Reverse Engineering the Organization

Digital transformation touches many aspects of an organization. On the one hand this is is what makes transforming an organization so challenging. Additionally, it makes it difficult to determine where on the spectrum between a traditional organization and a fast-moving "digital" one an organization currently stands. There are some simple tests, but one can reverse-engineer quite a bit more from an organization's structure.

The changing role of IT

One of the critical changes during a digital transformation is IT taking on a fundamentally different role. Traditionally, IT largely grew by optimizing existing processes: the business performed a certain function manually, be it reporting on financials, handling incoming customer requests, or doing risk calculations. IT automated these functions, making them faster and cheaper. The reduction in cost through automation provided the business case for the IT project, which was considered a success if it delivered on time and on budget.

The salient aspect behind this IT model is that one had a general idea what the end product should look like because it was essentially based on existing work. It also meant that IT was largely driven by reducing the cost of doing business, i.e. boosting the bottom line, which in turn meant that scale was more important than speed: the bigger the org, the bigger the savings. The widespread separation between IT and "the business" originates in this operating model: the business defines the demand and IT delivers to spec.

Digital companies use IT in quite different ways. They do use IT to operate efficiently, but more importantly to provide unique market differentiators and opportunity, i.e. top line revenue. I tend to explain that Google is largely an advertising company, but one that really understands how to use IT to drive business outcomes. The switch from the traditional optimize-whats-there IT to the discover-new-opportunities IT is fundamental to digital transformation. For example, speed becomes a much more important factor. Eric Ries' well-known book The Lean Startup elaborates this topic quite nicely.

CIO Reporting Lines

Generally speaking, I find organization charts to be of limited value when trying to understand an organization. An org chart shows reporting lines, but not the way people collaborate on a day-to-day basis. It's a structural representation, not a dynamic one.

When looking at IT reporting lines, they usually flow together at the CIO, the Chief Information Officer. He or she is in charge of IT spend and delivery, which can run in the Billions of Dollars. Which person the CIO reports to can tell you quite a bit about how business and IT are linked, and thus about the role IT plays in the particular business. From that in turn, one can tell how "digital" an organization has become. Sounds like reverse-engineering? Let's have a look.

Large company CIO's generally report to one of four other executives: a CIO may report to a CFO (Chief Financial Officer), a COO (Chief Operating Officer), or straight to the CEO (Chief Executive Officer). In addition to a CIO, a company may have a CDO, a Chief Digital Officer, who also runs a part of IT. Let's look what these 4 models tell us about where on the digital transformation spectrum an organization stands.

CIO- CFO

Traditionally, many CIOs report to the CFO, whose job is to watch over the company spend, making sure to control cost and optimize profit. While the CFO looks at the overall financials, the top line revenue is generally driven out of sales.

This reporting line therefore indicates that the organization regards IT mainly as a cost center, meaning new projects are evaluated by their cost and awarded to the lowest bidder. IT is seen as a commodity that can be obtained at the lowest price, just like electricity. Whether we like it or not, if for this industry IT is absolutely non-differentiating, outsourcing it to the lowest cost location is the logical conclusion. I'd warn though, that this situation has become extremely rare in the digital world.

CIO-COO

Having the CIO report to the COO is a significant step ahead. I sometimes call the COO the Chief Optimization Officer, because his or her role is to optimize exiting processes. The good news is that in this model IT isn't solely driven by cost -- a higher return justifies a higher investment, which for example allows funding and concern for quality of delivery as long as a corresponding return for the investment can be shown, or at least projected.

Still, the anticipated return is largely based on cost savings. IT is still largely seen as supporting the business, but at least it has an opportunity to invest. Generally, organizations at this stage work with a partner for their IT development and operations and rely on their size to maximize the return on investment, i.e. they are primarily bound to economies of scale.

CDO

A Chief Digital Officer has become a common sight in organizations that are looking to become more "digital", meaning more similar to organizations that tend to succeed in the digital economy. Typically, the CIO doesn't report to the CDO, but the organization separates the traditional "CIO IT", which is largely non-differentiating, from the "new" IT, which is run by the CDO and driven by generating business value. The CDO is typically not part of IT, but belongs to the business or marketing organization. That's good because it gives him or her the needed proximity to the business to focus on generating business value instead of optimizing existing processes.

The presence of a CDO is a clear indication that the organization is on a transformation path and understood that IT and business need to become closer to achieve agility and value for the end user. Also, many of these organizations bring IT staff back into the organization as they consider IT an asset. However, the two-speed model of "new" and "old" IT can generate a fair amount of conflict and friction. It's a reasonable intermediate state on the transformation journey, but not how digital companies operate.

CIO-CEO

Some organizations have the CIO reporting directly to the CEO, just like the CFO and COO. Sometimes this model is called "uppercase CIO" as it puts the IT on par with other top executives. Doing so indicates that the business has realized that IT is not a supporting function, but one that's critical to the business.

In these organizations, IT is generally seen as a business driver as opposed to a pure delivery function that optimizes already existing processes. Because IT charts new territory for the business, speed and innovation are important as they are the currency of success in digital economies. If you take this thinking a step further, you realize that separating the IT from the business becomes counter-intuitive.

IT = Business

Large enterprise refers to IT that happens as part of the business (as opposed to the IT organization) as "shadow IT", something that's considered undesirable. In digital organizations this is the norm, however. The majority of developers and operations staff don't report to the CIO but into product development. The traditional IT is merely in charge of supporting systems like HR and payroll, many of which have become available in a Software-as-a-Service (SaaS) model in the cloud.

Traditional companies would counter that this is the setup of a technology company, not a "normal" business. As stated at the beginning, though, the separation into "business companies" and "technology companies" has become outdated in the digital world because technology drives the business.

Selling IT

Understanding the organization's IT reporting line can help you "sell" IT projects to upper management. For example, in a CFO-driven organization pitching automation and speed of delivery through containers and Kubernetes will be a difficult sell. More likely than not, it'll be seen as a waste of money -- you'd be trying to sell speed to an organization that's focused on cost and doesn't value speed. You may fare better by highlighting how the increased infrastructure utilization thanks to elastic infrastructure can reduce hardware invest. Selling cost savings to a cost-focused organization has a higher chance of success.

To their defense, most CFOs have seen multiple generations of new tech promising pretty much anything, from transforming IT to saving lots of money. They have seen client-server, the web, CASE tools, and now cloud infrastructure, and big data. In most cases, IT spend has gone up, though, not down, for example because new approaches require new, and thus expensive, skill sets and software licenses.

Refactoring the org

I have seen a fair number of organizations change the CIO reporting line, generally from left to right in the above depiction, e.g. from CFO to COO or straight to CEO. This is a clear sign that the organization has understood the changing role of IT and is reflecting this in the top management org chart.

Many developers and architects believe that reporting lines are something abstract dreamt up by bureaucrats. When you engage with senior IT management, though, having a look at reporting lines can give you valuable hints as to where on the digital transformation journey the organization stands and how to position new initiatives and projects.

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