A blended future the changing mix of IT service delivery and consumption

Key findings of the report include the following: l CIOs and LOBs agree that the growing availability of easy-to-use technology services from third parties, along with employee expectati

A blended future :

The changing mix of IT service delivery and consumption

About this report 2

Contents

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About this report

A new global survey of executives confirms a changing mix in how IT services are delivered and consumed both currently and over the next three years The survey was conducted by The Economist Intelligence Unit (EIU) in December 2013 and sponsored by EMC Respondents include chief information officers (CIOs) and line-of-business executives (LOBs) The findings and insights complement an earlier EIU study that assessed the emergence of CIOs as strategic leaders in a setting

of continuous business and technological change

The report draws on two main sources for its research and findings:

l A survey that included responses from 205 executives worldwide whose responsibilities involve the delivery and consumption of IT services A large majority of respondents are personally located in Europe (40%), North America (29%) or Asia-Pacific (23%) Nearly 50% of the companies represented in the survey have more than US$500m in revenue, while about one-third have US$5bn or more

Respondents hail from 19 different industries, with financial services (17%), manufacturing (15%) and IT/Technology (13%) leading the pack

l A series of in-depth interviews with senior executives and academics We thank them for their valuable insights

Jeroen Tas, CEO informatics, solutions and services, Philips Healthcare

Judith Spitz, senior vice-president and CIO, Verizon IT Strategy and PlanningKlas Bendrik, group CIO, Volvo CarsJeanne Ross, director and principal research scientist, Center for Information Systems Research, MIT Sloan School of Management

Information technology (IT) has a decisive impact

on what a modern organisation can do So more line-of-business executives (LOBs) want to control

IT directly to run their current businesses and innovate for competitive advantage “Technology has advanced to the point where it is less expensive

to experiment with radically new experiences,”

says John Kim, senior vice-president of global product development at Expedia, the world’s largest online travel agency

At the same time, chief information officers (CIOs) and other IT professionals understand in depth how technology and business processes function and relate to each other, not only at the departmental level but for the organisation as a whole “Almost any core capability in a modern organisation involves mixing data with some kind

of business process,” says Dr Jeanne Ross of MIT’s Sloan School of Management “That’s where the IT unit becomes so valuable They understand what technology can or cannot do.”

Both LOBs and CIOs acknowledge they must work more closely, according to the EIU survey and interviews, but not necessarily under the same rules that governed in the past LOBs want the flexibility to use whatever technology and services help them achieve their business goals CIOs are realistic about giving LOBs more influence and control over IT decisions and resources The result

is a changing mix of internally developed and externally sourced technologies and third-party

of both CIOs and LOBs away from just overseeing IT assets towards managing risks and opportunities Key findings of the report include the following:

l CIOs and LOBs agree that the growing availability of easy-to-use technology services from third parties, along with employee expectations for greater control over the technology they use at work, is driving this trend towards supplementing internal IT capabilities with external resources

l At present, LOBs are sourcing more technologically mature third-party IT services for their business units—services that are easily, quickly or inexpensively acquired in the market but are not ultimately responsible for a firm’s competitive advantage Communications (59%

of surveyed respondents), storage and back-up

Executive summary

(54%), servers (48%) and web hosting (44%) comprise the lion’s share of third-party IT infrastructure spend for business units.

l Greater adoption of external IT capabilities—

whether directly by the IT organisation or by the business unit—will change the focus for CIOs going forward One-quarter of participants say that CIO responsibilities for security, risk and compliance management will increase substantially over the next three years Similar percentages of respondents expect significant expansion of CIOs’ roles for information management and analytics (25%), IT services management (23%) and vendor management

(21%) Only 12% of surveyed executives anticipate that traditional CIO functions such as technology infrastructure management and internal applications development will increase substantially over the next three years

l The survey findings and interviews suggest a service-centric rather than asset-centric vision for enterprise IT, in which the internal IT department acts more as an advisor and broker

of best-of-breed solutions to business units Sixty-three percent of LOBs surveyed say third-party technologies and services brokered from external providers but managed on the inside will increase over the next three years

