Fintechs can help incumbents, not just disrupt them

Posted in Aktuellt, Board work / Styrelsearbete, Digitalisering / Internet on July 26th, 2016 by admin

While true for other financial services, it’s most striking in corporate and investment banking.

Fintechs, the name given to start-ups and more-established companies using technology to make financial services more effective and efficient, have lit up the global banking landscape over the past three to four years. But whereas much market and media commentary has emphasized the threat to established banking models, the opportunities for incumbent organizations to develop new partnerships aimed at better cost control, capital allocation, and customer acquisition are growing.

We estimate that a substantial majority—almost three-fourths—of fintechs focus on retail banking, lending, wealth management, and payment systems for small and medium-size enterprises (SMEs). In many of these areas, start-ups have sought to target the end customer directly, bypassing traditional banks and deepening an impression that they are disrupting a sector ripe for innovation.

However, our most recent analysis suggests that the structure of the fintech industry is changing and that a new spirit of cooperation between fintechs and incumbents is developing. We examined more than 3,000 companies in the McKinsey Panorama FinTech database and found that the share of fintechs with B2B DD 2offerings has increased, from 34 percent of those launched in 2011 to 47 percent of last year’s start-ups. (These companies may maintain B2C products as well.) B2B fintechs partner with, and provide services to, established banks that continue to own the relationship with the end customer.

Corporate and investment banking is different. The trend toward B2B is most pronounced in corporate and investment banking (CIB), which accounts for 15 percent of all fintech activity across markets. According to our data, as many as two-thirds of CIB fintechs are providing B2B products and services. Only 21 percent are seeking to disintermediate the client relationship, for example, by offering treasury services to corporate-banking clients. And less than 12 percent are truly trying to disrupt existing business models, with sophisticated systems based on blockchain (encrypted) transactions technology, for instance.

Assets and relationships matter. It’s not surprising that in CIB the nature of the interactions between banks and fintechs should be more cooperative than competitive. This segment of the banking industry, after all, is heavily regulated.1 Clients typically are sophisticated and demanding, while the businesses are either relationship and trust based (as is the case in M&A, debt, or equity investment banking), capital intensive (for example, in fixed-income trading),DD 1 or require highly specialized knowledge (demanded in areas such as structured finance or complex derivatives). Lacking these high-level skills and assets, it’s little wonder that most fintechs focus on the retail and SME segments, while those that choose corporate and investment banking enter into partnerships that provide specific solutions with long-standing giants in the sector that own the technology infrastructure and client relationships.

These CIB enablers, as we call them, dedicated to improving one or more elements of the banking value chain, have also been capturing most of the funding. In fact, they accounted for 69 percent of all capital raised by CIB-focused fintechs over the past decade.

Staying ahead. None of this means that CIB players can let their guard down. New areas of fintech innovation are emerging, such as multidealer platforms that target sell-side businesses with lower fees. Fintechs also are making incursions into custody and settlement services and transaction banking. Acting as aggregators, these types of start-ups focus on providing simplicity and transparency to end customers, similar to the way price-comparison sites work in online retail. Incumbent banks could partner with these players, but the nature of the offerings of such start-ups would likely lead to lower margins and revenues.

In general, wholesale banks that are willing to adapt can capture a range of new benefits. Fintech innovations can help them in many aspects of their operations, from improved costs and better capital allocation to greater revenue generation. And while the threat to their business models remains real, the core strategic challenge is to choose the right fintech partners. There is a bewildering number of players, and cooperating can be complex (and costly) as CIB players test new concepts and match their in-house technical capabilities with the solutions offered by external providers. Successful incumbents will need to consider many options, including acquisitions, simple partnerships, and more-formal joint ventures.

Source: McKinsey.com
By Miklos Dietz, Jared Moon, and Miklos Radnai
About the authors: Miklos Dietz is a senior partner in McKinsey’s Vancouver office; Jared Moon is a partner in the London office, where Miklos Radnai is a consultant.
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Adapting your board to the digital age

Posted in Aktuellt, Board work / Styrelsearbete, Digitalisering / Internet on July 14th, 2016 by admin

Many directors are feeling outmatched by the ferocity of changing technology, emerging risks, and new competitors. Here are four ways to get boards in the game.

