The role of the CIO today is evolving at an accelerating pace. The most effective CIOs are shifting their focus from inward-looking operational issues to an emerging set of outward-focused strategic opportunities that are central to their companies’ financial and competitive success.
We call these new opportunities “customer-integrated systems,” a new class of critical systems that link a company to its customers. The most effective customer-integrated systems embody a customer-differentiated design, with the CIO insightfully tailoring systems linkages to evolving account relationships.
Three CIO Eras
Over the past decades, the CIO role has moved through three eras.
First, CIOs developed horizontal systems that automated and linked their companies’ core functions, like accounting, human resources and inventory control. We think of this as the Era of the Operational CIO.
Second, CIOs helped deploy a range of vertical systems that essentially tuned up these core functions in a variety of ways. We think of this as the Era of the Tactical CIO.
While many of these vertical applications were important, they tended to be minimally integrated with the overall business. All too often they amounted to a series of localized, uncoordinated improvements, each of which required significant organizational change.
This caused a big problem because a company’s ability to absorb change is the gating factor in IT systems’ effectiveness. Even if each application nominally offered a positive ROI, all too many of these systems failed to achieve their promise—not because they were technically deficient, but rather because the organization was not able to make the changes needed to reap the benefits. CRM systems provide a well-documented example.
The Strategic CIO
Today, CIOs are facing an immensely important opportunity to develop systems that link their companies with their most important customers. These emerging systems are ushering in the Era of the Strategic CIO.
These customer-integrated systems form the essential infrastructure for the company to secure and grow its Profit Peaks, its high-revenue, high-profit customers, to convert many of its money-losing Profit Drain customers to solid profit contribution, and to improve the profitability of its numerous small, minimal-profit Profit Desert customers. Enterprise Profit Management, which creates transaction-level P&Ls, can provide this information.
Strategic CIOs are becoming key players in creating and driving their company’s most important business relationships, making these top managers critical to their company’s profitability and strategic future.
New Business Era
The source of this emerging CIO opportunity is rooted in a major change that occurred over the past 30 years in the way we do business. We have moved from one era of business into another without realizing it.
The Age of Mass Markets spanned most of the 20th century. In this era, the win strategy was clear: maximize production volume to gain economies of scale and lowest costs. This meant distributing product as widely as possible through mass distribution fueled by mass marketing.
Companies simply dropped their product at their customers’ receiving docks, so distribution processes and costs were relatively uniform. Pricing was relatively uniform as well, so it was reasonable to manage both sales and operating activities separately from each other.
In this era, companies had little need for systems that comprehensively integrated them with their customers. It was entirely appropriate for CIOs to focus on horizontal systems, which automated their companies’ core internal processes, and on vertical systems, which essentially tuned up these core processes in a variety of ways.
Today, all this is changing. In the current Age of Diverse Markets companies form very different relationships with different customers—some arm’s length, some highly-integrated and some in-between. These relationships have very different operational processes and cost structures, and at the same time, pricing varies widely from customer to customer.
This means that CIOs have to shift their focus toward developing a new set of customer-integrated systems that appropriately and differentially link their companies with their customers. The nature of these links varies greatly from customer segment to customer segment, depending on the account relationship. In many cases, the nature and quality of the inter-company IT links will actually drive the customer relationship’s profitability and share of wallet.
The problem is that CIOs traditionally focus IT on their internal company processes and linkages. In all too many companies, these new externally focused customer-integrated systems are largely off the radar screen.
Certainly, most companies today have elementary links such as web-based ordering and portals that display order status, but the true promise of customer-integrated systems is much more sweeping.
For the most important Profit Peak customers, customer-integrated systems will provide actual integration of selected functions between customer and supplier, creating very strong mutual benefits and in many cases enormously “sticky” links that drive both revenue and profit increases. They also are critical in enabling the flexible “showcase” projects that provide powerful new business initiatives. For example, we have seen many concrete examples where well-thought-out intercompany links created over 35% revenue and profit increases in the highest-penetrated customers in the country.
