
specific. Asset-intensive industries such as manufacturing
tend to look at return on net assets. In other industries,
the key metrics are different. The IT organization needs
to play a significant role in measuring the key metrics
for its industry. I'm not satisfied with the answer that
IT investment is hard to measure.
"Very few IT organizations are
covering their cost of capital, but they don't know that
because they don't measure. "
—AMIR HARTMAN
What about post-hoc measurement?
Very few IT organizations are covering their cost of capital,
but they don't know that because they don't measure. It's
a very problematic circle. Here are some facts: In a 500-company
survey that we did, less than 12 percent of large companies
can actually measure the value of their IT investments.
Most large companies (with revenue over $1 billion) are
spending 50 percent more on IT than their budgets indicate.
Most CIOs don't do post-hoc reviews of actual spend. They
don't really consider total cost of ownership. They typically
look only at the initial investment of hardware, software
and installation, and not the ongoing investment. From our
study, in the case of big automotive companies, their actual
IT spend was 100 percent more than the budget. You're spending
a lot more than you think you are. And you don't have much
of an idea of what you're getting for that investment. That
adds up to a major problem. CEOs and CFOs get upset about
this, and rightfully so.
What are some questions to ask to determine if
you—and your CEO—are ruthless leaders?
Almost 100 percent of the questions can be applied to the
CIO [see "Are You Ruthless?" right]. I survey
the top 50 executives across the organization. I say, Let's
look at your practices versus best-in-class, and let's see
the gaps, and let's focus on the red flags that are really
critical. How do we close those gaps? [One could] take that
same tool and apply it in IT.
Look at whether your organization is relentless about ensuring
direct linkage of initiatives to strategic imperatives.
Whether your senior leaders are actively involved in the
prioritization and review of IT initiatives. Whether your
organization has a tradition of discipline and rigor. Whether
you kill or close nonperforming initiatives on a regular
basis. Our research tells us that the ruthless companies
do a very good job of managing talent. They also can identify
and get rid of nonperformers.
You have said that most companies have too little
and weak operational governance—please give examples
of both.
Too little—that's where IT decisions get made in a
very ad-hoc fashion, which is mostly the case. You'll have
a strong business unit leader, and you'll make investment
decisions because that leader wants it—not because
it's good for the company as a whole. There is very little
process around selection and prioritization of investments
and very little post-hoc review of what was actually accomplished
with the investment. Typically, business cases are weak.
Ruthless companies are much more disciplined about the process
for investing. If you have a process that is rigorous and
fact-based, investment decisions can be made a lot more
intelligently.
[As for too much corporate governance,] the analog to that
is where there is too much bureaucracy. So any size of investment
goes through the same justification and review process whether
the initiative is a large ERP implementation that will cost
a couple of million dollars versus a very small enhancement.
To apply this portfolio framework to IT, you've got in
essence four buckets, driven by two key variables: business
criticality, and newness or innovation. The four buckets
are projects that are: fundamental or necessary for running
the business, those that aim to innovate the business, those
that aim to grow the business, and rational experiments.
Investments that aim to innovate the business—and
have a much longer payback period—and rational experiments
need to be treated very differently. Rational experiments
have a much longer payback, higher risk, and they're more
uncertain. Looking at it from an ROI perspective is counterproductive.
These different kinds of investments need to be funded,
measured and managed differently.
You discuss metrics a lot. You say companies—and
CIOs—typically measure the wrong thing. Shouldn't
they be measuring business results?
They should, but they typically don't. The classic reason
for that is that it's very difficult to measure the efficacy
of IT investments. It's true, in part, because more and
more, it's hard to delineate where IT starts and stops,
and where processes start and stop. It will be even more
difficult moving forward. [There is some holdover of the]
cost-center mentality baggage. So CIOs tend to get away
with not measuring things that truly matter. Moving forward,
a strong CIO needs to be able to show a linkage between
IT investments and what IT does for the business. Not every
IT investment creates value. Infrastructure investments
are never going to have ROI. They are part of the cost of
doing business. But that doesn't mean we throw up our hands
and say we can't measure it.
CIOs will do a lot of good by driving toward measures that
the business cares about—the CEO, the CFO, the board
and the shareholders. IT can play a strong partnership role
in helping to bring a lot of information about the cost
side. Here's what we actually spent, total cost of ownership
for this investment. They need to partner with the business
unit lead to bring visibility and clarity as to what these
investments are providing to the company.
There is a reticence on the other side of the fence: Business
leaders typically don't believe they should be held accountable
for IT investments. The education needs to happen on both
sides. A lot of top organizations that I have studied do
[hold their business units accountable for IT investments].
It will get on the agenda of leaders even more so because
I would wager that by the end of this year, about a third
of companies will subject their IT investments to a board
approval process.
What percent of companies are ruthless, by your
definition?
I studied about 500 companies over a 30-year time span:
It's less than 10 percent. And that's being generous. The
ones that are more ruthless get better results from their
IT investments, they have a better ROI on capital than their
peer group, and they have a better relative market cap growth
and relative market share growth. But if you take any 10-year
time span and flip it, you'll see that less than one in
10 companies can sustain profitable growth over that 10-year
period.
Economic conditions seem to be improving. Can CIOs
relax a little?
We're definitely coming out of the trough. I'm starting
to see the capital belt loosen up just a tad. But I'm also
seeing much more downward pressure to rationalize IT investments,
much more scrutiny, faster payback. IT organizations cannot
breathe a sigh of relief. There's actually more pressure
that will be put upon them.
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Fuente: CIO Magazine
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