“Software is eating the world,” veteran digital entrepreneur Marc Andreessen quipped a few years back. Today’s boards are getting the message. They have seen how leading digital players are threatening incumbents, and among the directors we work with, roughly one in three say that their business model will be disrupted in the next five years.

In a 2015 McKinsey survey, though, only 17 percent of directors said their boards were sponsoring digital initiatives, and in earlier McKinsey research, just 16 percent said they fully understood how the industry dynamics of their companies were changing.1 In our experience, common responses from boards to the shifting environment include hiring a digital director or chief digital officer, making pilgrimages to Silicon Valley, and launching subcommittees on digital.

Valuable as such moves can be, they often are insufficient to bridge the literacy gap facing boards—which has real consequences. There’s a new class of problems, where seasoned directors’ experiences managing and monetizing traditional assets just doesn’t translate. It is a daunting task to keep up with the growth of new competitors (who are as likely to come from adjacent sectors as they are from one’s own industry), rapid-fire funding cycles in Silicon Valley and other technology hotbeds, the fluidity of technology, the digital experiences customers demand, and the rise of nontraditional risks. Many boards are left feeling outmatched and overwhelmed.

To serve as effective thought partners, boards must move beyond an arms-length relationship with digital issues (exhibit). Board members need better knowledge about the technology environment, its potential impact on different parts of the company and its value chain, and thus about how digital can undermine existing strategies and stimulate the need for new ones. They also need faster, more effective ways to engage the organization and operate as a governing body and, critically, new means of attracting digital talent. Indeed, some CEOs and board members we know argue that the far-reaching nature of today’s digital disruptions—which can necessitate long-term business-model changes with large, short-term costs—means boards must view themselves as the ultimate catalysts for digital transformation efforts. Otherwise, CEOs may be tempted to pass on to their successors the tackling of digital challenges.
Bild1

At the very least, top-management teams need their boards to serve as strong digital sparring partners when they consider difficult questions such as investments in experimental initiatives that could reshape markets, or even whether the company is in the right business for the digital age. Here are four guiding principles for boosting the odds that boards will provide the digital engagement companies so badly need.

Close the insights gap
Few boards have enough combined digital expertise to have meaningful digital conversations with senior management. Only 116 directors on the boards of the Global 300 are “digital directors.”2 The solution isn’t simply to recruit one or two directors from an influential technology company. For one thing, there aren’t enough of them to go around. More to the point, digital is so far-reaching—think e-commerce, mobile, security, the Internet of Things (IoT), and big data—that the knowledge and experience needed goes beyond one or two tech-savvy people.

To address these challenges, the nominating committee of one board created a matrix of the customer, market, and digital skills it felt it required to guide its key businesses over the next five to ten years. Doing so prompted the committee to look beyond well-fished pools of talent like Internet pure plays and known digital leaders and instead to consider adjacent sectors and businesses that had undergone significant digital transformation. The identification of strong new board members was one result. What’s more, the process of reflecting quite specifically on the digital skills that were most relevant to individual business lines helped the board engage at a deeper level, raising its collective understanding of technology and generating more productive conversations with management.

Special subcommittees and advisory councils can also narrow the insights gap. Today, only about 5 percent of corporate boards in North America have technology committees.3 While that number is likely to grow considerably, tomorrow’s committees may well look different from today’s. For example, some boards have begun convening several subject-specific advisory councils on technology topics. At one consumer-products company, the board created what it called an advisory “ecosystem”—with councils focused on technology, finance, and customer categories—that has provided powerful, contextual learning for members. After brainstorming how IoT-connected systems could reshape the consumer experience, for example, the technology council landed on a radical notion: What would happen if the company organized the business around spaces such as the home, the car, and the office rather than product lines? While the board had no set plans to impose the structure on management, simply exploring the possibilities with board members opened up fresh avenues of discussion with the executive team on new business partners, as well as new apps and operating systems.

