How to win in a global economy

IT and communications are opening up the world to businesses of all sizes. How can your IT strategy maintain competitiveness?

Clint Witchalls, Computing Business 19 Jan 2006

Being a global company used to mean being a big company, but today even the smallest ecommerce firm is a global player by default.

IT has played a significant role in opening up the world’s borders. The internet, email, videoconferencing and agreement on global standards for communication, such as XML and TCP/IP, have all helped to facilitate business in a global economy.

For human resources, globalisation means we can seek skills wherever they are found in greatest supply. One of the manifestations of this has been the phenomenal rise in outsourcing – once the preserve of big firms, now everyone is doing it.

‘You don’t have to be big to be global,’ says Phillip Everson, a consulting partner at Deloitte. ‘I know of some very small companies – founded within the last 18 months – that have part of their IT run in the US, part of their development done in India, and they’re based in the UK. This is very likely to become more common.’

Dealing with an outsourced IT department on the other side of the world calls for a new set of skills – the so-called ‘soft skills’ that always seem to be in short supply among IT people.

‘When you move to an outsourcing relationship, you need new capabilities at home as well,’ says Wendy Currie, professor of information systems at Warwick Business School. ‘Managers at home need to learn about negotiation and contracts management. And often these are the skills that chief information officers (CIOs) don’t have.’

Although offshore outsourcing is an increasingly popular choice, Currie warns it is not always the cheapest option. ‘People look at the cheap labour costs and think they’re getting a bargain,’ she says. ‘But they don’t factor in international flights and the cost of sorting out problems abroad.’

It makes financial sense for a lot of firms to outsource systems development work, but this can cause headaches. One of the problems is – despite what the outsourcing firms say – their business is not your business. If a supplier meets its service levels, many offshore firms feel they have fulfilled their contractual obligations and do not need to offer any more. You cannot expect anything extra, as you might from an in-house IT department. You have to ask yourself, ‘Is the supplier really interested in my business?’ If you are truthful with yourself, you will find the answer is sometimes ‘no.’

To successfully outsource systems development work you need to be very good at writing water-tight specifications.

‘In reality, there are very few organisations that write and keep to water-tight specs,’ says Everson.

‘The advent of methodologies like rapid application development (RAD) requires a really close working relationship between the developers and the business. But it is hard to do this when you are 5,000 miles and seven time zones apart,’ he says.

In spite of the disillusionment with IT outsourcing, and that many firms have brought their operations back in-house, the sector continues to grow. According to the International Chamber of Commerce, IT services outsourcing is expected to be worth $24bn (£14bn) by 2007, up from $1.3bn (£736,000) in 2002. But Everson says managers will become a lot more selective about what they outsource.

‘People will outsource a subset of their operations rather than the totality of them,’ he says. ‘In doing that, it forces the retained IT department to develop a much different skill set based on commercial management of vendors and service rather than the management of resource.’

Fast networks and global standards have also spurred another revolution: software services over the web.

‘We’re seeing a move towards application services provisioning (ASP) and web services,’ says Currie. ‘Much more data is being routed over the internet and that makes firms much more agile and robust.

‘A lot of people talked about ASP five years ago, but the problem then was that the software hadn’t caught up with the aspiration. A lot of the ASPs did not understand what the customer wanted and found it very difficult to provide a tailored offering. Customers always want some sort of customisation. But people don’t call themselves ASPs anymore, they call themselves software-as-a-service providers. ASP became a little bit tarnished with failure.’

The development of platforms for web services by suppliers such as Microsoft, IBM and Sun Microsystems has enabled more seamless transfer of data across the internet.

For those systems that are kept in-house, global firms need to decide whether to keep central control of IT or whether to allow some local flexibility. With centralised control and a fixed set of standards, it is easier to implement standard business processes across the globe; it is easier to transfer IT staff from one location to another as they all share the same skills; it is also easier to squeeze a bigger discount out of suppliers; and it is easier to grow the company organically. But these gains are sometimes offset by a loss of flexibility. Too much standardisation can be also be a straightjacket.