For Profit Drain customers, they will enable the supplier to match its cost to serve to the accounts’ profit potential, turning significant portions of money-losing business into strong profitability.
When well-conceived, they will both reflect and accelerate a company’s critical business relationships, improve profitability and provide enormous competitive advantage.
These new customer-integrated systems create huge opportunities for revenue growth and cost reduction for both partners. But they also present important challenges for CIOs in three areas: first, tailoring the customer-integrated systems to the evolving relationships; second, developing the actual intercompany systems, often in coordination with their channel partners; and third, managing both internal change and change within the channel partners.
For CIOs, this is exciting new territory that opens vast opportunities to produce huge, new, sustainable value.
Differentiated Customer-Integrated Systems
One of the most important factors in designing and managing customer-integrated systems is the need to differentiate and tailor them for different customer segments. In most companies, defining and building these differentiated customer-integrated systems is one of the biggest strategic imperatives. Yet most companies today implicitly view their customer systems through a one-size-fits-all lens.
Profit Peak customers are major, high-profit strategic accounts that are supplier-loyal and generally are willing and able to form integrated supply chain partnerships.
Profit Drain customers are large, low-profit or money-losing accounts which are important but often are bargain shoppers that are less willing to join in supply chain innovations.
Profit Desert customers are smaller, low-profit stable accounts that are generally reluctant to innovate significantly. (However, some Profit Drain customers have the potential to be developed into Profit Peak accounts with adequate attention.)
Each account cluster requires a very different set of account relationships, supply chain structures and customer-integrated systems.
Profit Peak accounts. These major, supplier-loyal, high-profit customers require a high degree of supply chain and planning integration, customization and innovation. This creates the important need for a critical set of custom-tailored customer-integrated systems.
First, you should develop an aligned, long-term business strategy with each Profit Peak customer. This typically involves a three- to five-year year shared strategic plan for the relationship, and joint long-range planning. The relationship should be innovative and involve shared risk.
For example, in one company we know, an important Profit Peak account wanted to develop a process for picking up product at a major supplier’s factories, rather than having it shipped from the distribution centers. In another example, several major suppliers are working with their Profit Peak accounts to develop RFID (or Internet of Things) systems to track products as they move along the joint supply chain.
Second, the companies’ supply chains should be fully integrated. This should involve both supply chain processes and systems. Replenishment should be continuous, often involving vendor-managed inventory, rather than discrete orders. Some suppliers are pioneering efforts to develop new vendor management processes and systems that extend all the way to the retailer’s shelf or the manufacturer’s factory floor, rather than to the customer’s distribution center. For Profit Peak accounts, the supplier should dedicate cross-functional account teams and significant resources to understand the account’s structure and business.
It is essential for the Strategic CIO, in parallel, to devote significant resources to working with Profit Peak accounts to design and develop coordinated customer-integrated systems with enough flexibility to accommodate rapid strategic innovation. Importantly, the Strategic CIO and the on-site team have to be capable of coordinated change management, not only with their customer IT counterparts, but also with operating managers both within their own company and within the customer. This is very complex because the Strategic CIO has to be adept at working with key channel partners who have their own IT priorities and agendas.
Profit Drain accounts. These important, price shopping, low-profit or money-losing accounts warrant significant care and resources, but not extensive customization. This can be seen in two areas.
First, a major supplier and Profit Drain account should develop in advance an aligned business plan and scorecard. The joint business plan will not be as customized as in the case of a Profit Peak account. The plan should have a shorter time horizon, perhaps one year, and the relationship should be collaborative and trustworthy.
Second, the companies’ supply chains should be aligned and coordinated, but not necessarily fully integrated. The supplier should use existing internal processes to respond to orders from integrated accounts. Vendor-managed inventory systems may be appropriate for these accounts, as they are a cost-saving measure.
