IT Organization Management: Revisiting Centralization

For many IT execs, the term centralization is a relic of the 1970s, eliciting memories of skyrocketing gas prices, VW Beetles and Donald Rumsfeld. Like all those timepieces, centralization is back. But it’s not your father’s centralized IT organization?this time it has a chance to succeed.

Centralization in the 1970s and early 1980s involved monolithic IT organizations built around a mainframe that served the entire enterprise. Because IT staffers were set apart from the business units, they were usually out of touch with users who saw them?often accurately?as unresponsive and irrelevant. In the late 1980s, with the rise of distributed computing environments, IT departments also became distributed, with IT employees organized to support specific business units at different geographic locations.

Today there are two new breeds of centralization. The first involves organizing IT employees into groups that support specific business processes for the entire enterprise, such as supply chain management or marketing. While that strategy sounds more dispersed than centralized, it dictates that a single IT organization provide services for the entire company, regardless of business unit or location.

The second breed organizes information technology employees by skill set and assigns them to project teams that break up when the projects conclude.

Companies are centralizing now because it is more cost-effective than having a distributed environment; it allows them to create consistent technology standards across the enterprise; and it cuts down on “reinventions of the wheel” that occur when separate business units devise identical solutions to the same problems.

But doing it and doing it right are two different things. Centralization can be a disaster if CIOs don’t address cultural issues and if they don’t have processes in place to determine funding and staffing priorities across business units. (For another take on IT organizational models, see “Let’s Get Organized!”.)

The Cult of Functionality

Rather than assign IT workers to handle tasks such as supply chain management, procurement and distribution for one particular unit, companies that are centralizing IT operations by business process are assigning each worker to support one process for the enterprise as a whole.

CIO Jon Ricker is doing just that at Columbus, Ohio-based Limited Technology Services (LTS), a subsidiary of The Limited that supports the company’s retail businesses, including Bath & Body Works, Express, The Limited, Victoria’s Secret and White Barn Candle Co. Previously, each of these brands had its own IT organization. But as the company centralized more of its operations, making The Limited a hub for its other brands, IT followed suit, first implementing a centralized model to handle Y2K issues. Ricker kept the structure in place for future IT projects.

Today Ricker’s staff works for a host of strategic functions across the enterprise, including distribution services, store operations and real estate. (IS employees who work with less strategic functions such as LAN administration and PC support are still distributed geographically.)

The reorganization has improved project delivery and financial performance. For example, LTS just completed a massive migration of the Express business unit from homegrown legacy technologies to The Limited’s common systems platform, on time and on budget. In a distributed environment, Ricker says, Express would have been able to use only its own internal IT staff instead of recruiting skilled IT people from across the enterprise. He adds that each of The Limited’s past six major IT projects, including the installation of new warehouse management systems for both The Limited and Victoria’s Secret stores, have also benefited. “Previously, we’d have one or two people in the individual division trying to do the whole thing,” he says. “Now if I need to apply 10 people to make something happen at one brand, I can do it.”

Centralization has also helped to improve staff retention?it has led to clearer job descriptions, which in turn helped the IS staff reach defined goals, Ricker says. In the past three years attrition has been cut in half.

Kathy Tamer, vice president and CIO of United Space Alliance (USA) in Houston, has also reengineered her IT organization along business process lines. USA is NASA’s prime contractor for space shuttle operations, supporting launches, landings and logistics. It’s a product of a 1995 joint venture of 16 NASA contractors, including Boeing and Lockheed Martin, with offices in Houston, at the Kennedy Space Center in Cape Canaveral, Fla., and at the Marshall Space Flight Center in Huntsville, Ala. Before 1999, Tamer’s IS employees were dedicated to their particular sites and loyal to the companies they had worked for previously. There were also redundancies, notably the multiple help desks in each location? remnants of the contractors that combined to form USA. The help desks all operated differently and couldn’t communicate with one another to devise consistent solutions to problems.

In the past couple of years, Tamer has worked hard to eliminate those inefficiencies. She used a centralized organizational model, she says, because she had seen too many low-level decisions work their way up to the CIO’s office. With IT decentralized, people below her didn’t feel they had the authority to make decisions that might affect another location or business unit.

Tamer has centralized USA around six business process centers: strategic planning and integration, platform engineering and operations, application engineering services, data and documentation management, IT security, and user support services. She’s done it without relocating anyone. And, as at The Limited, in her own development group each employee supports a process such as procurement, HR or logistics.

So far the rewards have been great, Tamer says. Minor project plans are handled at the appropriate levels, leaving her to focus on issues such as overall IT strategy. She’s consolidated the three help desks in Florida and the four help desks in Houston so that there is just one in each location. Users now get better support because each help desk is staffed by people with a greater diversity of skills, Tamer says. Meanwhile, consolidating employees by skills has allowed her to trim 17 percent of USA’s help-desk staff?through natural attrition and reassignment, not layoffs?at a savings of $300,000 a year.

Tamer has also created consistent technology standards across the enterprise, such as the common desktop she’s putting into place. Now, whenever IT rolls out an enterprisewide application to USA’s more than 11,000 users, Tamer can do less testing beforehand and encounters fewer variables and complexities in the programming process. “You could never get a common desktop without centralization,” she says. “[Each location] would insist on doing its own thing. Of course, you still have to have enough flexibility in the process to accommodate local differences.”

