Perspective Eduardo Alvarez

Steven Waller
Ahmad Filsoof

Capabilities and
Coherence
Delivering Business
Value Through IT
Contact Information

Beirut Düsseldorf New York

Ramez Shehadi Dietmar Ahlemann Jeffrey Tucker
Partner Principal Partner
+961-1-336433 +49-211-3890-287 +1-212-551-6653
ramez.shehadi@booz.com dietmar.ahlemann@booz.com jeffrey.tucker@booz.com

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Principal Stefan Stroh Jorge Lionel
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stefan.stroh@booz.com jorge.lionel@booz.com
Berlin
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Principal Principal Andrew Cainey
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Chicago Munich
Eduardo Alvarez Bernhard Rieder
Partner Partner
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eduardo.alvarez@booz.com bernhard.rieder@booz.com

Steven Waller Stephan Dresel

Principal Senior Associate
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Booz & Company

EXECUTIVE As companies emerge from the severe economic downturn,
more and more of them are adopting capabilities-driven
SUMMARY
strategies to drive new growth and earn the right to win
in their markets. CIOs have an indispensable role to play
in these organizations, both in helping to define corporate
capabilities and strategies, and in ensuring that IT is
properly aligned with them.

In fulfilling this role, CIOs need to look beyond short-

term cost cutting and challenge their current assumptions
about the value IT delivers to their companies. They can
accomplish this by understanding the IT support required
to advance and differentiate the company’s essential
capabilities.

This capabilities-driven approach to IT fully considers

demand management, delivery models, and governance
issues that will enable CIOs to make better decisions
about the types of services IT provides, the quality of those
services, and who receives them. CIOs who embrace such
an approach will be well positioned to manage costs while
adding business value. In the process, they will not only align
IT more closely with the company’s overall strategies but
ensure that IT enables and enhances the essential capabilities
that drive competitive advantage.

Booz & Company 1

A CALL FOR
IT LEADERSHIP The Role of Functions in a Capabilities-Driven Strategy

A capabilities-driven strategy is built on a committed focus on what a

company does best. Typically, this entails identifying an explicit set of three
to six mutually reinforcing capabilities that lead to the creation of business
models, products, and services that competitors can’t easily beat. Each of
these capabilities is composed of a unique combination of process, tools,
As the global economy tentatively knowledge, and organization.
recovers from deep recession,
forward-thinking corporate leaders Once these capabilities are identified, they are further developed into a
are considering how to create new cohesive strategic road map. For example, Walmart’s capabilities, which
growth. They know that they cannot include aggressive vendor management, point-of-sale data analytics, superior
spur growth through cost cutting logistics, and rigorous working capital management, have enabled it to
alone, even though it has rightfully pursue a low-price/high-volume strategy that its competitors cannot match.
dominated corporate agendas in
Capabilities and the capabilities system (i.e., the interlocked, mutually
recent years. That’s why many highly
reinforcing system of three to six capabilities that perpetuate competitive
successful companies—Walmart,
advantage) reside at the business level. But each function has an essential
Procter & Gamble, and Coca-Cola
supporting role to play in the capabilities-driven company. The functional
among them—are actively pursuing
organizations within a company must understand the capabilities and the
capabilities-driven strategies. The
capabilities system. They must translate them into a set of requirements and
CIO has an indispensable role to play
opportunities for the function to deliver and/or capture; support, advance,
in developing and supporting this
and/or differentiate the capabilities; and redeploy their spending and
fresh approach to growth—a role that
investments accordingly.
demands innovative thinking and a
willingness to rise to new heights of
leadership.

IT is often a key element in the

successful creation of corporate
capabilities. Moreover, an IT team
that is properly configured to support
the company’s set of essential
capabilities can help maintain the
coherence needed to realize the
full potential of these capabilities
(see “The Role of Functions in a
Capabilities-Driven Strategy”).
That’s why CIOs who embrace their
role in realizing a capabilities-driven
strategy can advance far beyond
providing back-office support: They
can help drive their companies’
revenues and profits.

IT is often a key element in

the successful creation of
corporate capabilities.

