Firms achieve mind-boggling results with extreme biz-IT convergence

Paul Heller is CIO at Malvern, Pa.-based Vanguard Group Inc. — at least for now. He could very easily be plucked out of that job and reassigned to lead the company’s multibillion-dollar retail mutual funds business. In fact, he’s been there, done that, swapping jobs in 2006 with former Vanguard CIO Tim Buckley, who now helms the retail investor group.

Las Vegas-based Inc. is the No. 1 seller of shoes online. In 2009, it racked up sales of more than $1 billion. It stocks some 3 million pairs of shoes, offers free next-day shipping on all purchases and is known for its generous 365-day return policy and top-notch customer service. Behind the scenes, IT is embedded in everything Zappos does, from engineering and continually enhancing the customer’s online experience to coordinating the warehouse robot system.

Forget IT-business alignment. Vanguard and are two of a small number of companies where business and IT are virtually indistinguishable. Others on an admittedly unscientific short list of pioneers in IT-business convergence are The Progressive Corp., Southwest Airlines Co. and The Procter & Gamble Co.

What all of these companies have in common is that IT doesn’t just support the business; it enables and continually transforms the business, often creating new revenue and profit streams.

Moreover, CIOs and everyone else in IT at these companies know precisely how their businesses make money and lose money. In fact, it’s not at all unusual for employees to rotate through several jobs, moving in and out of IT and business roles. “Rotation gives you context,” says Buckley.

Another notable attribute: Customers of these companies are king, and customer service, both internal and external, is supreme. At Procter & Gamble, for example, dedicated client service teams from P&G’s shared services group (which encompasses IT) meet with business unit presidents to discuss the terms of their IT supplier-customer relationship.

Not coincidentally, this is the same way P&G’s sales teams do business with their giant retail customers. In fact, it was P&G’s lead relationship manager on the Wal-Mart customer team who helped coach IT on how to make these internal relationships work, notes Jim Fortner, P&G’s vice president of IT development and operations.

One Bull’s Eye

At all five companies, IT and the business are not so interested in aligning but rather are fully engaged in converging on an enterprise vision or goal that hovers above every department and project plan and is crystal clear to each and every employee.

“These IT-savvy companies are very targeted in what they’re doing,” says Jeanne Ross, director of MIT’s Center for Information Systems Research. “Even if it’s a very huge company, it doesn’t lose sight of how it’s going to deliver value or make money. There’s real clarity in how they’re going to do it.”

At Vanguard, for example, that singular vision is about creating wealth for clients, typically for retirement.

“We’re really not all that complicated of a firm. We’re not trying to do 100 different things, so there’s not that classic tension between different businesses, and there aren’t stovepipe systems. That is so not who we are,” Heller says. “It’s really all about running the firm, and it’s about doing the right thing for the client. We all move between jobs, so it’s not about your job; it’s about wearing that bigger hat — the Vanguard hat.”

At P&G, Fortner says the company’s CEO has made his vision perfectly clear: Acquire 1 billion new consumers. “What I’m focused on is what IT can do to drive more product adoption,” he says.

To help drive faster adoption of more products, IT has developed a virtualized environment that P&G uses to conduct product design work, product placement research and even consumer feedback studies.

Among other things, IT has created virtual reality models to test design ideas for the next breakthrough in products such as diapers or cosmetics. Within these cyberworlds, P&G can rapidly test product performance and consumer response to various kinds of ingredient and packaging choices.

Another big push is to use visualization to help executives run their businesses in real time. This involves integrating product, consumer and sales data that was once viewed in various reports into a single decision cockpit where the information can be viewed graphically. Both of these programs require hiring for nontraditional IT skills, Fortner says.

Another key attribute of these convergence pioneers is a distinct and vibrant company culture that is immediately recognizable. When you fly Southwest, you can tell it’s different from other airlines. Perhaps it’s the flight attendants wearing sombreros or carnival beads. Or it could be the way the company tries to make everything orderly and straightforward, from its Web site and electronic ticketing system to the way it handles boarding.

The Vision Thing

Progressive markets itself as an insurance provider that offers customers choices. Its overarching goal is to make insurance easy to shop for, buy and own. Its strategy involves using highly automated underwriting software and exposing data to customers in an easily understandable way.

The company’s exclusive IT-enabled online Name Your Price tool, for example, allows customers to choose the price they would like to pay for insurance and then see the coverage they can buy for that price. After entering basic car and driver information, shoppers are offered a customized insurance package that includes limits and deductibles closest to their named price.

Shoppers can also manipulate an online dial to change various options, and the system instantly responds with information about how such changes will affect the price. Progressive also allows customers to comparison-shop at its Web site, checking out what Allstate, State Farm or other competitors charge for the same coverage.

To enable this level of data transparency, IT developed software that allows Progressive to quickly extract pricing data filed with government regulators.

“If State Farm changes its rates in Ohio, for example, we would immediately stop giving out State Farm rates and use our software to produce a rating algorithm that reproduces State Farm’s rates,” explains CIO Ray Voelker. “We needed to create a tool that lets our business people read a state regulatory filing and glean the key data to determine a rating algorithm for our competitors.”