‘The level of competitiveness in the global economy is more significant, and competitive advantage is not very lasting in this environment,’ says Ebrahim Mohamed, director of the executive MBA programme at Tanaka Business School, Imperial College London.

‘Just note the fast rise of the iPod and the demise of the Walkman, or the emergence of the Chinese economy and the challenges it poses to the industrialised nations. The time frames for change are much shorter in the globalised economy.’

To survive in this environment, you need to be able to respond quickly. Standardised IT systems do not always lend themselves to this level of responsiveness, which is why some organisations go for the federated approach to IT. A federated approach involves an IT infrastructure that is globally governed, but which retains a certain amount of flexibility allowed at a local level. Or as Mohamed says: ‘Central coherence is necessary even if the solutions are localised.’

So, when CIOs have reached the correct balance between centralised and de-centralised, standard and proprietary, outsourced and in-house, what will be the next big issue to resolve? Everson believes it will be the ‘industrialisation’ of IT.

‘IT is characterised by many exceptions, failures and variability. It’s the sort of behaviour in IT that you would not find acceptable in a warehouse or in a supply chain,’ he says.

‘I think that people talk about running IT as a business. It’s about making IT do what it says on the tin, rather than have to employ extensive reactive managers who can mop up all the time.’

‘Has this started happening yet? ‘The rise of IT standards such as the Information Technology Infrastructure Library (ITIL) and BS15000 are the earliest stages of this, but we have a long way to go,’ says Everson.

‘If you go into a lot of IT organisations, managers can’t tell you what’s going in that organisation and if they can tell you, they probably can’t tell you why. There is a level of control and visibility and management transparency that would not be tolerated anywhere else in business.’

For Dwight Klappich, an analyst at Gartner, globalisation will mean the re-defining of the role of IT.

‘As businesses have become more information dependent, part of the role of IT is changing to that of information architects and information experts,’ says Klappich.

‘The functional groups tended to be very good at doing their one thing, running a warehouse for example, but when a company wants to re-engineer its approach to the marketplace, IT brings a certain set of skills around defining, modelling and managing business processes.’

And as this begins to happen, IT will take an increasingly strategic role in the global enterprise.

Best Practice:

Formulating a global IT strategy

* The strategy must have clear purpose and use. It must address the questions of the key stakeholders.

* It must align with the rest of the business, and should succinctly address the main needs of the business, its aspirations, and recognise the role and possibilities of IT.

* IT strategy must address the key questions of business strategy, information strategy, how to manage IT and how to maximise return from technology access.

* The plan must be fiscally responsible – there are a lot of IT strategies that are not. It must strike a financial balance between the need to balance IT spend with the business need for growth and productivity improvement.

* The IT strategy can be used to facilitate effective communication as this is where a lot of work carried out globally falls short. If you are working in France, for example, social considerations are in the top-three issues for business executives. And if they are not, employees will put them back there very quickly.

Focus on value

* Address the ‘how-to-do’ things rather than the ‘what’ and the ‘why’. A lot of IT strategies fall into extensive cross-cultural arguments about ‘what’ and ‘why’ and rarely address the ‘how’.

* Measure progress, or the lack of it.

* The strategy must be useable over time rather than being merely useful to inform at a particular point in time.

Outsourcing

* You must develop a relationship with the vendor and it must be an ongoing long-term relationship.

* Understand the culture of the offshore location. Employ people from the country you are doing business with to help you with negotiations.

* Outsource the less business-critical activities before you outsource the critical activities.

* Develop a risk mitigation strategy.

* Choose your outsourcing partner carefully because it can be costly to switch later.

Global data synchronisation

* ‘Before you go too far in implementing global data synchronisation, verify that the quality of data within your organisation is good, clean, consistently interpreted data. Do that inside before you push it outside or you will upset your partners quicker and you will waste money,’ advises James White, an analyst at Gartner.

Case Study: How to develop a winning IT strategy for an organisation competing in the global economy

‘The technology that we sell to our customers is the same technology that we use to run the organisation,’ says Albert Hitchcock, CIO at networking company Nortel.

‘A few years ago, a lot of organisations viewed IT as a necessary evil. We were lumped together with human resources and a number of other support functions as something you just had to do, and do as cheaply as possible. The view nowadays is that IT is much more core to business strategy, and that’s especially true for technology firms such as ourselves.’