Understand how digital can upend business models
Many boards are ill equipped to fully understand the sources of upheaval pressuring their business models. Consider, for example, the design of satisfying, human-centered experiences: it’s fundamental to digital competition. Yet few board members spend enough time exploring how their companies are reshaping and monitoring those experiences, or reviewing management plans to improve them.

One way to find out is by kicking the tires. At one global consumer company, for instance, some board members put beta versions of new digital products and apps through the paces to gauge whether their features are compelling and the interface is smooth. Those board members gain hands-on insights and management gets well-informed feedback.

Board members also should push executives to explore and describe the organization’s stock of digital assets—data that are accumulating across businesses, the level of data-analytics prowess, and how managers are using both to glean insights. Most companies underappreciate the potential of pattern analysis, machine learning, and sophisticated analytics that can churn through terabytes of text, sound, images, and other data to produce well-targeted insights on everything from disease diagnoses to how prolonged drought conditions might affect an investment portfolio. Companies that best capture, process, and apply those insights stand to gain an edge.digi
Digitization, meanwhile, is changing business models by removing cost and waste and by stepping up the organization’s pace. Cheap, scalable automation and new, lightweight IT architectures provide digital attackers the means to strip overhead expenses and operate at a fraction of incumbents’ costs. Boards must challenge executives to respond since traditional players’ high costs and low levels of agility encourage players from adjacent sectors to set up online marketplaces, disrupt established distributor networks, and sell directly to their customers.

The board of one electronic-parts manufacturer, for example, realized it was at risk of losing a significant share of the company’s customer base to a fast-growing, online industrial distributor unless it moved quickly to beef up its own direct e-commerce sales capabilities. The competitor was offering similar parts at lower prices, as well as offering more customer-friendly features such as instant online quotes and automated purchasing and inventory-management systems. That prompted the board to push the CEO, chief information officer, and others for metrics and reports that went beyond traditional peer comparisons. By looking closely at the cycle times and operating margins of digital leaders, boards can determine whether executives are aiming high enough and, if not, they can push back—for example, by not accepting run-of-the-mill cost cuts of 10 percent when their companies could capture new value of 50 percent or even more by meeting attackers head-on.

Engage more frequently and deeply on strategy and risk
Today’s strategic discussions with executives require a different rhythm, one that matches the quickening pace of disruption. A major cyberattack can erase a third of a company’s share value in a day, and a digital foe can pull the rug out from a thriving product category in six months. In this environment, meeting once or twice a year to review strategy no longer works. Regular check-ins are necessary to help senior company leaders negotiate the tension between short-term pressures from the financial markets and the longer-term imperative to launch sometimes costly digital initiatives.

One company fashioned what the board called a “tight–loose” structure, blending its normal sequence of formal meetings and management reporting with new, informal methods. Some directors now work in a tag team with a particular function and business leader, with whom they have a natural affinity in business background and interests. These relationships have helped directors to better understand events at ground level and to see how the culture and operating style is evolving with the company’s digital strategy. Over time, such understanding has also generated greater board-level visibility into areas where digitization could yield new strategic value, while putting the board on more solid footing in communicating new direction and initiatives to shareholders and analysts.

Boardroom dialogue shifts considerably when corporate boards start asking management questions such as, “What are the handful of signals that tell you that an innovation is catching on with customers? And how will you ramp up customer adoption and decrease the cost of customer acquisition when that happens?” By encouraging such discussions, boards clarify their expectations about what kind of cultural change is required and reduce the hand-wringing that often stalls digital transformation in established businesses. Such dialogue also can instill a sense of urgency as managers seek to answer tough questions through rapid idea iteration and input gathering from customers, which board members with diverse experiences can help interpret. At a consumer-products company, one director engages with sales and marketing executives monthly to check their progress against detailed key performance indicators (KPIs) that measure how fast a key customer’s segments are shifting to the company’s digital channels.

