Executive expectations for IT have evolved from technology services to business contribution. CEOs now want IT to contribute to strategic differentiation and growth. They are increasingly asking their CIOs: Do I have the right IT? And how do I know?
Many businesses traditionally have answered these questions by pointing to how much other enterprises spend on IT relative to their sales and industry peers. But a better way for CIOs to answer these questions is to connect their IT capabilities with the unique perspectives of their business model.
Many enterprises have generic IT; that is, IT capabilities that are common across companies and even industries. Generic IT is the right IT when the executives expect IT to be a back-office commodity service. But enterprises seeking competitive advantage need IT capabilities that support their business model.
The business model sits between strategy and operations, offering an integrated and simplified, higher-level view of how the business delivers and harvests value. It helps members of the executive team make strategic choices about how the business and IT should be configured without having to dive into the operational and process details.
Whether an executive thinks in terms of business models or not, he or she will recognize that the business has multiple perspectives, which must comprise a congruent whole for the business to succeed in the long term. So the first step is to define the portfolio of models your enterprise operates in terms of asset types and rights, using a framework based on research by MIT’s Centre for Information Systems Research and research funded by the National Science Foundation.
Start by identifying the predominant assets involved in your enterprise’s value proposition. Or more simply, what are the assets at the core of your product and service offerings?
Then, determine the rights you hold to the assets. Do you create the asset for the customer (creator), rent or lease it to the customer (landlord), distribute a product or service (distributor), or match up buyers and sellers (broker)? The asset rights capture the essence of how you deliver the value proposition to your customers.
Repeat this first step for all the major business models in your enterprise but concentrate on defining the two or three combinations of asset types and rights that really drive your enterprise. This will allow you to establish the scope and basis for knowing when you have the right IT.
The next step is to define the business model in greater depth by describing its uniqueness in terms of 10 perspectives as based on the approach developed by Arvetica consulting partner Alexander Osterwalder, formerly of the University of Lausanne. They are:
- Value proposition
- Target customer segments
- Communication and distribution channels
- Relationships with customers
- Core capacities
- Configuration of activities
- Partners and their motivations
- Revenue streams
- Cost structure
- Values and principles
Discover the Business Model
There are two basic elements that define a business model. The first is called an archetype, which is defined by what rights to which assets the business sells. For example, a financial services company that makes loans offers temporary-use rights to financial assets (money).
The archetype essentially defines what business the enterprise is in and enables comparisons to other businesses that have similar underlying business models (and therefore similar issues with regard to the configuration of the business). Note that a complex business may include multiple archetypes.
Summarizing the business in this way helps to identify where overlaps, conflicts and symmetries between business models may occur. This ultimately allows you to prioritize options for resolving conflict or profiting from symmetries.
The second element of the business model involves detailing how the enterprise does business in terms of the 10 perspectives previously listed. The perspectives must be defined for each archetype represented in the company’s businesses.
Unlike archetypes, the way that perspectives are configured can be entirely unique to a particular enterprise. This is, of course, one of the ways that an enterprise can achieve (or lose) competitive advantage.
Knowing the true business model is the first step in finding the right IT. The next step is to discover the IT that makes the business model work.
Discover the Right IT
As discussed earlier, the right IT is the IT that is consistent with all perspectives of the enterprise’s business model. If the business model is well designed, this is also the IT that delivers maximum value to the enterprise and its customers.
In assessing IT’s fit to the business, it helps to first frame what IT does in terms of the business model perspectives, working from the customer value proposition on down. For example, what is the value proposition that IT offers to particular customer segments within the enterprise? What services does it provide, to whom and with what desired outcomes? How does it communicate with those customers and distribute services to them? What core skills and technologies and configuration of activities or processes does IT use to carry out its mission?
This description of IT is the IT model. Note, however, that the IT model is not a detailed description of a particular technology’s role in supporting key perspectives of the business model. That is the role of the architecture.
A gap between the IT model and business model might be a potential that is not being realized in a specific perspective of the business model, not just an obvious current weakness. Thinking of gaps in this way helps to focus the business on how the right IT can improve business performance.
When fixing a gap, take care to avoid introducing new conflicts into the business model or IT model. For example, increasing services provided by IT to the business is one way to increase the customer value proposition for IT’s internal customers; but unless complementary changes occur in IT’s revenue streams or cost structure, the result is still a model with serious gaps.
Also, inconsistencies in the IT model are sometimes a result of inconsistencies in the business model. For example, unacceptably high IT cost structures might result from maintaining multiple versions of applications that perform essentially the same functions in different parts of the business.
With the IT model defined and checked for consistency against the business model, the final step is to implement it. Implementation of the right IT model may mean extensive changes for the IT organization.
Evolve with the Business Model
When IT doesn’t match the business model or effectively maximize value, something must change. IT organizations have made wide-ranging changes to align their IT models with the enterprise’s business models, especially when circumstances drive the business model to substantial change.
Significant change in the business means change in the business model. This is also true of competitors. When a competitor makes a move, there is often intense pressure to make an immediate countermove. But a change, whether made in response to internal or external events, is not isolated; it ripples through the business model from top to bottom.
Analyzing the impact of change in one perspective of a competitor’s model on all the others shows whether the change is viable and sustainable. Then analyzing one’s responses in the same terms helps to ensure that countermoves have maximum effectiveness with minimum negative side effects.
And further analyzing competitors in terms of all 10 perspectives of their business model reveals the ways in which they are enabled and constrained. It also reveals the extent of change required throughout the value chain to respond to a competitive move and, ultimately, the IT needed to support the change.
Because business models are largely intuitive, many executives use the basic concepts behind them every day without ever using the term “business model”. The value of business models is their unique ability to describe critical aspects of the business and the connections between them without massive amounts of detail.
By using business models systematically to understand the inherent strengths and challenges in its way of doing business, an enterprise can find new ways to maximize its effectiveness. And finally, by using business models in the same way, CIOs can find and demonstrate the right IT.
Andrew Rowsell-Jones is vice president and research director for Gartner’s CIO Executive Programs