IT strategies have traditionally been based on senior management's vision for the enterprise. However, the frequent absence of a long-term business plan calls for a fresh approach to creating an IT strategy. Strategy is one of the most abused and misunderstood terms used by those working in business, as well as by investors and observers. A recent CEO survey asked 1,160 CEOs what factors best determine an enterprise's value from an internal and external viewpoint. The top three answers were the same from both perspectives:

• Earnings
• Cash flow
• Corporate strategy

The first two answers are financial and retrospective, but the third is about the future and the enterprise's ability to survive. Before launching into a deeper look at IT strategy, a working definition of "strategy" must be established. A strategy takes a vision or objective (they are the same) and bounds the options for attaining it. Without a strategy, all roads lead to the future. With a strategy, a selected set of roads is designated for travel. The value of a clear strategy is that all middle and first-line management, as well as employees, can see where they are expected to go and can focus on the options that are available. Without a clear strategy, enterprises are perceived as being unfocused; employees see inconsistency in the actions taken by management; and a new plan is tried every year.

If a strategy is so important, CEOs should be expected to talk about it with employees and shareholders – for example, in the letter to shareholders section of the annual report. However, a random sample of 100 Fortune 1000 companies showed that this is not always the case.

• The top strategic idea for 31 percent of respondents was to improve products. That strategy doesn't set clear guidelines for options – employees could go in any direction to accomplish that goal.
• The next response, at 30 percent, was no discussion of strategy at all.
• Corporate growth through acquisition came in at 24 percent. When facing growth through a merger or acquisition, the enterprise is continually in a "react mode," attempting to absorb and integrate what is being bought. That often overwhelms efforts to create new, strategic business models.
• Customer focus came in at 22 percent. Shareholders must wonder why this issue is strategic, because customers are the sole reason the enterprise is in business.
• Cost reduction came in at 15 percent. From a shareholder perspective, that must mean that the enterprise has been wasting money all along, which is not very strategic.

Using any definition of "strategy," these are not helpful as strategy statements.

An IT Strategy – Actually, There Are Two

With so few usable enterprise strategies, what is the IT organization to do? To start, one must look at what the IT group delivers and recognize that it engages in two distinct activities that, although linked, have very different objectives.

A business strategy must be the starting point for developing an IT strategy, regardless of whether one already exists or must be created. The IT group is involved in two "businesses" – applications (delivering and maintaining) and operations. That is what the business sees, but all too often the picture is blurred. By creating a distinct strategy for each component of the IT group, the business can clearly discern each component's value propositions. Two support tools are key for developing a strategy – architectural and financial. Architecture sets the boundaries for IT decision-making options, while financial tools are used to choose the appropriate option – that is, how to go about planning and executing the strategy. Both tools are exposed to the business and form an essential part of the language for discourse.

The last component of the strategy model is people. The people component – which is internal to the IS group – is concerned with delivering sufficient resources to perform the work.

A key aspect of this IT strategy model is that it frames the discussion of IT with the business in strictly business terms, making it clear how the business side's decisions can affect its own operations and underlying costs. Once the business understands the value proposition and how it can control it, its support of IS strategies will become more solid.

A discussion follows of the six building blocks that comprise the IT strategy model.

Business Strategy

We examine business strategy by asking two questions:

• What are the essential components of all IT strategies?
• Where should one look in real or derived business strategies for specific answers to how to structure these strategic components for your enterprise?

The five necessary elements for all IT strategies are:

• IT infrastructure: This represents all of the IT components (hardware, software operating system/components and networks) necessary to deliver an operating environment for all enterprise processes.
• Service: This is how the IS group delivers on the operating environment, what the business units (BUs) are buying on a daily operational basis. The most common definition for delivery is a service-level agreement.
• Application portfolio change: This element concerns how legacy applications will change.
• Business process integration: With the emergence of virtual business models and the use of external sourcing, the need to tie together a diverse set of applications has become more important.
• Sourcing: This element addresses securing the resources necessary to handle strategy execution and management.

To determine the nature of how business strategy or operation affects the IT strategy, examine the seven business strategy factors:

• Geographic: What is the enterprise saying about how it will be physically structured? This will affect how the infrastructure will be deployed and how it will best provide service. Application change and integration take on different levels of complexity as the geographic parameters expand.
• Governance: This is at the core of defining the enterprise culture. How decisions are made will affect how all five IT components are implemented.
• Future: How clear is senior management in talking about the future? A longer-term vision makes it easier to evolve a set of options.
• Existing IT: What is the business saying about its core business processes, and how much change is being contemplated? A balance must be struck between breaking new ground and sustaining legacy applications.
• Virtual: It's clear that business models will become more "virtual" in the long term. Yet, there will be problems along the way. The extent to which the business model becomes virtualized will determine how IT architecture evolves and which applications remain internal and which are outsourced.
• Customer: This is about the customer interface and how integrated the applications will become with the customer. Just saying "we will pay attention to our customers" is not sufficient.
• Funding: This is where the enterprise truly shows its commitment to change.

