Keys to profitability: The strategic CIO

The role of the CIO is evolving at an accelerating pace. The most effective CIOs are shifting their focus from inward-looking operational issues to an emerging set of outward-focused strategic opportunities that are central to their companies’ financial and competitive success.

I call these new opportunities “customer-integrated systems” – a new class of critical systems that link a company to its customers. The most effective customer-integrated systems embody a service-differentiated design, with the CIO insightfully tailoring system linkages to evolving account relationships.

Three CIO eras

In past decades, the CIO role has moved through three eras.

First, CIOs developed horizontal systems that automated and linked their companies’ core functions, like accounting, human resources, and inventory control. I think of this as the era of the Operational CIO.

Second, CIOs helped deploy a range of vertical systems that essentially tuned up these core functions in a variety of ways. I think of this as the era of the Tactical CIO.

While many of these vertical applications were important, they tended to be minimally-integrated with the overall business. All too often they amounted to a series of localised, unco-ordinated improvements, each of which required significant organisational change.

This caused a big problem because the gating factor in IT systems’ effectiveness is a company’s ability to absorb change. Even if each application nominally offered a positive ROI, all too many of these systems failed to achieve their promise – not because they were technically deficient, but rather because the organisation was not able to make the changes needed to reap the benefits. CRM systems provide a well-documented example.

The Strategic CIO

Today, CIOs are facing an immensely important opportunity to develop systems that link their companies with their most important customers. These emerging systems are ushering in the era of the Strategic CIO.

These customer-integrated systems form the essential infrastructure for the company to secure and grow its islands of profit, and to convert the accounts in its sea of red ink from marginal performance to solid profit contribution. Strategic CIOs are becoming key players in creating and driving their company’s most important business relationships, making them critical to their company’s profitability and strategic future.

New business era

The source of this emerging CIO opportunity is rooted in a major change that occurred over the past 30 years in the way we do business. We have moved from one era of business into another without realising it.

The Age of Mass Markets spanned most of the 20th century. In this era, the win strategy was clear: maximise production volume to gain economies of scale and lowest costs. This meant distributing product as widely as possible through mass distribution fuelled by mass marketing.

Companies simply dropped their product at their customers’ receiving docks, so distribution processes and costs were relatively uniform. Pricing was relatively uniform as well, so it was reasonable to manage both sales and operating activities separately from each other.

In this era, companies had little need for systems that comprehensively integrated them with their customers. It was entirely appropriate for CIOs to focus on horizontal systems, which automated their companies’ core internal processes, and on vertical systems, which essentially tuned up these core processes in a variety of ways.

Customer-integrated systems

Today, all this is changing. In the current Age of Precision Markets, companies form very different relationships with different customers – some arm’s length, some highly-integrated, and some between. These relationships have very different operational processes and cost structures, and at the same time, pricing varies widely from customer to customer.

This means that CIOs have to shift their focus toward developing a new set of customer-integrated systems that appropriately link their companies with their customers. Importantly, the nature of these links varies greatly from business segment to business segment, depending on the account relationship. And, in many cases, the nature and quality of the inter-company IT links will actually drive the profitability and share of wallet of the customer relationship.

The problem is that CIOs traditionally focus IT on internal processes and linkages. In all too many companies, these new externally-focused customer-integrated systems are largely off the radar screen.

Certainly, most companies today have elementary links such as web-based ordering and portals that display order status, but the true promise of customer-integrated systems is much more sweeping.

For the most important customers, customer-integrated systems will provide actual integration of selected functions between customer and supplier, creating very strong mutual benefits. For other customers, they will enable the flexible “showcase” projects that provide powerful new business initiatives. When well conceived, they will both reflect and accelerate a company’s critical business relationships, improve profitability, and provide enormous competitive advantage.

These new customer-integrated systems create huge opportunities for both revenue growth and cost reduction for both partners. But they also present important challenges for CIOs in three areas: (1) tailoring the customer-integrated systems to the evolving relationships; (2) developing the actual intercompany systems, often in coordination with channel partners; and (3) managing both internal change and change within channel partners.

For CIOs, this is exciting new territory that opens vast opportunities to produce huge, new, sustainable value.

One Strategic CIO’s experience

Here’s how the CIO of a major service provider has made the transition to Strategic CIO. He found that his strategic accounts were demanding exactly the types of integration described above, and this was pulling him to be extremely customer-focused.

This CIO now spends 30-50% of his time either in business development or working with existing customers. Customer-integrated systems implementation investments (software and personnel) have already become equal to or greater than the investment in internal company systems.

The problem he encountered is that the customer-integrated systems were so critical and fast-growing, the company’s horizontal and vertical systems couldn’t support them. Consequently, the CIO has been investing in parallel in strengthening the company’s ERP system, and pulling some formerly-independent vertical applications into the ERP system, putting them under direct IT control.

The key success factors: a solid internal data model, efficient core processes, and excellent mid-level IT managers who can take projects to completion while seeing the strategic big picture.

The three-dimensional CIO

Today, CIOs have an enormous new opportunity to shape their companies’ future.

Horizontal systems were essential to ensure that a company’s core activities were efficient, and vertical systems were important to tune up and enhance a wide range of company activities. I think of these as forming two important dimensions of the CIO role.

But the third dimension, customer-integrated systems, enables a company to construct its essential links to its accounts. Today, the Strategic CIO directly drives revenues, profits, and competitive advantage.

If the Strategic CIO is effective, the company’s performance and market positioning will accelerate. But if the CIO neglects this critical opportunity, the company will be left further and further behind. This is the most important challenge facing CIOs today.

The successful Strategic CIOs develop a new set of skills and capabilities in four critical areas:

• Co-ordinating with counterpart managers within the company to develop and populate the service differentiation categories;
• Tailoring the company’s customer-integrated systems to the account relationships;
• Working with counterpart IT managers in accounts to conceptualise and develop the joint systems; and
• Managing change, both internal and in channel partners.

We are entering the era of the Strategic CIO. Today, the Strategic CIO faces an historic opportunity to directly drive the company’s financial success, and to shape its strategic future.

In this era of the Strategic CIO, the company’s success depends on it.

This is an edited version of the original story, which can be found here.