Risk discussions need rethinking, too. Disturbingly, in an era of continual cyberthreats, only about one in five directors in our experience feels confident that the necessary controls, metrics, and reporting are in place to address hacker incursions. One board subcommittee conducted an intensive daylong session with the company’s IT leadership to define an acceptable risk appetite for the organization. Using survey data, it discovered that anything beyond two minutes of customer downtime each month would significantly erode customer confidence. The board charged IT with developing better resilience and response strategies to stay within the threshold.

Robust tech tools, meanwhile, can help some directors get a better read on how to confront mounting marketplace risks arising from digital players. At one global bank, the board uses a digital dashboard that provides ready access to ten key operational KPIs, showing, for example, the percentage of the bank’s daily service transactions that are performed without human interaction. The dashboard provides important markers (beyond standard financial metrics) for directors to measure progress toward the digitized delivery of banking services often provided by emerging competitors.

Fine-tune the onboarding and fit of digital directors
In their push to enrich their ranks with tech talent, boards inevitably find that many digital directors are younger, have grown up in quite different organizational cultures, and may not have had much or even any board experience prior to their appointment. To ensure a good fit, searches must go beyond background and skills to encompass candidates’ temperament and ability to commit time. The latter is critical when board members are increasingly devoting two to three days a month of work, plus extra hours for conference calls, retreats, and other check-ins.

We have seen instances where companies choose as a board member a successful CEO from a digitally native company who thrives on chaos and plays the role of provocateur. However, in a board meeting with ten other senior leaders, a strong suit in edginess rarely pays off. New digital directors have to be able to influence change within the culture of the board and play well with others. There are alternatives, though. If a promising candidate can’t commit to a directorship or doesn’t meet all the board’s requirements, an advisory role can still provide the board with valuable access to specialized expertise.

Induction and onboarding processes need to bridge the digital–traditional gap, as well. One board was thrilled to lock in the appointment of a rising tech star who held senior-leadership positions at a number of prominent digital companies. The board created a special onboarding program for her that was slightly longer than the typical onboarding process and delved into some topics in greater depth, such as the legal and fiduciary requirements that come with serving on a public board. Now that the induction period is over, she and the board chairman still meet monthly so she can share her perspectives and knowledge as a voice of the customer, and he can offer his institutional insights. The welcoming, collaborative approach has made it possible for the new director to be an effective board participant from the start.

Organizations also need to think ahead about how the digital competencies of new and existing directors will fit emerging strategies. One company determined that amassing substantial big data assets would be critical to its strategy and acquired a Silicon Valley big data business. The company’s directors now attend sessions with the acquired company’s management team, allowing them to get a grounding in big data and analytics. These insights have proven valuable in board discussions on digital investments and acquisition targets.

Board members need to increase their digital quotient if they hope to govern in a way that gets executives thinking beyond today’s boundaries. Following the approaches we have outlined will no doubt put some new burdens on already stretched directors. However, the speed of digital progress confronting companies shows no sign of slowing, and the best boards will learn to engage executives more frequently, knowledgeably, and persuasively on the issues that matter most.

Source: McKinsey.com, July 2016
By Hugo Sarrazin and Paul Willmott
About the authors: Hugo Sarrazin is a senior partner in McKinsey’s Silicon Valley office, and Paul Willmott is a senior partner in the London office.
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How leaders can let go without losing control

Posted in Aktuellt, Executive Coaching, Leadership / Ledarskap on July 13th, 2016 by admin

Massive flocks of starlings, known as murmurations, exhibit a rare combination of speed and scale. The birds coordinate themselves with remarkable agility to find food and avoid attacks. Schools of fish do the same.

What’s noteworthy in these murmurations is the lack of a leader. Instead, each bird follows three simple rules: (1) move to the center, (2) follow your neighbor, and (3) don’t collide. The rules enable each bird to act independently while ensuring the group acts cohesively.

