"Understanding the overall business value proposition and how IT and business can best align their strategies is fundamental to selecting the optimal organizational structure."

— Jerry Luftman, Guest Editor

As new information technologies emerge as strategic differentiators, there is renewed interest in finding the best organizational model for the firm. However, there is no one "right" structure for how an enterprise or its IT function should be organized. The organization of the firm will evolve often to reflect changes in market forces, management thinking, technology, trends in business, politics, culture, and even change for the sake of change itself. IT should choose to organize in a way deemed to deliver the most value to the firm. Nevertheless, choosing and changing an organizational structure is not easy. Often, it's a combination of structures. In an earlier Cutter publication², I discussed the following common organizational structures:

• Centralized IT. In a centralized organization, IT can be managed in a conventional, formal hierarchical structure, led by a chief information officer. The fundamental nature of the centralized organization places the CIO as the ultimate gatekeeper of the entire IT organization.

• Decentralized IT. In a decentralized organization, the defining element is that the individual business areas own, fund, and determine the priorities of their respective IT departments, an arrangement that directly addresses a major criticism of the centralized model. The CIO at the headquarters level does not necessarily have a dotted-line responsibility, but is at best more of an advisor to the decentralized IT departments.

• Matrixed IT. The matrix organization attempts to marry the attributes of both the centralized and decentralized structures. In a matrix organization, workers in cross-functional teams answer to two (and perhaps more) bosses. Each worker would have a dotted- or direct-line responsibility to both a product manager and a functional manager. The former would be responsible for managing priorities and assessing daily tasks, while the latter would be responsible for work evaluations, providing training, and ensuring adherence to standards. The human resource responsibilities, such as salary increases, promotions, bonuses, and assignments, would be handled jointly by the product and function managers.

• Federated (or Hybrid) IT. The federated organizational structure uses the US federal government as its model. In this concept, some responsibilities are best handled by a strong centralized unit because they have an impact on the organization as a whole (e.g., national defense). At the same time, there are responsibilities that the local, decentralized units can best handle, usually because of the specialized nature of the issue (e.g., highway maintenance, which in the US is handled at the state level). Essentially, the federated structure is a blend of the centralized and decentralized models. The federal government, under its CEO (the president), sets direction, policy, and priorities. Meanwhile, the state governments focus on local issues and concerns but operate within the overall structure built by the federal government. In this model, the IT activities that benefit from central control, such as standards, common systems, and architecture, remain centralized. Activities specific to a business unit, such as specialized application development, mirror the firm's organization structure and report directly to the business unit managers.

• Adhocracy (Internal or Virtual IT). An adhocracy describes an organization that is composed of temporary, project-oriented work groups. An example is the movie industry, where actors/actresses, producers, directors, cameramen, and scores of other professionals temporarily work on a film. When it is completed, they go on to their next project — or play golf. The same is true for the construction industry. The architects, masons, electricians, and carpenters work together to construct a building, and once it is complete, they go on to the next project. Naturally, the consulting industry is a good example of an adhocracy.

This organizational form can scale from a simple project with three or four staffers to a major department of hundreds of staff working toward completion of a major initiative. Staff can be rotated within projects (potentially through the use of external/outsourced consultants), and needed skills can be provided through temporary assignments/employment. SWAT teams, Centers of Excellence, and Centers of Competency that leverage subject matter experts are examples of internal adhocracies. With outsourcing (domestic or offshore), instead of relying on and managing temporary corporate employees for a project, the work is performed by people outside the firm. The rise in popularity of this organizational form has been dramatic, as many corporations have used consultants, temporary workers, and outsourcing suppliers.

Is there a Proper Fit for IT in a Business Organization?

The organization of IT should not depend on the structure of the firm, but rather on the market forces and competitive nature of the business environment. The form of the IT organization is an important factor in supporting the overall organization's ability to respond to market forces and compete effectively. The key question to ask when choosing an organizational form is: which design facilitates strategic alignment and improves the firm's position of alignment maturity¹?

Organizational structure satisfies only one aspect necessary to attain mature IT-business alignment. A good structure works to strengthen all six components of alignment maturity:

1. Communication — the effective exchange of ideas, knowledge, and information among the IT and business organizations, enabling both to have a clear understanding of the company's strategies, business and IT environments, priorities, and what must be done to achieve them

2. Value metrics — the use of metrics/measurements that clearly demonstrate the contribution of the IT organization to the business, in terms that the business understands and accepts

3. Governance — the degree to which the authority for making IT decisions is defined and shared among management, as well as the processes managers in both IT and business organizations apply in setting IT priorities and allocating IT resources (IT organization is considered here)

4. Partnership — the relationship among the business and IT organizations, including IT's involvement in defining business strategies, the degree of trust between the two organizations, and how each perceives the contribution of the other

5. Technology — the extent to which IT is able to provide a flexible infrastructure, evaluate and apply emerging technologies, enable or drive business processes, and provide customized solutions to meet customer and internal needs

6. Human resources — includes practices such as training, performance feedback, encouraging innovation, and providing career opportunities, as well as fostering the IT organization's readiness for change, capability for learning, and ability to leverage new ideas

Many businesses have been successful at reorganizing their structures over the years, and most businesses will continue to do so to remain fresh and effective in the years to come. But for a company to be successful, the IT function needs to be effective as well.