Drivers of change

1

Organisations increasingly engage with their customers and business partners through digital channels and technologies Therefore, how IT is accessed and managed has a material effect on what a modern organisation can do It is not surprising that more LOBs are looking to wield technology as a native capability

At the same time, because technology underpins the vast majority of contemporary business processes, IT leaders have unique insight into how

an organisation really executes its business IT professionals understand in depth how information systems and business processes function and relate

to each other, not only at the departmental level but for the organisation as a whole

Until recently, both CIOs and LOBs lived in largely separate camps CIOs focused on back-office efficiency and stability of organisation-wide

IT systems, while most LOBs looked to IT for business applications but not for competitive advantage But the rise of mobility, computing-as-a-service, social media, and other technology and consumer trends has transformed how CIOs and LOBs deliver value to the organisation

To gain more flexibility to respond to rapidly changing conditions, both LOBs and CIOs are moving towards a blended model of IT service delivery that merges internal IT capabilities with third-party services Success under this new paradigm requires at least as much organisational

Source: Economist Intelligence Unit survey, December 2013.

Q Which of the following statements best describe the main forces driving changes

in the CIO’s role in your business?

(% respondents)

Business units and functions have increasing options and opportunities to acquire technology services from third parties

The consumerisation of IT and proliferation of easy-to-use technology services have complicated compliance with enterprise IT policies

Employees increasingly expect greater control over the way they use technology in their work

The consumerisation of IT and proliferation of easy-to-use technology services have reduced the need for centralised control of IT resources

The consumerisation of IT and proliferation of easy-to-use technology services have driven the IT organisation to serve more as a provider of guidance and less as a provider of services

The company is trying to leverage IT in revenue generation or other strategic initiatives

4540

3826

2221

innovation as technology innovation

The EIU survey and follow-on interviews reveal that business units are taking greater control over the IT solutions used in their operations and decision-making A little more than 80% of LOBs say that they currently obtain IT services directly from third-party providers or develop them on their own, and more than half do both Many LOBs are bypassing internal IT channels to source external technology and IT services because comparable services are not available from corporate IT, or are not timely enough in their delivery This comes in addition to the fact that IT capabilities have become simple to buy on the open market CIOs and LOBs agree on the two primary drivers towards supplementing internal IT capabilities with external resources Forty-three percent of CIOs and

45% of LOBs cite the growing availability of easy-to-use technology services from third parties, while 41% of CIOs and 42% of LOBs mention employee expectations for greater control over the technology they use at work

However, this doesn’t mean that LOBs and CIOs intend to neatly divide IT responsibility in half with the CIO focused on back-office efficiency and LOBs

on innovation Instead, both LOBs and CIOs recognise the need to work more closely together

at both the tactical and strategic levels “It can’t just be an IT innovation or a business-unit innovation for the organisation,” says Klas Bendrik, group CIO for Volvo Cars in Sweden

“Collaboration is about creating a corporate asset that contributes to both top-line growth and bottom-line efficiency.”

Business-unit needs

2

LOBs do not seek to own or control IT for its own sake LOBs seek agility Faced with customers who can review products and prices with their mobile phones and share positive or negative experiences

on social networks, business units must pivot to become more oriented towards customer experience In such a rapidly changing environment, LOBs want the flexibility to use whatever technologies and services are necessary

to achieve their goals

According to the survey, 46% of LOBs say they obtain external technology services because comparable services from internal IT are either not available or take too long to deploy Another 46%

of LOBs want an IT services catalogue that lists both internal and external capabilities that can be tapped by business units Most important, nearly two-thirds (63%) of LOBs expect that the use of external IT resources brokered by internal IT departments will grow over the next three years—far more than any IT services delivery mode.The dramatic expansion of third-party IT offerings

is one reason why LOBs are increasingly requesting external IT sourcing, according to Dr Jeanne Ross, director and principal research scientist at the Center for Information Systems Research at MIT’s Sloan School of Management “The IT supply side is not the major limiting factor anymore,” she says

Source: Economist Intelligence Unit survey, December 2013.

Q Which of the following statements best describe your motives for obtaining IT services

from outside of your corporate IT function?

