The IT alignment problem.(Observations)

Most companies believe that IT goals must be aligned with business goals to create value. Yet fewer understand that alignment alone does not guarantee performance. In fact, it can be a trap.

Charles Schwab gained prominence in financial services because of its IT mastery, first as a discount broker, then as a leader in online trading. By the early part of this decade, however, IT had actually become a detriment. A patchwork of custom systems was snarling operations and big new IT-based products were delayed, disappointing customers. Worse, it was spending 18 per cent of revenue on IT, while three leading competitors were spending 13 per cent or less--a net disadvantage of many millions of dollars.

Schwab's predicament signals a growing realisation that the usual diagnoses--and fixes--of IT's troubles are often misguided.

Indeed, our work with dozens of executives reveals that even when IT groups are well-aligned with the units they support, performance dependent on IT sometimes goes sideways, or even declines. How?

To improve alignment, IT organisations often deploy enterprise resource planning systems or develop solutions designed to serve each business's unique needs. At the same time, they hold off standardisation and upgrading of legacy systems. They overlay complexity on old systems, postponing improvements and leaving significant scale benefits untapped. Costs rise; delays mount; and fragmentation undercuts coordination across business units.

This kind of focus on business alignment hurts the units, instead of helping them. As Richard Connell, CIO of Selective Insurance Group, told us: "Aligning a poorly performing IT organisation to the right business objectives still won't get the objectives accomplished."

Another warning emerged when we surveyed more than 500 senior executives: few companies rate their IT capabilities highly. They fell into four camps. Nearly three-quarters believed their IT capability was neither highly aligned with their business goals nor highly effective, and occupy what we call the "maintenance zone". Minimal budgets keep systems running, but IT doesn't offer much added value and often isn't expected to. These firms recorded a slower rate of growth--2 per cent below the three-year average--while spending the same as the average on IT.