IT Business Fundamentals Part 1

IT as a Business System

Why does IT exist as an organization? What is the IT organization? What is its purpose? These are fundamental questions that every IT executive should have clear answers to. Your success as an IT manager and the success of the IT department increasingly depend on your level of clarity around these basic management questions and how you build upon this foundation of knowledge.

Why does the IT organization exist? There are several paths that an organization might have taken to get to the point where a functional IT organization was created. Early adopters of mainframes kept IT resources grouped from the beginning because of the highly specialized nature of the skills and resources required and the centralized nature of the hardware. Other organizations that began adopting computing technology in the early PC days often had non-dedicated individuals within existing departments to manage and maintain the few PCs in their department.

As PC usage grew these ad-hoc technology resources became dedicated solely to the support of technology within the existing business unit. As more and more dedicated resources came into existence within the different business departments and the interconnectedness of computing systems grew, the management overhead reached a point where it was distracting from the business unit’s core competencies. At this point a dedicated IT department is created so that resources could be more efficiently and effectively managed.

The IT organization exists because of the organizational need to efficiently and effectively manage a complex set of specialized value producing resources.

What is the IT organization? From an organizational design perspective, IT is a functional grouping of resources with similar skills. Organizations whether for profit, not for profit, or government are all organized collections of resources with capabilities to produce something of value. All organizations, even governments, must produce something of value or they will eventually cease to exist. All organizations face a fundamental challenge to structure their resources and capabilities in a way that produces maximum value (effectiveness) at an acceptable level of efficiency.

In meeting this challenge organizations structure themselves in different ways to meet their particular needs. Every structural choice has its pros and cons. No matter which option an organization chooses there will be adverse effects that must be managed. Some organizations structure resources around the flow of work that produces value. This method maximizes focus on value creation and usually the customer too. Some organizations structure themselves geographically, or by project. However, by far the most common organization method is to group resources by function or skill set.

In this scenario all of the welders are in a group, all of the pipefitters are in a group; marketing and accounting have their own groups. This type of organization allows specialists to become very good at their skill sets. They have access to more experienced people to help them improve their craft over time. Their career path is clear and typically based on development of their core skill set. The downside of this type of organization is that these functional groupings quickly become very narrowly focused on skill sets and lose sight of the larger organization’s purpose. This result is commonly referred to as a silo mentality.

When first introduced to the idea of business processes and “managing to process” people often jump to the conclusion that to avoid the silo trap they should structure resources around business or ITIL processes. What they are missing is that there is an expensive trade off to this jump. All of the benefits of the functional grouping will be lost. Depth of expertise in core skill sets will weaken and ultimately value production will be reduced unless steps are taken to resolve these issues. So, functional organization provides a level of effectiveness that is difficult to achieve with distributed resources.

Also of concern is the fact that functional organization is one of the most natural ways to group resources and is one of the easiest to manage. Utilizing other organizational methods generally requires a greater level of skill and capability from the organization and from individual managers. It is often easier to structure by function and manage to process than it is to manage and structure by process.

Changing organizational structure takes careful thought and planning to be successful over time. It requires an investment in developing organizational capabilities for managing the more difficult structure and the benefits of changing structure should be greater than the cost of developing capabilities before any change is considered.

The IT organization is a business structure (system) created to provide more efficient and effective value creation through the use of technology by grouping like resources together.

What is the IT organization’s purpose? To understand the purpose of the IT organization we must first understand why the larger organization invests in technology and why the larger organization exists at all. Every organization exists to deliver value. Typically, organizations exist to deliver value to customers in the form of goods or services. Organizations invest in resources and capabilities that help to produce value. As companies began to see value from their computing technology investments they increased those investments to produce even greater value. With this increased investment came increased management complexity. The response was first to dedicate resources within the existing business units to manage these investments. As complexity increased even further resources were removed from business units and consolidated to improve their management.

The purpose of IT as an organizational system is to produce value for the larger organization from the use of technology.

Before IT managers get into the nuts and bolts of managing technology they must deal with basic management issues. One basic management issue is covered in the domain of organizational management where issues of structure vs. value production are addressed. The two primary goals of organizational management are to 1) maximize effectiveness and efficiency of structure and 2) to maximize value production. These two goals are often in conflict and therefore they must be maximized simultaneously. In optimizing each of these goals a point is reached where any additional optimization of one goal must come at the expense of the other, ergo, the classic silo-trap where structure is optimized at the expense of value creation.

It is common for organizations, not just IT, to focus too much on structure or the organizational chart and to lose sight of value production. The extreme focus on structure arises from the fundamental belief that individual leaders are the lynchpin to better production. Senior leaders believe that if they just find the right person for the leadership position then everything will fall into place. This is in contrast to the systems and quality views introduced by Dr. Deming that propose that people will rise to the highest level of performance allowed by the business system. Improvements to value production then come only from improving the system as a whole and the role of management is to optimize the entire system under their control.

Leadership is crucial in both cases. In the traditional case the goal of the leader is to drive through the limitations of the system and to just make things work. The idea is that of the leader as a heroic figure who saves the day without thinking of tomorrow. By contrast in the systems view, the goal of the leader is to create robust self correcting systems that minimize the need for management intervention. The idea here is one of the leader as builder inspiring teams to improve systems; saving the day while ensuring a better tomorrow.

All of my views regarding IT management come from the premises of IT as a business system, IT leader as builder of a robust IT business system, and the system’s purpose being to maximize value production for the larger system (organization).

Next we will discuss the fundamentals of value delivery in terms of the only two ways in which value can be delivered; through goods and services. Following that we will discuss the differences between processes and functions in terms of producing value and in terms of organizational design.