2 Booz & Company

THE IMPACT OF
A CAPABILITIES-
DRIVEN
APPROACH
A capabilities-driven approach to IT
promises great rewards. By shap-
ing IT spend, services, and offerings
around the company’s capabilities in
a way that supports the company’s
overarching strategy, CIOs will be
better positioned to accomplish the
following:
• Redefine the traditional boundar-
ies between IT and the business by
directly linking business strategies
Booz & Company
and underlying sources of competi-
tive advantage to the services IT
provides.
• Balance cost reduction targets with
new investment requirements by
focusing investments on building or
extending the corporate capabilities
system while aggressively cutting
expenses that do not directly sup-
port them.
• Empower IT to look beyond tradi-
tional business unit and functional
silos to drive business process auto-
mation and reduce complexity.
• Reduce excessive fixed structural
cost by attacking its underlying
sources and drivers.
• More efficiently migrate IT spend-
ing from “lights on” investments to
new sources of business value.
• Develop new operating, service
delivery, and governance models to
better align IT to emergent business
priorities.
• Align IT skills, competencies,
recruiting, and training programs
to further enhance and drive essen-
tial corporate capabilities.
Savvy CIOs will recognize that a
capabilities-driven approach can
carry risks as well. Setting new
priorities always creates winners and
losers. Major changes reverberate
through IT, not only internally but
also with suppliers, distributors, and
customers. But CIOs who recognize
early that change is inevitable and
thoroughly prepare for it can mitigate
the risks and significantly enhance IT
and corporate results.
3
ADOPTING A Developing a distinct capabilities-
driven strategy for IT begins with
CAPABILITIES- understanding where and how IT
DRIVEN drives competitive business advan-
tage. To capture this insight, CIOs
APPROACH need to look beyond short-term con-
straints, challenge perceived sources
of value, and focus on four activities:
• Clarifying the company’s sources of
competitive advantage and identify-
ing the role IT can play in enabling
or deepening them.
• Analyzing key drivers to identify
the business trends that will have
the most impact on IT. Most IT
organizations understand the
impact of technology trends,
but far fewer fully consider the
impact of drivers such as competi-
tors’ actions, customer needs and
desires, and changes in the regula-
tory environment.
• Reevaluating IT’s services portfolio
and reweighting its offerings based
on the company’s capabilities and
capabilities system. Identifying the
financial benefits, skill gaps, and
key risks within IT for each corpo-
rate capability.
• Prioritizing, stress testing, and
rigorously tracking investments in
CIOs need to look beyond
short-term constraints, challenge
perceived sources of value, and
focus on four activities.
4 Booz & Company
road maps, processes, and skills
across business portfolios in order
to develop or extend each corpo-
rate capability.
Once a capabilities-driven strategy
is in place in IT, CIOs can use it to
better inform their decisions about
the types of services IT provides,
the quality of those services, and
who receives them. To make the best
decisions about IT services (whether
unilaterally or in conjunction with
the senior leadership team), CIOs will
need to fully consider the demand
management requirements, delivery
models, and governance issues
associated with each service.
Demand Management
A shift in business priorities to
growth, often in tandem with still
aggressive cost reduction targets, has
positioned IT demand management
front and center with many CIOs and
their companies. Next-generation
demand management strategies
can support CIOs as they work to
drive consistency across business
units and processes, redraw lines of
accountability between IT and the
business, and pivot away from taking
orders to challenging the business (see
“An Energy Company Manages IT
Demand”).
 An Energy Company Manages IT Demand

Effectively managing IT demand requires aligning IT services to business

priorities in a systematic way, as one large energy company recently
discovered. The company, which provides a diversified portfolio of energy
products and services in three segments of the market (merchant energy,
regulated electricity, and regulated gas), had grown at an enviable compound
annual rate of 20 percent over the previous five years, largely via acquisitions.
But this strategy placed a premium on speed, flexibility, and minimizing
disruption, and as a result, IT integrations were delayed and structural
transformation projects were not even considered. When energy prices
collapsed and the cost of credit increased in 2008, the downside of this
“light touch” to IT became painfully clear as the company found itself with a
complex, heterogeneous, high-fixed-cost portfolio of more than 500 business
applications.

To remedy this situation and effectively seize the opportunities associated with
rationalizing its application portfolio and standardizing business processes,
the company began by aligning IT to its new business goals. It ranked its
application portfolio by developing a framework to evaluate applications
based on their short- and long-term business and technical fit.

Applications that ranked low in business or technical fit became prime

candidates for elimination or reduced service levels. Conversely, applications
that ranked high qualified for standardization and additional investment.
The ranking process revealed that 35 percent of the company’s application
portfolio was not well aligned to future business needs or technical
architecture; those applications became prime candidates for retirement.
Another 30 percent of applications were candidates for reduced support
levels.

After the applications were ranked, the total support cost for each was
calculated. The company discovered that 15 applications drove more than
80 percent of support costs. However, only eight of those applications were
aligned to the company’s future business and technical needs. The poorly
aligned applications became prime candidates for retirement.

The company also analyzed the workload data for applications that were
candidates for reduced support levels to gain insights into the types of
application support and corresponding support costs they required. Using
workload data such as bug fixes, minor enhancements, major enhancements,
and the like, the company created tiered support categories for each
application. Each support category was associated with a set of application
services to better align support costs and value.

Through these efforts, the company was able to cut its structural IT overhead
and maintenance costs by 20 to 40 percent and save more than US$25
million per year. At the same time, the company identified the specific
applications that deserved greater investment and used them to standardize
business processes, drive complexity reduction, and improve its overall
competitive position.