Every organization today wants to achieve both alignment and autonomy. Can what works for birds and fish also work for people? The answer comes from a surprising place: the battlefield.

Over centuries, the military has developed an approach to managing “the fog of war.” Generals need to ensure alignment to the strategy, while soldiers need autonomy to respond to changing conditions. The military’s solution has two parts:

Commander’s Intent declares the purpose of an operation and the conditions for success.
Doctrine determines how soldiers make decisions towards the fulfillment of that purpose.
The formal definition of doctrine is important: “Fundamental principles by which the military forces guide their actions in support of objectives. It is authoritative but requires judgment in application.”

For a flock of birds, the intent is to reach their breeding grounds. This means finding food, staying on course, and staying alive. The three simple rules areladda ned the doctrine for the flock. They don’t tell the bird which way to go, but rather guide them on what action to take (move to the center, follow one’s neighbor). In terms of doctrine they are the “principles [that] guide actions in support of objectives.”

We can find doctrine in other places besides the battlefield, namely constitutional democracies. For example, in the U.S., the Declaration of Independence describes an intent of “life, liberty, and the pursuit of happiness.” There are also numerous laws, rules, and regulations that specify what citizens can and can’t do. In between, the Constitution serves as doctrine. It is “authoritative but requires judgment in application.” In fact, an entire branch of government is tasked with its interpretation and application.

Turning to business, we find doctrine to be noticeably missing. Every organization has its mission, goals, and strategies to tell people where to go. They also have rules, policies, and procedures that tell people what to do. But few organizations have comprehensive, communicated, and contextualized doctrine to empower decision-making across the organization.

Without doctrine, it’s impossible for managers to let go without losing control. Instead, leaders must rely on active oversight and supervision. The opportunity is to replace processes that control behavior with principles that empower decision-making.

Although rare, there are companies that have made the shift from process to principles-based management. Wikipedia has its five pillars. Red Hat has embraced open source principles. Visa was designed to achieve both chaos and order. Google has its nine principles of innovation. And Amazon has its own leadership principles.

Amazon says of its leadership principles: “Our Leadership Principles aren’t just a pretty inspirational wall hanging. These Principles work hard, just like we do. Amazonians use them, every day, whether they’re discussing ideas for new projects, deciding on the best solution for a customer’s problem, or interviewing candidates.” Good decision principles help people make everyday decisions in diverse settings.

It’s important to know the difference between values, goals, and decision principles: Values are what’s important to you. Goals are what you want to see in the world. Principles are what help you make decisions. So “Frugality” is a value. “Saving money” is a goal. “Spend others’ money like your own” is a principle.

One difference between values and principles is their specificity. Principles can “nest” inside other principles, like Russian dolls. Amazon has a fundamental principle of “Customer Obsession” and working backwards from the customer. This means different things for product development, marketing, and customer service. Wikipedia has specific principles for authors that nest inside the more general five pillars. The Agile Software movement has general principles that apply universally, and specific principles for practices like Kanban and scrum.

Be aware that the shift to doctrine and principles-based management is more than a tactic. It’s a new way of thinking about management. Instead of making decisions for others, or delegating those decisions to others, it’s creating principles with others that enable them to make decisions for themselves. It’s a distributed governance model for networked organizations.

Current, a digital power service from GE, is on this journey. Like many other companies, Current saw the need to evolve its company culture. They defined their values, put them in behavioral terms, and built them into systems & structures. But as Bethany Napoli, global head of HR for Current says, “the action rested on the shoulders of leadership to implement. We were left with a system that measured what leadership defined as the ‘right’ way to behave.”

Current wanted a culture that could move faster and support exponential growth. So they shifted their focus from values and behaviors to cultural tenets and decision principles. According to Bethany, “The very act of creating the tenets and associated decision principles is what creates the promise of real and organic culture change. We are on a path to change from the typical pattern of creating culture by defining attributes and managing them through systems and structures to organically building it through dialog, empowerment, and engagement.”