Here, the Strategic CIO faces a far more manageable set of challenges. While more traditional approaches like web-based ordering and order tracking may suffice for core activities, more complex systems support is needed for the intercompany systems like vendor-managed inventory.
Importantly, many Profit Drain accounts have the potential to develop into Profit Peak accounts, so it is important for the Strategic CIO to develop a strong set of relationships with his or her counterparts both in the customer IT group and among customer operating managers so they can be ramped up later. For example, many Profit Drain accounts lose money because of seemingly minor operational issues like over-frequent ordering that are almost painless to fix and produce rapid profit increases for both the supplier and customer.
In many cases, focused, coordinated customer-integrated systems can nudge a Profit Drain account into becoming a Profit Peak, with the Strategic CIO directly driving major increases in revenue and profitability.
Because there is a long lead time in developing and installing coordinated systems, it is imperative for the Strategic CIO to map the IT terrain for Profit Drain accounts as well as for Profit Peak accounts.
Profit Desert accounts. These stable low-revenue, low-profit accounts typically cause a disproportionate amount of costs because many are unsophisticated and have idiosyncratic processes. For example, a Profit Desert account may order by fax rather than EDI and may have unusual shipping specifications.
The key to supplying this group profitably is to provide a menu of service offerings, along with clear rules of engagement, such as minimum order sizes for various lead times, weekly ordering and shipments to distribution centers only. In this way, the supplier can provide very reliable, consistent, cost-efficient service. This will ensure transactional efficiency for both the supplier and customer.
The systems objective for these accounts is to drive down costs by providing efficient means of transacting business. This is the area of IT systems that most companies have been focusing on recently because the pathway is clear, and the payback is compelling.
The danger, however, is to view these minimal cost-oriented systems as a one-size-fits-all solution sufficient for all customers. The most important accounts—Profit Peaks and Profit Drains—require completely different types of customer-integrated systems.
We strongly underline that the company’s major revenue and profit streams are at stake in whether or not a CIO makes this distinction.
One Strategic CIO’s Experience
Here’s how the CIO of a major company has made the transition to Strategic CIO. She found that her Profit Peak accounts were demanding exactly the types of integration described above, and this was pulling her to be extremely customer focused.
This CIO now spends 30-50% of her time either in business development or working with selected existing customers. Customer-integrated systems implementation investments (software and personnel) have already become equal to or greater than the investment in internal company systems.
The problem she encountered is that the customer-integrated systems were so critical and fast-growing, that the company’s horizontal and vertical systems couldn’t support them. Consequently, the CIO has been investing in parallel in strengthening the company’s ERP system and pulling some formerly independent vertical applications into the ERP system, putting them under direct IT control.
The Three-Dimensional CIO
Today, CIOs have an enormous new opportunity to shape their companies’ future.
Horizontal systems were essential to ensure that a company’s core activities were efficient, and vertical systems were important to tune up and enhance a wide range of company activities. We think of these as forming two important dimensions of the CIO role.
But the third dimension, customer-integrated systems, enables a company to construct its essential links to its accounts. Today, the Strategic CIO directly drives revenues, profits and competitive advantage.
If the Strategic CIO is effective, the company’s performance and market positioning will accelerate. But if the CIO neglects this critical opportunity, the company will be left further and further behind. This is the most important challenge facing CIOs today.
Today, successful Strategic CIOs must develop a new set of skills and capabilities in four critical areas:
- Coordinating with counterpart managers within the company to identify and manage the three customer segments;
- Tailoring the company’s customer-integrated systems to the three account segment relationships;
- Working with counterpart IT managers in key accounts to conceptualize and develop the joint systems; and
- Managing change, both internal and in channel partners.
The Strategic CIO today faces an historic opportunity to directly drive the company’s financial success, and to shape its strategic future.
In this Era of the Strategic CIO, the company’s success depends on it.