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Monday, January 03, 2005

Balanced IT Organisation : Centralisation Vs Decentralisation

The Misweb writes,"While recent years have seen companies swing between the extremes of centralising and diffusing their IT operations, a balanced model has emerged that offers an ideal blend of cost-effectiveness and control. Quite recently,business units within organisations were obsessed with creating their own IT shops,lured by the promise of greater agility and alignment with their core objectives. A global cost-cutting wave, however, has chilled the fervor and IT resources are once again returning to the centre of the organisation.

Pioneers such as DaimlerChrysler and PepsiCo swung back to consolidation after attempts to disperse IT operations into diverse business units inflated costs and led to reporting chaos. Today, companies have started asking themselves the same question they asked a few years ago: "What is the best IT structure for our business?" Many leading enterprises and analyst firms are advocating a balanced model, which some also call a hybrid, combination, or federated model. The approach is believed to provide cost advantages from the aggregation of common IT functions and flexibility from the decentralisation of application management. Despite recent surveys that indicate the majority of organizations continue to view a centralised IT system as the most "business-friendly" approach, advocates of the balanced model say it results in tangible benefits."Hybrid models avoid the extremes of a purely centralised or decentralised model, and bring about the best of both worlds” is the reigning wisdom at United Overseas Bank (UOB).

-In a central IT organisation, all functions-including planning, application development and maintenance-as well as resources such as personnel, equipment and budget come under the command of a CIO or CFO. Obvious benefits are economies of scale, minimal duplication of work and well-defined reporting lines.
- In IT-dispersed organisations, business units keep a grip on IT funds and expertise needed to support their priorities. Because IT personnel sit in the business unit, the theory goes, they have a good knowledge of processes and are better able to customise technology to solve specific problems. IT staff in business units may have "dotted-line" reports to the CIO. By devolving power away from the IT division, it is believed, inter-division tensions are reduced and technology is embraced more fully.
But how do companies get the best mix? How do they strike the right balance between cost and agility, predictability and risk, and consistency and innovation?According to Meta Group, the best practice is to default to business unit autonomy, unless there is a need to reduce cost, comply with regulations or support corporate policies in the areas of security, human resources or research and development. "Cost reduction initiatives typically involve the centralisation of procurement, networks, help desk and data centers, while compliance with regulations such as the Sarbanes-Oxley Act and Basel II drives the harmonisation of enterprise applications and processes," says Brian Burke, an analyst at Meta Group.

Shared services as the foundation - At UOB, a full-service bank, only the infrastructure and communication services layers that are not sensitive to market conditions are centrally controlled. The bank is carrying out a huge re-consolidation project. Data centres, networks, back-office functions and corporate IT systems throughout the region are being pooled in Singapore for economies of scale. Through its shared services hub in Singapore, UOB also hopes to improve the efficiency of its overseas branch operations, as well as risk and infrastructure management. To ensure that innovation is not stifled by overbearing and unnecessary executive oversight, customer-, sales- and country-specific applications have been dispersed to regional offices. UOB views services the "content" part of the IT stack. "The content layer can still be innovative and driven by the business," she says.

Business units pay for the IT services they use. According to management consultancy firm A.T. Kearney, charge backs provide transparency, "ensuring there is clear accountability and a focus on services that internal customers value most." At UOB,Unlike many decentralised IT shops, CIO manages resources-including budgets-on behalf of the business units. Like other leaders, the CIO has to compete for IT's share of the spending pie, but it has helped that IT is not seen as a cost center.As in most decentralised IT shops, having multiple reporting lines made it a lot harder to account for expenses and define responsibilities. Crossovers in job functions were common, as were accountability gaps. Deploying new technology was expensive due to massive duplication across geographical offices and extensive integration of heavily customised applications. When IT functions were decentralised throughout multiple locations, systems and practises were not easily shared. Many investments had to be duplicated. As UOB expanded, it made sense to pull most IT resources and oversight back to the centre for greater cost control and job accountability. "As the organization grew, scale was required, especially in infrastructure. The IT organisational structure had to be changed to stay relevant.

In an August report, Forrester Research says that enterprises view centralised IT as the most "business-friendly" structure, in contradiction to the very reason for the existence of decentralised IT. More than half of enterprises with centralised IT shops say that IT is responding to business needs. In contrast, only 39 per cent of companies with decentralised IT organisations agree that business needs are being met.

The article lists how some leading companies in Asia stack up:

United Overseas Bank
Combination model
Centralised: Data centres, global networks, back-office functions and corporate IT systems, to get economies of scale from managing common functions in a central location.
Decentralised: Customer-, sales- and country-specific applications, to ensure that innovation is not stifled by unnecessary executive oversight.

Singapore Exchange
Centralised: Everything from infrastructure management and network support to application development, to ease coordination and ensure consistency of delivery across inter-connected business units.

Bank of America
Centralised: Infrastructure management, network support and applications design and development, for more conducive knowledge sharing and skills transfer among IT professionals.

My Take: As IT's importance grows inside organisations, with more competition and concerns about ROI and BVIT, pressures on resourcing, offshoring strategies and heightened sense of expectations from IT by business, all enterprises undergo such changes and an appropriate framework with a three year rollong plan perspective for IT strategy and planning is absolutely essential for any medium sized to large sized IT user organsations. IT service providers, need to develop and offer disctinctive consultative approaches solidified by well researched methodologies with scenario planning facilities that covers all aspects of organisational management viz - Structure, Systems, Process, Infrastructure, Human Resources etc.. factored in to facilitate organisations begin to see decent returns in IT investments.

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