To get started on the journey, take these steps:

Purpose: Re-examine your mission. Is it truly a shared purpose? Do you have a narrative that explains how that purpose will be fulfilled?
Principles: Start with your existing values. Transform them into decision principles. Then find real-world decisions and reverse engineer the most effective principles.
Catalysts: Find internal catalysts who can help evolve the principles and help people apply them to daily decisions. Connect the catalysts to learn together.
Keep in mind that this is an iterative process. When decisions are made that don’t align with the mission or strategy, take a look at the situation. It might be that the person is responsible. But chances are you are simply missing the right principles and need to create some new doctrine. The goal is to manage principles more than people.

By creating the missing layer of decision principles, leaders have an opportunity to let go without losing control, and to add structure without losing speed. It’s a way to transcend the tradeoff between alignment and autonomy and to create a culture based on principles over process. It works for birds, fish, and soldiers. Maybe it’s time to give it a try for companies too.

Source: hbr.com, July 2016
Authour: Mark Bonchek
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Five questions boards should ask about IT in a digital world

Posted in Aktuellt, Board work / Styrelsearbete on July 5th, 2016 by admin

CIOs, business executives, and board directors need a shared language to discuss IT performance in a fast-changing environment. Here’s a framework for those conversations.

Historically, boards have had a hard time assessing and discussing information-technology spending and capabilities. They associate IT with endless reviews of mammoth, years-long transformation projects or complex explanations by the CIO of ever-changing technologies and system requirements. And they try to decode the CIO’s reports using their first language, which is centered on traditional cost-related metrics, such as head counts and bottom lines.

Digi 1In this era, companies are exploring digital business models, processes, and automation technologies, as well as seeking to hire and retain people with different skill sets—data analysts instead of data programmers, for instance. The IT organization can no longer be considered just a service provider; how it manages the integration of emerging technologies can help determine the success of a company’s digital strategy. Therefore, simply relying on cost-related measures will not provide a full picture of IT performance. And the CIO’s boardroom presentations will continue to get lost in translation.

Boards need to master a second language—one focused on digital themes, such as speed to market, agile product development, platform-based delivery models, and the benefits and challenges of analyzing various forms of corporate data. With a higher degree of digital fluency, boards can help C-suite leaders make better decisions about how to expand a company’s most successful technology initiatives and when to pull the plug on lagging ones. In our experience, board directors are more likely to gain such fluency if they routinely ask these five critical questions relating to the IT organization’s performance:

– To what degree does technology permit core business activities to happen?
– What value is the business getting from its most important IT projects?
– How long does it take the IT organization to develop and deploy new features and functionality?
– How efficient is IT at rolling out technologies and achieving desired outcomes?
– What skills and talent does IT need to achieve desired outcomes?

By systematically considering each question, boards can generate practical, detailed conversations about both IT projects and processes. This approach can help directors understand exactly how much value IT is creating for a company and how its IT capabilities stack up against those of competitors. Costs associated with IT performance will remain an important topic in the boardroom—hence the need to monitor returns on critical projects—but should not dominate the conversation, as they do currently. Making these questions a formal part of IT discussions can also help CIOs determine exactly which data relating to IT projects and processes will be most useful to the board (see sidebar, “Reporting metrics to the board”).

In this article, we explore the five questions and illustrate the benefits boards may gain by asking them. But first, let’s consider some of the challenges board directors, CIOs, and other executives face in today’s digital environment.

Making decisions about digital
According to a McKinsey survey, senior business and IT executives plan to increase their investments in new technologies from about 32 percent of overall IT spending today to about 40 percent in 2019.1 In many instances, spending has been earmarked for critical digital initiatives—for example, building online channels or mobile applications and services. At board meetings, CIOs and IT organizations share detailed data about technology costs, operations, requirements, and outcomes. But board directors and business executives seem less sure than ever about how to identifydigi 2 the right areas for investment.2 They face new realities about corporate technology usage and IT performance, among them:

Higher stakes. Technology is no longer just another business utility, one of many common inputs into operations. It is shaping strategies and business models as companies seek to meet their customers’ demand for tech-enabled products and services.
Greater complexity. The typical corporate IT landscape no longer comprises collections of “island” systems and applications. It is a complicated network of interlinked applications, interfaces, and databases—and many of them must be able to “speak” with external systems.
More risk. As companies begin to digitize more products and processes, breaches of security are becoming more common—think of the data losses that have occurred, in just the past few years, at large retailers, financial institutions, utilities, and healthcare companies. Cybersecurity has thus become a frequent point of discussion in the board-room. But in a 2015 survey of more than 1,000 board members, only 11 percent of the respondents said they had a high level of knowledge about the topic.3
Addressing the five IT questions

In the wake of these changes, board directors need to gain a broader, more comprehensive understanding of IT strategy and performance. The five questions we’ve identified can provide some clarity by helping to steer boardroom conversations toward not just the costs but also the capabilities and value that IT engenders.

1. To what degree does technology permit core business activities to happen?

Compared with even five years ago, companies are investing more in digital initiatives to gain critical process and production efficiencies, to launch new products, and to enter different markets. These initiatives span multiple business units and functional areas. One of corporate IT’s most important objectives, then, is to facilitate end-to-end business processes. These might be activities undertaken by administrative support functions, such as finance or human resources, or they might be core business processes, such as facilitating the steps in a bank’s mortgage-application process. In this environment, boards must accurately gauge the IT organization’s ability to implement technologies that allow core business activities to happen, as well as its ability to act as a true partner with the business rather than just a service provider.4
Boards can use a number of metrics to evaluate IT performance in this area—for instance, the percentage of business processes that have been automated, the cycle times for critical end-to-end business processes, and customer- and business-satisfaction scores for various production groups. Board directors and executives at a large US bank, for example, reviewed the progress of a project to digitize the customer-registration process. After some discussion, they homed in on three performance metrics: the time needed to register new customers (in minutes) and to activate new customer accounts (in days), and the percentage of automation within the process (compared with the old one).

With these key performance indicators (KPIs) in hand, senior leaders approved the launch of digital initiatives that would decrease the time required to register customers and to activate their accounts, while increasing end-user satisfaction. The board and the technology teams recognized that IT’s priorities and resource needs would shift as more customers registered and required support for advanced transactions. They decided to revisit the metrics and priorities associated with the registration process after the project had reached certain milestones.

2. What value is the business getting from its most important IT projects?
As we mentioned earlier, cost is already a major part of the dialogue in all boardrooms, but assurances of value should be part of the conversation as well. The leadership mostly understands that to go digital or otherwise modernize IT systems, it will need to invest millions, sometimes billions, of dollars in IT over the next five to ten years. It also knows that the capacity and funding required to get IT projects off the ground are typically in short supply.

Thus, it is crucial for boards to track the most important projects actively and learn whether they are delivering the outcomes promised—according to our analysis, the act of measuring a project’s benefits can reduce the risk of failure by more than ten percentage points. Board directors must have regular access to information such as the percentage of projects that are completed on time and on budget and that provide functionality within designated time frames, as well as the tangible business and IT benefits that an IT solution generated.

The board and other stakeholders have a number of ways to gain access to this information. The leadership team at one global travel company made such outcomes more transparent by implementing a portfolio-management tool that compels all project managers to report project status (cost, schedule, and scope) in a standard way. With this information, IT leaders, executives, and the board could more easily track costs and returns for the company’s portfolio of important projects. They were able to allocate and reallocate resources as needed, increasing the organization’s operational agility.

3. How long does it take the IT organization to develop and deploy new features and functionality?
Companies operating in a digital world can no longer afford to delay product launches or upgrades—not when online companies can deploy new features and functionality on their websites several times a day. Amazon, for instance, can release code every ten seconds or so, update 10,000 servers at a time, and roll back website changes with a single system command.5
Many IT organizations are now shifting toward two speeds of operation. Product-development teams and IT operations staff are charged with rapidly launching innovative customer-facing digi 3applications or upgrades while also maintaining slower (but still reliable) back-end transactions-oriented systems.6 Boards, CIOs, and other IT leaders must come to a common understanding of the infrastructure, resources, and capabilities required to operate at two speeds.

