Should we get out the champagne?

Should we get out the champagne?

Peter Hind presents his annual Forecast for Management. 'Each year I get a chance to take a look at what has happened in the New Zealand IT industry over the past 12 months. I reviewed this year's data with particular interest. For some time I have been conscious that many in the ICT industry are anxious for some good news. They seem to feel that if everything in business is about cycles the ICT upturn must be due. Is it, then, now time to open the champagne?'

Each year I get a chance to take a look at what has happened in the New Zealand IT industry over the past 12 months. I gather these insights when I analyse the results from IDC's annual Forecast for Management (FFM) survey. It is always an interesting process as it allows me to check whether the anecdotal feedback I am hearing from CIOs here is in line with the survey evidence. However, I reviewed this year's data with particular interest. For some time I have been conscious that many in the ICT industry are anxious for some good news. They seem to feel that if everything in business is about cycles the ICT upturn must be due. Is it, then, now time to open the champagne? At the outset though, since the perennial challenge in ICT is to align it with the business, we should position IT investment against how New Zealand business has been operating as a whole. In this regard local CIOs should feel encouraged. In January the NZSX 50 stood at 15% over the previous record high as at January 2004. There was also good solid growth in GDP performance and inflation was well under control. There have been many times in the countries history when such solid statistics would generate euphoria. They should indicate boom times. For those in IT such circumstances should equate to a myriad of new exciting IT projects underway. Yet the reality is that the CIOs I talk to have never felt more stressed.

The McKinsey Global Index perhaps gives us the first indicator to this stress. This shows that there is a wild volatility to business confidence, especially in this part of the world. McKinsey survey around 10,000 senior business executives across the globe every four months. While the majority in the Asia Pacific sample, which includes Australia and NZ, are more optimistic than pessimistic their confidence varied markedly through last year. Moreover, the same regional business executives were the most pessimistic in their outlook for the next 6 months ahead. Only 44% thought things would get substantially or moderately better in that time frame. Yet the economic data for these countries is among the most positive in the world.

I see this as a reflection of an over-riding current business focus on the here and now. People seem to gauge how confident they feel at the time they are asked the question rather than against the context of how things have progressed over time. This is highlighted by other findings from McKinsey's research. When they asked Asia Pacific business executives what was the single most pressing concern their company faced over the next 12 months respondents, like their counterparts around the world, spoke of competitive pricing pressures. Operational effectiveness was a distant third. Yet more than 56% of the same regional executives said that over half of their strategic focus was on short-term operating improvements rather than long term growth. In my mind nothing more highlights the major challenge facing local CIOs – they are dealing with a business executive that pays lip service to strategy.

The first evidence of this in FFM is in response to the question how IS people believe their executive view IT. For the first time since 2000 there was an overall increase across the survey in the number of respondents who believe their executive now see IT in terms of competitive advantage (up from 16 to nearly 20%). Moreover, there was an even larger drop in the numbers who reported their executive only saw IT in terms of operational efficiency (down from 72 to 64%). However, there was also a notable increase in the percentage that said their executive thought IT had a mixed track record (up over 3 percentage points to nearly 15%). As such, one wonders whether this level might increase further in 2006 when those who see IT in terms of strategic advantage have started to realise that IT never rewards the impatient. Business executives must invest their time, effort and money if investments in IT are going to prosper.

This challenge is highlighted further when examining changes to New Zealand IT investment patterns. IDC tracks these both as a percentage of turnover and as a percentage of operating expenses. Interestingly, despite the added enthusiasm of the executive for IT as a source of competitive advantage they do not seem willing to increase their proportional investment in it. IT as a percentage of turnover was more or less static in this part of the world over the last 12 months. Unfortunately, unlike in Australia where it has slowly inched up, in NZ it has been on its current plateau for over four years and the outlook for improvements to the IT budget is modest.

Furthermore, this challenge of dealing with higher business expectations is compounded by the fact that the CIO portfolio is widening. In effect, local CIOs are being asked to do more with less. Each year FFM asks respondents to identify the level of responsibility the senior most IT executive in the business has for a number of tasks – do they have most/all, some or little/none. Increasingly, the CIO has a lot more on their plate than just computer technology. In 2002 over 55% of New Zealand respondents indicated that they had little or no responsibility for office equipment. The advent of multi-function printing (MFP) devices means today that figure has dropped to just over 20%. Similarly, 43% said in 2002 that cellular phones were not part of their portfolio. With the advent of 3G functionality only 29% do today. There are similar reductions in those with little or no responsibility for library and records management. While this widening portfolio does offer an increasing variety in their work for many CIOs, and an opportunity to influence the business in more areas, it also means more potential problems to address.