(% LOB respondents)

Comparable services are not available from corporate IT

Corporate IT is too slow in delivering services

Corporate IT is too expensive

External IT providers have a more client-centric approach to IT solutions

Solutions from external providers are technologically superior

Corporate IT is not adequately familiar with emerging technologies

Corporate IT imposes too many restrictions

Corporate IT does not understand the needs of our business/industry

4629

28282619

1610

❛❛

The IT supply side

is not the major

“We can use our own resources We can use somebody else’s resources We can outsource We can use cloud Basically, if we want to do something with IT, we can do it The question is whether an organisation can absorb the necessary changes to use these capabilities effectively.”

The survey reveals that, for now, LOBs are sourcing more technologically mature third-party services for their business units LOBs are typically focused on business-unit-specific solutions and services that are easily, quickly or inexpensively acquired in the market but are not ultimately responsible for a firm’s competitive advantage

Concurrent with greater demand by LOBs for external sourcing is a re-evaluation of the metrics for gauging IT value by CIOs and other

management For most of its history in the enterprise, the value of IT was measured largely by operational-level metrics such as cost per stored megabyte, cost per transaction, or IT availability

metrics such as uptime and mean time between failures These metrics were important for maintaining IT efficiency and resiliency But they were too removed from measuring the value of IT for business outcomes in terms that could be understood by most LOBs

A focus on operational metrics was not unusual for many large organisations Much of the past decade’s enterprise IT spending was aimed at automating and streamlining existing business processes to go online Only in the past five to seven years have many large organisations completed the process of transitioning to digital channels as a primary means for interacting with customers and business partners

According to Judith Spitz, senior vice-president and CIO for Verizon IT Strategy and Planning, that heavy lifting has enabled the company to change its view of IT from primarily a transactional partner that delivers operational efficiency to a strategic partner that improves customer service and drives

Source: Economist Intelligence Unit survey, December 2013.

Q Which of the following IT services does your business unit develop locally or obtain from

third-party providers?

(% LOB respondents)

Communications (e-mail, messaging, telephony, videoconferencing)

Storage and back-up

Servers and computing

Web hosting

Analytics

Employee collaboration and file sharing

Information or data services

Mobile applications

Customer relationship management

Other business process applications

Social media

Partner/Supplier collaboration

595448

444240383634343025

revenue growth That switch has changed the metrics against which IT value is judged “Years ago, IT was measured in transactional terms—how often did we deliver projects on time and on budget, what percentage of the requirements did

we deliver? Those metrics are nothing more than table stakes now Today, IT is measured by whether

we are enabling a competitive advantage for Verizon—are we delivering shareholder value in terms of the customer experience, simplifying the businesses, helping to win and retain customers?

We are strategic partners in the business’s success and are measured by the same yardstick as our marketing and operations teams.”

Expedia Inc is the largest travel company in the world with an extensive portfolio of online travel brands, including category leaders like Expedia

com and Hotels.com Collectively, Expedia brands operate across 150 travel-related websites in more than 70 countries In 2013, the company recorded nearly US$40bn in gross travel bookings on over

400 airlines, more than 260,000 properties, and dozens of cruise lines and rental-car companies

According to John Kim, senior vice-president

of global products, Expedia enables its millions

of users to navigate complex choices related to travel within an interface that is both intuitive and fast In such a massive, high-speed environment, product development decisions involve a balancing act in which innovation must be justified against the investment of talent and resources required to bring a new feature up to Expedia-level scale “For example, we know that customers would love to see new ways to view pricing for flights, hotels and other travel services We also know that building these types of experiences can be both very complex and very expensive What makes this a complex problem is there are infinite possibilities for how we

do it But we don’t know if it is worth our time and effort, for any given option, unless we go out and test it,” he says

Testing, in this case, means that multiple

versions of the Expedia.com website are running live with a portfolio of features across the globe

at any one time Not only must these websites function properly for booking travel, but the websites must also generate data and insight that help guide product development decisions