The Two IT Strategies: Application Change and Operations

• The elements for creating the two IT strategies will be determined by an analysis of the intersections of the five IT components and the seven business strategy sources. The IT components of infrastructure, service and sourcing serve the operations strategy. Applications, integration and sourcing serve the application-change strategy.
• The application-change strategy focuses on how the enterprise sees itself in the future. If the enterprise has developed a picture of how it wants to evolve, building an IT strategy to match that vision is rather straightforward, and the value of that strategy will match what the business sees as IT's value proposition. With little or no IT strategy, the resulting portfolio of application changes will still satisfy the business's needs, but will be very inefficient from an IT perspective. The BUs will be paying a premium IT expense compared to competitors that have developed sound IT strategies. The dialogue is to make sure the BU sees the cost of that inefficiency as a byproduct of its decision making.

The Normandy Group recommends that an operations strategy be based on a service model. At the heart of an operational-level service model is the simple premise that approximately six core service processes define everything that the operations group does. The BU manager sees those services and understands their necessity to his or her own operation. The dialogue between the IS organization and the BU is all about the services that the BU needs – that are priced at service levels that they can afford. The operational-level service model opens up competition with outside organizations that also provide such services.

IT Architecture

Architecture is too technical for many business executives to understand. Most executives equate the level of IT needed to operate a complex enterprise with the ease of PC use. Such misunderstanding historically has resulted in dysfunction for many enterprises. Discussing architecture with senior management can be enhanced by using two readily understood concepts: complexity and cost.

Complexity gains added relevance through the concept of reliability. To determine the reliability of IT infrastructure, one must calculate a final probability by measuring and multiplying all the underlying probabilities that go into ensuring smooth IT delivery. With so many variables, obtaining a probability of more than 99 percent becomes very costly.

The cost to operate an infrastructure is directly proportional to the level and complexity of architectural decisions being made. To determine the cost for your IS organization, you can develop several scenarios that posit an environment, which then is simply "costed out." An alternative example was developed using the Gartner Total Cost of Ownership Manager for Distributed Computing tool. Using the tool, one can define alternative operating environments and derive the costs for each. The cost differentials for a sample midsize and large enterprise conservatively amounted to 20 percent and 12 percent, respectively. Gartner budget surveys place operating expenses at 60 percent to 70 percent of IT annual budgets – that is a material amount that is bound to get a CFO's attention.

Financial Tools

Creating and managing a strategy requires a consistent methodology and a set of tools. Those tools range from simple, decision-making tools like payback period to advanced ones like real option valuation. There is no single best tool; each one serves a subset of problems. It is essential to make sure that the tool matches the decision or uncertainty needing resolution.

Using the Building Blocks to Create Strategies

The following is a brief introduction to nine steps for creating your strategies:

• Understand the business strategy: Understand where the business wants to go.
• Establish a governance process and financial toolset: Establish how decisions will be made.
• Define what enterprise architecture must look like: Develop a picture of the IT infrastructure's future.
• Understand the boundaries that the current infrastructure architecture applies: Establish a base for starting and its meaning.
• Define the application change strategy: Apply what was learned in previous steps.
• Define the IT operations strategy: Gartner recommends the internal service company (ISCo) model.
• Define the people strategy: This involves all who execute the strategy – internal and external.
• Develop an IT strategy document: This captures the strategy and gives a platform for formal discussion.
• Create a management framework to keep your strategies alive: This provides a high-level view of how all of those concepts are put to work.

Moving down Figure 2 from the top left-hand side, the two strategies of operations and change are developed using the tools and concepts discussed previously. A management tool such as a balanced scorecard ensures that the strategy continues to be effective. The budget reduces the planning horizon to 12 months, using the financial tools to make the appropriate decisions. The services established for both of the IT strategies form the basis for operation.

Working from the bottom up on the right-hand side, the chargeback that is incurred during operations feeds the budget and the process management too, such as the balanced scorecard. The impact of these on managing a strategy is then used to make the appropriate adjustments in strategy, before the cycle starts all over again.

People

No strategy discussion is complete without a consideration of the people involved. Successful organizations inevitably have the right people in the right jobs at the right time. For the IS group, this historically has meant managing a skills inventory. Although skills are usually employed to define what it takes to execute tasks, an additional dimension is necessary – talent. That concept is spelled out by Marcus Buckingham and Curt Coffman in their book, "First, Break All the Rules." According to Buckingham and Coffman, each person has basic abilities, or talents, that drive how one instinctively acts or reacts, and these cannot be changed. Reaching the highest capacity levels requires more than skills, it requires these natural, unlearned capabilities to act instinctively and see things that are not obvious to others.

Bottom Line

Most enterprises claim to have an effective business strategy in place, but many don't really possess one.

That is probably the single biggest problem facing IS organizations in their quest to manage enterprise IT expectations.

Nevertheless, regardless of whether an effective business strategy exists – one that states a clear vision and objectives, and bounds the options for attaining them – the IS organization must identify one to guide its application change and operational support efforts.

By following the model provided IS organizations can develop an IT strategy that serves their enterprises' actual or implied business strategies – that simultaneously provides effective, efficient IT operations, while developing new applications to power the business processes needed to ensure enterprise competitiveness and growth.

Strategies provide everyone in the enterprise with a road map for future direction and the boundaries for creating options.

An organized model for developing an IT strategy serves the dual purpose of focusing the business and IS organizations on what is appropriate for the enterprise and providing a common language to discuss what must be done.