Reestablishing an IT organization along enterprisewide business processes isn’t easy. Ricker’s greatest challenge has been planning for big, long-range projects while leaving enough flexibility to tackle smaller, unplanned but necessary projects. “How do I ensure I have enough local resources left to do the quick hits without decimating the large enterprise project resource pool?” he says. For example, last fall Ricker’s group was asked to enable cash registers in the Bath & Body Works stores to process several promotional schemes simultaneously. That way, as merchandise is scanned the customer can get the best deal the combinations will yield. Because no process governs resource allocation yet, it took almost three months to figure out which projects in other business units could spare the necessary staff and funding. “That should have taken three days,” Ricker says.

Tamer, for her part, has struggled to convert employees from being loyal to their location or prior employer to supporting the enterprise as a whole. People who have always been part of a single-point operation are reluctant to give up their independence, she says. Tamer has traveled to meet with IS and businesspeople to foster centralization efforts. She’s also made geography-sensitive decisions, such as combating a perceived bias toward Houston, where USA’s executives are primarily based, by planning to put a production system as well as a distribution and manufacturing system in Florida. Though Tamer picked Florida strictly for business reasons?it put the systems close to its primary users?the heightened sense of corporate unity was a nice byproduct. “We were sending a message to the Florida people that we weren’t just thinking about Houston,” Tamer says. “It was a vote of confidence.”

Set on Skills

Not every company is centralizing around business processes; some are centralizing workers around specific skill sets. To expedite its 2000 merger with Consolidated Natural Gas (CNG) of Pittsburgh, Dominion, a $10 billion energy company based in Richmond, Va., centralized IT. Lyn McDermid, CIO and senior vice president of IT, placed a director-level IT account manager in each of the company’s five major business units to keep track of IT needs. Then she grouped employees by expertise, such as mainframe, applications development and servers.

A year later, that arrangement has improved the quality of IT services, McDermid says. “We’re just getting to really capitalize on this, but we have the advantage of cross-pollination and cross-communication, and we aren’t reinventing the wheel for every project or issue,” she says. “We have tremendous checks and balances where people who [have solved specific IT problems] will give advice or be part of quality processes in other areas.”

Like Tamer, McDermid has struggled with cultural issues, particularly among non-IT people in various business units. “Centralization makes the business units nervous because they think they’re losing control over their IT resources,” she says, since the IT decision-making process is no longer localized. “So we’ve had to always make sure customers are aware of what we’re doing and what the business case is.” That’s why the IT account managers meet with the stakeholders in each unit. “[These IT liaisons] help create common goals and expectations, and they help build the alignment between business and IT that’s critical to delivering an acceptable product,” says McDermid.

For example, Dominion is an SAP shop for enterprise resource planning, and CNG was an Oracle/PeopleSoft shop. After the merger, McDermid wanted to convert CNG to SAP in six months. She was successful, she believes, largely because the IT account managers from Dominion who were placed in CNG trained former Oracle/PeopleSoft users on SAP and made sure SAP was configured to meet the new users’ needs. As a result, Dominion now has consistent HR policies and a single supply chain process, and more strategic sourcing, because there’s one source of information about all purchase orders and vendors. McDermid says achieving the same result in a decentralized organization would have taken months longer because she’d have been dealing with a separate IS staff in the new business unit with no way to bridge the divide between it and the rest of the enterprise.

McDermid’s new organization follows the traditional Centers of Excellence model that has its roots in consultancies, which organized themselves that way to create nimble teams quickly, drawing from various pools of IT workers grouped by specialty. The approach first spread into IT organizations in the late 1980s and early ’90s but soon fell out of favor, says V. Sambamurthy, an associate professor at the Robert H. Smith School of Business at the University of Maryland. Centers of Excellence failed largely because they were rolled out for the whole IT organization rather than just for application development and solutions delivery, which Sambamurthy says they’re best suited for.

Resentment from the business side as it loses a measure of control over IT is a natural risk of rolling out skill-based Centers of Excellence for the whole IT organization, because they’re traditionally used to owning their project team. “It’s a departure from the past model of decentralization, because with the centers you are recentralizing technical people by putting them into a corporate group,” Sambamurthy says. That’s a danger, he adds, because IT can become an island that invents solutions that are irrelevant to the business unit.

Another potential problem with that model is downtime. Employees sit in the bull pen with other specialists and leave the pen to join a project. When the project ends, they go back to the bench and wait for the next one. “The danger here is human anxiety, especially in a bad economic environment,” Sambamurthy says. “The concern is ’I’m visible because I don’t have a project to work on. Will I be the first target of a cutback?’”

Appointing career managers to focus exclusively on IS employees can help, assuring them that bench time is no cause for concern. McDermid also uses that time for training as well as for development of new technologies and applications. It keeps the group sharp and takes away the pressure of predicting necessary staffing levels by discrete skill.

McDermid stresses that just as in decades past, centralization will fail if your company’s culture does not already emphasize business-IT alignment. “When the business units first took back IT, it happened because we weren’t responding to their needs,” she says. “We were doing a terrible job, victims of the old glass-house syndrome. Outsourcing and the threats of new technology have shown us that the only way to survive is to understand where the business is going.”