Moreover, effective product innovation involves more than experimenting with the user interface Edmond Mesrobian is Expedia’s chief technology officer in charge of ensuring that back-end performance enhances the front-end customer experience According to Dr Mesrobian, there are infrastructure and back-end operations decisions that can’t be boiled down to simple business decisions For example, Expedia procures fraud control services from a third party, but not necessarily because of lower cost “The goal is to partner with best in class, especially when you’re trying to crack a problem that is not core to your business model and yet you need to be world class

at executing against it,” he says

Both executives collaborate closely because any new product or feature results from highly interconnected IT systems in which innovative work

on the front end must be understood in the context

of how it affects the back end In that sense, the test-and-learn methodology runs through one continuous fabric

case study : Test and learn at Expedia

Senior vice-president and CIO,

Verizon IT Strategy and

Planning

CIOs are realistic about a certain level of external IT procurement by LOBs Increased consumerisation

of IT means that employees, customers and business partners will bring in IT assets and capabilities that have not undergone an explicit approval process by the organisation And some CIOs are embracing external IT solutions as aggressively as their LOB counterparts

Although automotive manufacturing and healthcare seem worlds apart in terms of industry concentration, both Klas Bendrik, group CIO of Volvo Cars, and Phil Fasanso, CIO of healthcare company Kaiser Permanente, told the EIU that their organisations start with the assumption that the first place to look for IT solutions is the

external market “Today, we get the best IT capabilities into our business when we mix internal and external resources,” Mr Bendrik says Mr Fasano concurs that once an organisation reaches

a certain size, it is virtually impossible to generate internally all of the needed IT solutions “We start with the bias that we are going to buy our IT capabilities,” he says

Greater adoption of external IT capabilities—whether directly by the IT organisation or by the business unit—will change the focus for CIOs going forward Policy-setting for how data are secured and made legally compliant is becoming more top-of-mind One-quarter of survey participants say that CIO responsibilities for security, risk and

Information management and analytics

Business strategy and consulting Services management (including provisioning, metering and billing)

Vendor management and services brokering Technical consulting

Infrastructure management Applications development and management

How will traditional CIO responsibilities change over the next three years?

compliance management will increase substantially over the next three years Similar percentages of respondents expect significant expansion of CIOs’

roles for information management and analytics (25%), IT services management (23%) and vendor management (21%) Only 12% of surveyed executives anticipate that traditional CIO functions such as technology infrastructure management and applications development will increase

substantially over the next three years

Taken together, the survey data suggest that CIOs are expanding their role to manage a portfolio of IT capabilities that include internal infrastructure assets, local and externally developed applications, and third-party IT services Some of these

capabilities will originate from the IT organisation

Perhaps just as many IT capabilities will be developed or sourced directly by LOBs

The broader sharing of responsibility by CIOs and LOBs for IT service delivery is driving increased cross-fertilisation of human resources among IT and business units Says Dr Ross: “Back in 2000, we coined the phrase, ‘download IT to the field’, which captured our push to get IT professionals out of their cubicles and into the call centres, the trucks and the business offices to truly understand how work was done and what the user and customer experience was really like Requirements documents are far inferior to first-hand observation and real-world experience We also recognised that to deliver value, the technologists and their business partners needed to be comfortable in each other’s back

yards.”

Nearly every CIO the EIU interviewed agreed that exchanging talent across departments is a key factor in making a blended IT delivery model work That exchange happens at the executive level as well More LOBs are participating actively in enterprise IT governance, and CIOs are playing greater roles in business strategy formulation, injecting more technology-driven opportunities into the strategic mix In these and other leadership forums, LOBs and CIOs work together to understand the flow of data, work, decisions and analysis across the enterprise

According to Dr Ross at MIT, business-unit leaders need a “technical friend” who both understands technology and can access the resources and talent necessary to execute projects LOBs must also provide a clearer vision of how a business process must function, what are the critical workflows, how decision rights are determined and what analytics need to be installed

to ensure that the adopted rules are actually good business practices “LOBs and CIOs need to design the high-level flow of work and data in the organisation, so somebody can build all of the connecting parts,” she says “At some level, this isn’t new It has just become so much more important.”