From discussions with his peers, Hitchcock found that IT is also becoming core in an increasing number of non-technology firms.

So how does Hitchcock go about developing an IT strategy?

‘We have a well-defined process for developing our strategy,’ he says. ‘The cornerstone of it is an 18- to 24-month strategy that we revisit every 12 months. I have a chief architect – a combination of a strategy person and a technology person – who looks at our 24-month vision both in terms of what’s happening in the business, at a Nortel level and at a market level.

‘What market challenges will we be facing in the next 24 months? He takes a macro-level view of that and a IT view of what’s happening with IT.’

Most people would consider a strategy to be something that looks at longer-term horizons, maybe five years. ‘Some people say that a 24-month strategy is not really a strategy but a set of objectives,’ says Hitchcock.

‘But technology is moving so fast that I don’t think you can reliably predict beyond 18 to 24 months.’

When gathering data for the IT strategy, the process never stops. ‘There isn’t a fixed start and stop timeline,’ says Hitchcock. ‘We start creating the document in September and finish in December. That’s when we set the priorities for the next year.’

Once the chief architect has analysed the environment that Nortel is operating in, the team looks at the company’s own business objectives for the next 12 months.

‘We boil that down to a combination of a vision and something we can make into an operational set of objectives,’ says Hitchcock. ‘We have a set of about 10 priorities that we manage, and we review those every six months. That set of priorities has to link back to the strategy. Every employee in the firm understands his or her priorities for the six-month period. They also understand how their work contributes to delivering the greater vision. The strategy really becomes a living document.’

Case study: The legal challenges of being a global ebusiness

Michael Hancock, a partner at international law firm Salans, is active in ecommerce issues for the International Chamber of Commerce in Paris. He says ebusiness does not involve many new issues for people who have been involved in international business for years.

For as long as there has been trade across borders, the basic questions remain the same: if I pay in advance, how can I be sure to receive delivery? If I manufacture or provide service in advance, how can I be sure to get paid? What can I do if my foreign partner steals my business, concept, products or clients? If everything goes wrong, is there any effective recourse?

So, what is new?

‘First, the players. IT permits very small businesses to become involved internationally at a very low cost,’ says Hancock. ‘All it takes is an email address and some imagination. But these new players are not usually familiar with dealing abroad. Second, the nature of the products and services are frequently IT based, and therefore may be easier for someone to copy and distribute without authorisation.’

For all businesses, intellectual property (IP) is hard enough to protect in their home country, but it becomes next to impossible for small firms, if only due to the cost of engaging foreign lawyers and prosecuting claims abroad. Hancock’s advice is simply, ‘don’t disclose the essentials’, assuming the business permits it.

‘Some products and services are well suited to a start-small-and-grow strategy,’ says Hancock. ‘Here the key is building up a network of trading partners that are worthy of confidence.’

Nonetheless for other businesses there is no substitute to travelling abroad to meet partners and using networks to find someone who can give you a little advice about finding the right partner. Business school alumni associations can be good for this.

When the monetary value of the business permits it, contract obligations can be enforced abroad thanks to an international treaty that foresees the enforcement of arbitration awards abroad – the 1958 New York Convention. A quick internet search will let a small business check the proposed trading partner is in a country that signed it.

‘To keep costs under control, a small business may want to add a contract clause that provides for a single arbitrator and an expedited procedure, perhaps without oral hearings to eliminate travel costs,’ says Hancock.

‘I usually recommend requiring a mediation before arbitration, as mediation so often leads to a settlement at a fraction of the cost of arbitration.’

There are also inherent legal implications of setting up a business with an ecommerce element.

‘If a firm is selling in a foreign country, the seller will probably be subject to the local consumer laws,’ says Hancock. ‘Very small sellers may essentially be “judgment proof” in the sense that the courts of a faraway jurisdiction will not be able to reach them in their home country. But as the business grows, the seller will have more at stake and perhaps even assets in the country. There are, of course, almost as many different situations as there are businesses, and each one must be considered separately.’