There is no way that an IT team could build such a system if it didn’t thoroughly understand how insurance pricing works and how price fluctuations impact Progressive, says Voelker.

“Just having technical knowledge doesn’t really help,” he says. “We really stress that we want people to be conversant in technology but also understand the insurance business. Once you understand the insurance business, you know how important the cost structure is to the business. I never forget I’m in the insurance business. Technology is just part of the rhythm.”

That’s why virtually all new hires at Progressive take a core insurance curriculum at the company’s IT University. After that, they spend at least a few years out in the business units “on assignments with lots of repetition,” says Voelker, who spent several years early in his career in the claims business.

“I understand all of the [claims] issues, and I speak the same language,” he says. In IT, “we have folks who understand the way a product works maybe even more than the product manager. Unless you’re a hard-core infrastructure guy, it’s hard to be effective in your job if you can’t speak the language and understand all of the terms and the dynamics of the business.”

Information transparency is a common denominator at companies where IT and the business are fully converged.

“It’s everything from sharing financials to sharing project plans and statuses and issues,” says Southwest Airlines CIO Jan Marshall. “I don’t think there is anything within the context of the technology organization that I wouldn’t feel comfortable sharing with my business customers.”

This is essential because virtually all of the products Southwest has developed and implemented have been enabled by technology.

The airline’s Early Bird check-in service is a prime example. For an extra $10 each way, travelers can purchase this option via the Web site, which automatically checks them in 36 hours before their flight’s scheduled departure time, securing them an earlier boarding position. (Other passengers can check in electronically a maximum of 24 hours before flight time.) Like most everything else at Southwest, this is all done online.

Marshall emphasizes that information transparency and clear communication channels are absolutely critical because Southwest’s “whole customer thread and all of our fundamental transactions are very, very tightly integrated. If you make a change with the airline schedule, it has implications for how our flight crews are scheduled to work, how our airport operations might be affected and how we market our flight schedule on our Web site. We need to understand all of the implications when we make business or process change decisions.”

To do this well requires team players, which is why Southwest hires IT professionals based on attitude first and then on technical and business skills. What constitutes the right attitude, Marshall says, is a passion for customer service and open communication. These are absolutely critical in the airline’s 850-person IT group “because it is technology that is our product,” she says.

Taking the Long View

Convergence pioneers do not develop and deploy IT as a solution to a particular problem. They design, build, integrate and operate technology for the long term. Essentially, their technology strategies boil down to first figuring out what is and what isn’t going to change about their business, and then automating what isn’t going to change, like financial processes.

The remaining business systems are built in-house as part of a highly flexible computing platform that can adapt to market demand for new products and services.

This IT-business convergence is clearly anything but the norm, according to McKinsey & Co.’s 2009 survey on IT strategy and spending. Of the 444 IT and business executives who responded, only 16 per cent said they have put in place tightly coupled IT and business strategies, even though two-thirds of executives indicated that would be the ideal.

At Zappos, IT chief Brent Cromley says that he and others in IT “basically think of ourselves as [working in] an engineering shop. We have built almost all of our own systems, except we have an SAP financial system.”

As for the main business platform, “we basically have an enterprise data warehouse where all of our data goes — Web site traffic, marketing data, merchandising analytics,” Cromley explains. This is the system that handles the new business as Zappos expands its product and service offerings.

For example, when Zappos expanded into selling luggage, it had to set up a special place at its distribution center to store the new items, since suitcases are much bigger than shoes. On the systems side, the company needed to reconfigure its main data warehouse to reflect that change.

Vanguard’s Heller says that “everything about Vanguard is long-term, and we think of business technology the same way.”

For example, ever since the company launched its first Web site in 1995, it has been keenly focused on Web and now Web 2.0 technologies, says Buckley, “because even back then it was very clear to us that this was the main way we would interact with clients. We took a big bet in 1995, and we have accelerated investment in it ever since.” Live webcasts and chat, internal and external blogs, biometric security tools and the first financial fund application for the iPhone are just a few examples of Vanguard’s IT investments.

“Everyone knows these things have to last and they have to scale,” says Heller.

The business results are in the numbers. From 2001 to 2010, Vanguard has grown from $580 billion in assets to $1.4 trillion — and technology has been a major driver of that growth, officials say.

Business results are similarly positive at other convergence pioneers. Southwest marked its 37th year of profitability in 2009. Zappos recorded gross merchandise sales of more than $1 billion in 2009 and was purchased by Inc. for $928 million. P&G’s earnings per share were up 17 per cent in 2009.

Looking ahead, Progressive’s Voelker says business and IT will increasingly converge — even at companies that struggle with alignment. The next generation of employees will make it so.

“Young people entering the workforce understand that technology is everywhere and involved in everything. They grew up on technology,” he notes. “When I talk to new hires, I always give a canned speech about how IT is involved in every aspect of the business. The speech is a lot shorter now.”


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