Frank Gens, IDC's Senior Vice President of Research, has indicated where CIOs should focus their energies. He has coined the phrase 'Dynamic IT' to describe the challenge facing IT. In Frank's view the task for CIOs is to establish a dynamic IT environment. This is an IT operation that can nimbly adapt to whatever the business throws at it. He sees that CIOs have two options – they can either focus the use of IT on helping their business respond to market competition (the red option) or else they can use it to drive operational efficiencies in the business (the yellow option). If they choose the first path then Frank sees IT can be used to help accelerate business processes and to provide real-time data to help the business change its direction. On the other hand they could use IT to boost operational efficiency by automating tasks, enhancing governance or else looking for creative sourcing environments such as utility computing.

In examining the technologies that grew the most in New Zealand in 2004 there was almost an equal mix between the red and yellow options. For example growing use of smart cards and biometrics shed some light in to the fact that local CIOs are looking at more creative solutions to address operational security challenges. In addition, the increasing use of management methodologies like ITIL and quality certification highlights the on-going work with governance. On the other hand the increasing use of mobility-centric technologies, voice over IP and a quiet renaissance in the use again of Systems Development tools like .Net and J2EE supports a focus on using IT for strategic competitive advantage.

These trends are further emphasized when FFM looks at the technologies that kiwis envisage adopting over the next two years. Top of this list is the much-trumpeted RFID. However, voice over IP, workflow and exchanges all give credence to an increasing enthusiasm among local CIOs for the strategic potential of IT. Nevertheless, strong predicted growth in security, document management and ITIL reveal that the recent emphasis on using IT for operational efficiency is still alive and well in many local businesses. Interestingly, several of the much- vaunted industry systems like supply chain management and business continuity plans seem, in New Zealand at least, to have been put in mothballs for the time being. Supply chain systems only recorded a 5% growth in usage in the last twelve months while the adoption of business continuity plans actually declined 7% in the same timeframe.

What then are the business problems that New Zealand IS executives believe they need to address with these technologies? Forecast for Management identifies 24 major issues confronting the IT department and asks correspondents to identify what they see as their top three challenges over the next 12 to 18 months. The results are then ranked by the popularity of the response. In this list yellow challenges are far more dominant than red strategic initiatives. This year the dominant choice was reducing costs. It has been in the top three for so long that it would be easy to imagine that this has always been the case. However, in 1996 it ranked tenth on the local CIO priority list, which perhaps indicates that the time can come again when business is more enthused about the transformation potential of IT than its cost.

The biggest riser this year in New Zealand was the challenge of recruiting and retaining staff. This went up from 12th to 5th position in the last 12 months. However, in 2003 it was ranked bottom but one on the list by NZ IS executives. As I shall discuss later this is the first of several pieces of evidence from FFM that indicate a skills shortage among IS professionals may be evident in the country. The other great rise was in the task of keeping abreast of technology. This rose from 16th place to 7th. This may well reflect that IS people are conscious that a renewing executive interest in the potential of technology might lead to unrealistic expectations of its capabilities. Many CIOs might feel a need to be one step ahead of their business counterparts by translating the functionality of new technology in to realistic business benefit.

The final rise in the top ten challenges list was connecting with partners, suppliers and clients electronically. Don't we work in a funny industry? We always seem to talk about fledgling, embryonic technologies and overlook those that quietly and efficiently make steady progress. Data drawn from IDC's global Information Society Index, the measure of a country's ability to compete in the Information Age, is testimony to how eCommerce supports that statement. No one these days is trumpeting adverts about eBusiness or out of business. Yet the percentage of the population in NZ that uses the Internet continues to rise and IDC predicts this figure will be larger than Australia by the end of this decade. Moreover, the % of the GDP made up by eCommerce has gone up significantly and IDC research anticipates that nearly 25% of NZ GDP will revolve around eCommerce by the end of the decade. Clearly, the investment business made in the online world in the dot Com era was not wasted. It is starting to pay dividends. In effect if a kiwi business today does not have an effective eBusiness channel it could very well soon be out of business!

Moreover, the evidence from FFM is that this investment is continuing. The survey tracks the usage of a series of Internet centric applications. For most of them there was a growth in their reported use between the 2004 and 2005 surveys. In addition, it is clear that the Internet is also facilitating mobility and offering flexibility in working arrangements. It seems that the IT industry has been talking about telecommuting, video conferencing and laptop PCs forever. Yet I think we may have become complacent about the impact these are having on the NZ working landscape. These offer key executives lifestyle choices and help HR departments provide innovative opportunities to recruit and retain all staff, not just in IT. Furthermore, they increasingly facilitate distributed operations and empower workers in the field.