In this issue:

This issue of Cutter IT Journal presents five articles that examine the different organizational choices for IT so that you can determine which one might work best for you, and provides guidance for how to change the IT organization.

In our first article, Mohan Kancharla and Vipin Arora recognize that while it is obvious that "one structure does not fit all," the more specific question that needs to be addressed is: "Is there even one right structure for a particular IT organization?" The authors explore the factors that affect organizational structures — both in terms of business imperatives and IT functions — and offer insights on creating the "right" structure for your organization.

Next, Tracy Gibbons and Randall Webb tell us how a cross-functional design team was able to effect a sweeping redesign of a large, decentralized IT organization amidst sudden senior management changes, tight CEO-imposed constraints — and the selling of the company out from under them. While the outcome was not exactly what the members of the team had envisioned, by following a stringent set of design criteria, they nevertheless managed to turn a collection of dis-integrated functional silos into a fully scalable, customer-facing organization that enabled the CIO to slash costs while maintaining service levels. Clearly, the design team must have done something right — after the dust from the company buyout finally settled, the design team became part of the new organization's leadership team.

In our third article, Saad Bargach, CIO of Schlumberger, offers a case study in IT reorganization. This large oilfield services company underwent a period of rampant diversification in the late 1990s and early 2000s, but it is now attempting to refocus on its core business. As a result, Schlumberger has experienced the full pendulum swing, from a centralized organization model to a decentralized one — and back. In creating their new organization model, the company is less worried about the correctness of the model than about making IT business-driven rather than technology-driven. Schlumberger has evolved toward a hybrid organization in which all of the key IT managers report to the CIO, but where several key positions are directly linked to major company goals, and other positions ensure coordination with the geographical and functional structure of the company. Read on to discover how this structure "reduced [their] overall IT costs by over 40%, while greatly improving service delivery, reliability, and security of the infrastructure and applications."

The NASDAQ stock market is the subject of our fourth article, by Richard Cheng. Cheng discusses the way NASDAQ uses cross-functional (business and IT) project-based teams to provide effective and efficient productivity, quality, and accountability to produce business value. Cheng writes, "At NASDAQ, the business teams worked with specific IT units assigned to their project.... With the same units constantly implementing a project, the team's effectiveness becomes self-optimizing." The article focuses on how to structure a team to effectively implement projects that have been determined to be of high business value. To attain mature alignment, a strong partnership between IT and business is key.

In our last article, Ruby Raley and Bruce Webster provide an interesting perspective by comparing an IT organization to a competitive sports team — specifically, an American football team. They recommend that you rethink your IT organization by recruiting top-notch personnel, molding them into a team, and coaching them for success, while applying the "offense" (development methodology) and "defense" (QA approach) that will best achieve your firm's critical business goals. Raley and Webster even offer insights on dealing with the "front office" (the business side). The authors argue that, by implementing some of these suggestions, you can improve your IT organization's project success rate.

In general, our authors agree that there is no one best organizational structure for IT; a combination would seem to be most appropriate. Understanding the overall business value proposition and how IT and business can best align their strategies is fundamental to selecting the optimal organizational structure. Once the organization grasps this, IT and business should work together to select the structure. When the structure has been selected, planning an effective organizational transition is critical to any significant change initiative. Keep in mind that mature alignment is more than just having an effective organizational structure. Continued assessment of the effectiveness of the organizational structure, as well as the overall alignment maturity, is key to ensuring an IT function that will deliver on its value proposition.

References

1. Luftman, Jerry. Competing in the Information Age: Align in the Sand. Oxford University Press, 2003.

2. Luftman, Jerry. "Organizing IT: What's The 'Right' Structure?" Cutter Consortium Business-IT Strategies Executive Update, Vol. 7, No. 8, April 2004.

ABOUT THE AUTHOR

Dr. Jerry Luftman is the Executive Director of Graduate Information Systems Programs and Distinguished Professor of Information Systems at Stevens Institute of Technology in Hoboken, New Jersey, USA. His career includes strategic positions in IT, management (including positions as a CIO and consultant), management consulting, and executive education. After a 22-year career with IBM, he has been at Stevens for more than 10 years. His framework for assessing IT-business alignment maturity is considered key in helping companies around the world understand, define, and scope an appropriate strategic planning direction that leverages IT. Dr. Luftman is the author of Competing in the Information Age: Align in the Sand. He is also an active member of the Society for Information Management. He can be reached at jluftman@stevens.edu.