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CIOs can hone their demand
management expertise and processes
in five ways:
• Using business and IT architecture
road maps to shift from simply
responding to and managing proj-
ect demand to proactively influ-
encing and shaping both project
and operational demands before
and as they emerge. To success-
fully support corporate capabilities
initiatives while managing costs in
a flat budget environment, next-
generation demand managers will
need to carefully balance the short-
and long-term trade-offs between
“lights on” investments and new
project demand.
• Explicitly linking IT priorities to
the capabilities that create a right
to win for the business and then
redrawing the IT road map in
accordance with that prioritization
to direct investment to the support
of differentiated capabilities and
the reduction of complexity. This
will require a reevaluation—and, in
most cases, a redesign—of the pro-
cess by which IT-centric activities
are prioritized across the enter-
prise. By keeping the company’s
capabilities-driven strategy firmly
in mind, a CIO will be in a better
6 Booz & Company
position to reduce the high costs
associated with poor prioritization:
In most companies, non-strategic
IT costs consume as much as 85
percent of the IT budget—spending
that can be redeployed to far better
effect.
• Ensuring that each project has
a defined, accountable business
sponsor and that the resources it
requires are available.
• Investing in talent management
programs to upgrade and empower
business and business process
analysts, project managers, change
management, communications,
and enterprise architecture skills.
These resources, which sit at the
intersection of IT and business,
will play an increasingly important
role in next-generation demand
management.
• Rigorously screening and tracking
pre- and post-project delivery met-
rics to ensure that both capital and
operational IT investments yield
the highest return.
Delivery Models
IT’s delivery models should be drivers
of efficiency and joint accountability.
They will become increasingly
important as the externalization
of applications development,
infrastructure operations, and back-
office processes gradually erodes the
“factory” side of the IT function, and
the cloud enables the externalization
of as much as 80 percent of
application lifetime spend.
To optimize IT delivery models in
support of corporate capabilities
and coherence, CIOs should do the
following:
• Carefully evaluate the requirements
of each business unit or process
to understand the level of speed,
flexibility, and/or standardiza-
tion needed to support business
strategy. CIOs should ask questions
such as these: Where in our busi-
ness model is differentiation more
valuable than standardization?
Which processes and technologies
confer competitive advantage?
Which of our business units have
unique technology needs?
• Carefully evaluate and prioritize
the types of IT services provided—
including lower-cost new technolo-
gies such as open source, Linux,
virtualization, and software as a
service, among others—based on
their linkage to and impact on
 business capabilities. Accelerate
adoption of the services that offer
the greatest utility.
• Evaluate how services are bundled
and delivered by comparing the
costs, benefits, and trade-offs of
retained and outsourced services.
Then optimize them by consolidat-
ing overlapping suppliers, introduc-
ing competition into the supply
chain, renegotiating existing con-
tracts and service-level agreements,
and improving and standard-
izing end-to-end processes across
retained and outsourced activities.
• Ensure that delivery models and
pricing provide the transparency
and flexibility required to quickly
adapt to changes in demand.
Existing chargeback policies and
CIOs will need to link governance
to accountability systems and
structures. This will ensure that
governance programs have teeth.
Booz & Company
procedures should be revisited so
the trade-offs can be evaluated and
managed by the business.
Governance
To strike the right balance between
cost management and corporate
capability investments, CIOs will
have to close any gaps between
business and IT capital investment
planning horizons, more effectively
plot business objectives against the IT
project portfolio, and directly link IT
architecture direction with corporate
capabilities.
At the same time, to support changes
in the IT delivery model, CIOs will
need to revisit risk management
strategies and information flows
between retained and external service
providers. In the process, existing
vendor management strategies will
need to be updated to reflect changes
in service providers, the types of
outsourced services, and the service
provider geographic footprint.
Finally, to ensure that governance
programs and processes drive desired
results, CIOs will need to link
governance to accountability systems
and structures. This will ensure that
governance programs have teeth.
CIOs should also advocate the
establishment of a joint business/
IT governance and accountability
process. This process should assign
correct owners to goals and tasks,
track overall progress of projects,
maintain momentum, and ensure
that individuals (both internal and
external) are held accountable for
deliverables.
7
IT VALUE IS To successfully execute against cost
reduction targets and capabilities
a capabilities-driven strategy process,
at both the corporate and IT levels,
BUSINESS support priorities, CIOs will need to the CIO will be well positioned to
GROWTH make difficult, carefully calculated
trade-offs. Achieving these objectives
manage costs while adding business
value and meshing IT more closely
will require a fresh approach that than ever before with the company’s
tightly couples IT to the company’s overall corporate strategy.
overarching strategy. By engaging in

8 Booz & Company

Resources

Paul Leinwand and Cesare Mainardi, “The Coherence Premium,”

Harvard Business Review, June 2010.

“A Conversation with Paul Leinwand and Cesare Mainardi, Authors of

‘The Coherence Premium’
www.booz.com/global/home/what_we_think/reports_and_white_papers/
ic-display/48203382

About the Authors

Eduardo Alvarez is a
Booz & Company partner
based in Chicago. He
leads the North American
energy technology
practice and is an expert
in business process
and technology-enabled
transformation.

Steven Waller is a
Booz & Company principal
based in Chicago. He
specializes in technology
strategy and developing
new operating models
for energy and financial
services companies.

Ahmad Filsoof is a
Booz & Company
associate based in
Chicago. His focus is
cross-industry technology
strategy.

Booz & Company 9

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