As such, it is perhaps not surprising to see that line costs continue to grow as a proportion of the overall kiwi IT budget. These now represent just under 10% of the average local IT budget compared to 6.7% in 1998. Another area that grew strongly last year was hardware, perhaps due to the post Y2K refresh. However, staff costs dropped significantly as a proportion of the overall budget. These included both internal and external staff costs. This supports the earlier slide highlighting the difficulty New Zealand CIOs were having in recruiting and retaining staff. Not surprisingly, there was also a growth in the turnover rate of IS staff, the first increase since 2000. With a drop in staff turnover in IS departments across the Tasman the evidence may be that kiwi IS professionals are heading to Australia for better-paid positions.

However, on both sides of the Tasman one question from FFM highlights the major challenge facing CIOs in this part of the world. Last year for the first time, and at the request of an industry executive, IDC introduced a new question into FFM. It asked respondents to identify the timeframe their executive gave before they expected an IT investment to be revenue positive. Unfortunately, that timeframe is decreasing. 25% of NZ respondents reported that their executive now expect an IT investment to be revenue positive in a year, up from 16% last year. Moreover, perhaps given the volatility of business confidence, another 25% did not even know the answer to this fundamental question. Clearly CIOs find themselves in the uncomfortable position of dealing with an executive who, as the Doors once sang, "want the world and want it now".

For CIOs and their potential suppliers there is no way of avoiding the fact that business has a narrow short-term focus. In such a climate it is not politically savvy to canvass and propose large complex projects however worthy their goals. Instead if IT is to effect change it has to be gradual. Complex projects have to be broken into components and stages that can standalone or which can evolve to something more comprehensive. Furthermore, these phases need to be tied to service level agreements and other performance milestones that can help a CIO show an ongoing success factor.

There is also a need to see where some quick revenue gains can be made. Retiring long-in-the-tooth but stable equipment might free funds from one part of the budget (e.g. maintenance monies) to subsidise new investments elsewhere. This might also allow for equipment consolidation for easier management. It also demonstrates to the business that the CIO and their main suppliers are serious about examining all ways to deliver cost-effective computing.

For suppliers there is also a need to be pragmatic. CIOs embroiled in long-winded merger and acquisition activity are unlikely to be amenable to investigating comprehensive new business systems like automated supply chain management or ERP. They are going to want to see the dust settle before they can adequately assess such opportunities. On the other hand a business case for added IT security protection, a business continuity plan or server consolidation might well be appropriate to such a CIO. With it being very challenging even to schedule a meeting with a CIO today those proposing new products and services to them need to be hard nosed about qualifying the potential business and be willing to look elsewhere if the current climate in that organisation becomes too unsettled.

In many ways participants in the New Zealand IT industry might feel as if they are playing a part in a Clint Eastwood movie. Unfortunately, it is not his current hit Million Dollar Baby. Instead it is the1960's Western 'The Good, the Bad and the Ugly'. The good is represented by the economy and the sharemarket. Businesses are growing and profitable and shareholder funds are available for worthwhile projects. While it may be hard getting hold of funds at least they are increasingly available and with money anything is possible. Moreover, executives are beginning again to see IT as a source of competitive advantage and this will make them more receptive to innovative ICT projects proposed by the CIO. Certainly, eCommerce with its dependence on IT, continues to expand along with technologies that facilitate mobility.

Unfortunately, while many CIOs strongly favour these monies being used for IT projects that offer long-term strategic business advantages the bad side is that they are stymied by an obsessive myopic executive focus, usually on the organisations quarterly results and share price. Often business executives are under pressure to return profits to the shareholders and are uncomfortable with the impact of large projects on the balance sheet.

However, behind this is the ugly fact that many CIOs are dealing with executives who have completely unrealistic expectations of what IT can deliver. Typically, these executives often look to IT to overcome problems generated by their shortsighted decisions. For example it is interesting to observe how many CEOs have come to think that a customer relationship management (CRM) system might overcome the absence of customer facing service staff who have, perhaps, been let go in one of the never ending cycles of corporate restructures. Many CIOs have come to realise that if these investments do not deliver within the aggressive timeframes set then, by association, the IT department will be seen as responsible because technology has failed. The reality for many CIOs is that they can be left holding the baby for these flawed executive ambitions.

Nevertheless, in the overall context New Zealand IS executives are definitely in a better position than they were twelve months ago. Back then the local ICT industry seemed in the doldrums. Today there are some signs that things are picking up. While I would say that we are still quite some way off the heady heights of the late 1990s at least things are moving in the right direction. Moreover, there is an election due in 2005 and that it is likely to bring with it a raft of promises that will undoubtedly include an IT component or two. So while the evidence probably does not warrant those in the industry breaking out the champagne just yet a strong argument could possibly be made for putting it on ice ready for the survey results from next year.

Join the CIO New Zealand group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

Join the newsletter!


Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.
Show Comments