One metric they might use is the percentage of groups, within the IT organization, that can develop and deploy “business consumable” functionality within four to eight weeks in a secure, repeatable way. The senior leadership at a large European bank, for example, was considering how to release new product features and functionality into the market more quickly. As part of the boardroom discussions, the directors, the CIO, and the CEO sought to understand the company’s technology capabilities by assessing the average time a project took to go from initial funding to first production release. With this and other time-based information in hand, senior leaders recognized gaps in the processes for project approval and software development and saw significant lag time in issuing new releases. They determined that they needed to reallocate IT resources in a way that would ensure the IT organization’s agility by funding the appropriate technologies, processes, and people to establish a two-speed operating model.

4. How efficient is IT at rolling out technologies and achieving desired outcomes?

Infrastructure operations, application development and maintenance, and security—these three areas account for about 90 percent of staffing and spending in typical IT organizations. So it is critical for boards, executives, and IT leaders to agree on not just what IT is achieving (the focus of the first three questions) but also how efficiently it achieves these outcomes. By regularly monitoring metrics relating to execution, boards can ensure that their companies get optimal returns on IT projects, that teams go to market quickly with new products or upgrades, and that overall costs remain low while the technologies used promote long-term reliability.

Stakeholders can learn a lot by reviewing metrics on productivity, product quality, and average costs. Already, IT organizations are collecting many of these data—for example, incident data, average defects in code, or the cost of code per function point. CIOs and other technology professionals can use existing tools to collect and present these metrics in the boardroom. At one travel company, for instance, the board got a clear reading on productivity in the IT organization and product quality by tracking maintenance metrics—for instance, incidents and enhancements reported per software application, help-desk staffer, or call-center employee. Managers on the CIO’s team, using information already available, compiled targeted reports for directors to review.

What next-generation skills and talent are already embedded in IT?

A recent McKinsey survey of more than 700 CIOs and other C-suite executives revealed that talent management in IT is among their top three issues.7 The IT organization, increasingly, is being asked to participate in projects and initiatives that require technology workers to extend themselves beyond their traditional roles—playing a central role in data analytics or mobile-app development, for instance—while simultaneously maintaining legacy systems. The change in expectations is creating more opportunities but also more risks and stresses among IT teams. It is therefore critical for boards and CIOs to have a common understanding of what skills and capabilities the IT organization might need, now and in the future.digi 4

They can measure their talent-development efforts along three dimensions: how often a company is rotating professionals in and out of different roles within the IT group and the business units, the degree to which the IT organization is hiring outside people, and how effective it has been in developing people in-house to fill pivotal roles.

Getting agreement on these topics may require directors, CIOs, and other stakeholders to consider metrics such as employee-satisfaction scores or the percentage of project roles that could not be adequately staffed over a 12-month period because of a lack of internal skills. The board at one large international retail bank undertook such a review and found that less than 5 percent of its IT leadership team had any business-unit experience. It promptly sought to increase that number to 20 percent. The CIO and the rest of the senior leadership agreed to establish cross-unit training and development teams, redefined certain roles and responsibilities to increase business–IT collaboration, and instituted regular checks with employees to ensure that the IT organization was making progress against its goals for improvement.

Because of the speed at which IT innovations occur, boards and CIOs may need to introduce new metrics and drop less relevant ones within each of the five areas of inquiry. Regardless, the questions impose discipline on the relationship between the board and the CIO. They prompt directors and technology executives to have productive discussions about the function’s strategic direction and the technology initiatives that matter most, to ensure that the overall management structure required to realize those projects is in place, and to monitor and discuss the results in a way that everyone understands.

Source: McKinsey.com, July 2016
Authors: Aditya Pande and Christoph Schrey
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