Wednesday, October 26 2005 3:00 pm

The role of the CIO is about to change again. 

Over the last five to ten years, the CIO role in most companies has been twofold: (1) to implement an Enterprise Resource Planning (ERP) system covering as many corporate processes as possible; and (2) to outsource as much of the Information Technology (IT)  function as possible.  The resumes of CIOs brag about implementing SAP or Oracle ERP systems company-wide and negotiating huge outsourcing contracts.  Although some of these conversions have been traumatic, on average they have contributed significantly to corporate productivity improvements and cost reductions, and the laggards are still scrambling to catch up.  For most companies, though, this phase is now drawing to a close.  The ERP system (including Customer Relationship Management and Supplier Relationship Management extensions) has been implemented and is now in control of most corporate functions.  The obvious functions have been outsourced.  Further gains from ERP or outsourcing will come at a higher cost and produce diminishing benefits.  So what is next?

Let’s take our clues from two companies who have dominated their industries in large part due to their IT decisions.  Google dominates the online search business because it decided to build its own computer to do the most efficient searches.  As far as I know, Google is the only company in existence today who builds its own computers solely for its own use.  Although Google mostly used commodity off-the-shelf components (e.g. PC motherboards, Linux), they invested heavily in proprietary software. Their offshore strategy is driven by their conviction that owning the brightest computer scientists will be what strengthens their differential advantage, so they are opening new R&D centers in such high-cost areas as Tokyo, New York, and Switzerland in addition to India and China. 

Although Wal-Mart has not gone to the extreme of building its own computer (yet), they have invested heavily in their own proprietary data mining software and expertise.  The result has been a logistical and marketing tour-de-force that competitors find difficult to match – they cannot simple go and buy an off-the-shelf data mining package and gain the same advantage that Wal-Mart has. 

Let’s suppose that you are convinced that Google, Wal-Mart, and a few other leading companies have gained significant strategic advantage by not following the generic ERP/outsourcing approach used by most CIOs.  Unfortunately, your corporate information system is now a monolithic system running a single vendor’s software offering little apparent opportunity for adding innovative new software or proprietary development, and your technical talent has been heavily outsourced.  Are you stuck?

Fortunately, you are not stuck. The evolution of Services Oriented Architectures (SOAs) will allow CIOs to break up their monolithic ERP systems into loosely coupled cooperating systems composed of both new and old applications.  Some of these loosely coupled applications will be good candidates for further outsourcing.  Others will be good candidates for introducing best-of-breed new software or proprietary development to gain strategic differential advantage over competitors.  Holding it all together will be a corporate architecture and corporate and public networks.  Security and privacy issues will have to be addressed with new approaches in these architectures – the old firewall approach will no longer work.  The CIO will have to decide which protocols and standards to use and will probably have to get personally involved in setting these standards industry-wide.  Choosing the correct approach for control and management over these loosely coupled distributed computing assets will also be critical. 

All of these decisions will have to be carefully aligned with company strategy in order to drive the most shareholder value.  This will require a far more technically astute CIO than the ERP/outsourcing era required. It will also require one who has strong strategic planning abilities and business management experience, and who can see value from the shareholder’s perspective.  Finally, in order to attract and properly motivate the experts that will be needed, the CIO will need to be comfortable with using non-traditional (for IT departments) organizational and financial approaches such as acquisitions, subsidiaries and partially owned ventures.