Important, too, are a cluster of key skills that CIOs need according to survey respondents Communications skills to collaborate more effectively with business stakeholders (49%) and

Source: Economist Intelligence Unit survey, December 2013.

Business skills to participate in high-level strategic decisions across the enterprise

IT security skills to mitigate the risks of a more decentralised IT delivery model

How important will the following skills be to enable CIOs to lead IT adoption and deployment across the enterprise under evolving service delivery models?

Please rate each skill from “essential” to “unimportant”

the ability to innovate solutions outside of traditional boundaries (42%) emerged as the most essential for adoption of new models of IT service delivery These skills will be at a premium as CIOs anticipate even greater demands from LOBs in areas such as mobility, Big Data and social media that cut across IT service delivery models

In addition to technology forces that are pushing from the outside, it has become increasingly difficult for large enterprises to develop internal IT for just departmental or business-unit use According to Jeroen Tas, CEO of informatics, solutions and services at Philips Healthcare, the fact that multiple business units must collaborate to develop a complete solution for the customer means the desired skill sets for IT leaders have evolved from focusing mainly on systems analysis and application development

“The IT skill emphasis has shifted internally to

more business process modelling, configuration and integration expertise,” he says

Where does “shadow IT” fit in the blended mix of

IT delivery? Neither CIOs nor LOBs are in favour of having business-significant information systems initiatives outside the purview of central or local IT organisations However, they are also realistic about the growing capability of individuals and teams to meet many of their own information needs The survey reveals that while 68% of CIOs regard shadow IT as counterproductive and actively discourage it, 78% are mitigating risks by taking a more proactive approach to information and security across their organisations Equally important, slightly over half (55%) of CIOs say their organisations are assisting lines of business

to make external IT procurement decisions by disseminating catalogues of preferred external services and providers

Source: Economist Intelligence Unit survey, December 2013.

Q

Agree Disagree

We are mitigating the risks of shadow IT by promoting a more informed and proactive approach to information and security across the company

We regard shadow IT as counterproductive and we actively discourage it

We explicitly forbid the use of shadow IT and we prevent or stop its use wherever we find it

We want to discourage shadow IT and we believe we can do so in positive ways by offering assistance from corporate IT

We assist LOB decision-makers to make their own IT decisions by disseminating a catalogue of services/providers

We dislike shadow IT but we recognise that LOBs sometimes adopt it for good reasons

We have liberalised our policies concerning shadow IT on the grounds that it is inevitable

Our policies do not encourage or discourage the use of shadow IT

Do you agree with the following statements about your company’s policies towards IT that is implemented without informing or seeking support from corporate IT (“shadow IT”)?

(% CIO respondents who agree)

78 68

61 61 55 54 43

Building a shared model

4

Going forward, CIOs and LOBs point to partnerships among internal IT, lines of business and third-party providers as the standard way to do business The survey findings and interviews suggest the emergence of a shared vision: an enterprise IT function that proactively markets its services to business-unit customers, bringing the full range of

IT expertise—including brokered third-party solutions—to bear on business-unit needs While 50% of LOBs surveyed say they expect to rely increasingly on enterprise systems, storage and networks deployed by internal IT over the next three years, 63% say that third-party technology services brokered by the IT organisation will also increase over the same period

Thirty-one percent of CIO respondents say their organisations intend to adopt a service model that offers fee-based services to business units and

operates in parallel with external providers Internal IT transitions to a service-centric delivery model by pooling assets that had formerly been devoted to specific business units (and severely under-utilised) With the help of virtualisation and cloud computing, IT can deploy a general pool of data, application and infrastructure resources drawn upon by multiple business units that pay for usage The shared asset and services approach drives up utilisation, drives down cost and gives LOBs a better understanding of the relationship between their units’ IT consumption and business outcomes

Of course, the challenge for organisations will

be to figure out what constitutes effective brokering and delivery of IT services—whether internal or external Expertise in this area could become a point of advantage in a world where IT

Source: Economist Intelligence Unit survey, December 2013.

IT solutions developed or sourced by individuals or small teams without control from either corporate or LOB IT

How will your business unit’s reliance on the following IT service delivery methods likely change over the next three years?