Pragmatic Approach to IT-Based Management Koki YODOKAWA and Yukio OKOCHI

Transcription

1 No. 135 October 1, 2008 Pragmatic Approach to IT-Based Management Koki YODOKAWA and Yukio OKOCHI

2 NRI Papers No. 135 October 1, 2008 Pragmatic Approach to IT-Based Management Koki YODOKAWA and Yukio OKOCHI Preface: Laying a New Cornerstone of Growth by IT-Based Management IT-Based Management Creates Innovation I IT Innovation: Expectations vs. Reality II Bringing about IT Innovation by Systematic Processes III Cases of IT Innovation in US Companies IV Steps towards Developing Systematic Processes Innovation is an essential element in a company s growth. In realizing such innovation, IT (information technology) often plays an important role, which is referred to as IT innovation in this paper. As the scope of IT applications expands, greater expectations are being given to IT innovation within a company. Actually, however, there are only a limited number of companies that consider that they have reached a satisfactory level of innovation, generating gaps between expectations and reality. To bridge these gaps, activities conducted by leading companies in other countries can provide suggestions. Under the concept that we do not regard IT innovation as something yielded by chance, dedicated teams formed within these companies assume leading roles in establishing systematic processes to continuously generate IT innovation. In these systematic processes, schemes and concepts that are not seen in conventional approaches are incorporated. An example of such a novel scheme is activities to discover promising ideas sporadically lying within business operations departments, discuss such ideas directly with the chief information officer (CIO) and develop a project by considering such ideas from a company-wide perspective. In terms of concepts, there are unprecedented approaches in which a dedicated IT team strives to systematically elicit ideas that remain unnoticed within business operations departments. The first step that is necessary in establishing these systematic processes is to form a dedicated team that can concentrate on generating IT innovation, even if it consists of only a small number of members, through building up achievements and establishing methodology. After these steps are adopted, the number of employees who can promote IT innovation should be increased. Firm commitment on the part of the CIO and other management executives over a long period of time is indispensable for achieving these activities. Copyright 2008 by Nomura Research Institute, Ltd. 1

3 Preface: Laying a New Cornerstone of Growth by IT-Based Management IT-Based Management Now Required of Companies Against the backdrop of an ever-changing management environment markets of advanced countries that are increasingly becoming mature, rapidly expanding markets of growing countries, consumers equipped with high capabilities to utilize information and select companies, degradation of the global environment that is becoming more and more serious, and an insufficient supply of resources, just to name a few there will be no future growth for companies that are unable to adapt to a new market environment and continue their business operations based on a supplier logic that produces poor return on assets. Companies should strengthen their approaches to full utilization of information, which is now generally regarded as the fourth asset (next to human resources, products/services and capital), in order to acquire and maintain a competitive edge that enables them to evolve highly efficient business operations that can gain consumer support in the global arena. More precisely, this means that companies are now required to implement management that generates products and services creating value for customers by employing IT (information technology) to increase their employees capabilities to use information and to reform business processes, that is, IT-based management. METI Launches the IT Management Council In June 2008, the Ministry of Economy, Trade and Industry (METI) held the first meeting of the IT Management Council, which consists of chief executive officers (CEOs) and chief information officers (CIOs) of companies making focused efforts to promote IT-based management, and adopted the IT Management Charter. Based on IT, this charter aims at strengthening the global competitiveness of Japanese companies through such activities as (1) sharing information on cases in which IT is effectively utilized to create and/or reform businesses among companies, enabling CEOs and CIOs to take the lead in actually implementing IT-based management at each company; (2) fostering highly skilled IT personnel including CIOs; and (3) promoting standardization that enables information exchange beyond company borders. IT as a Driving Force to Promote Management Reform For companies, IT or an information system remains no more than a tool. Nevertheless, the use of IT enables companies to increase quality, productivity and speed of business processes, and to improve the turnover of management resources such as fixed assets and inventory assets. The use of IT also contributes to quick decision making based on actual situations that are accurately identified, and to increasing employee creativity by sharing knowledge and wisdom through their close communication. Companies such as Matsushita Electric Industrial Co., Ltd. (Panasonic) and Komatsu Ltd. that experienced major crises and have been successful in implementing management reforms to overcome such crises have used IT to implement sweeping structural reforms involving employment, business activities, product lineup, logistics, etc. In addition, under new structures, they have implemented reforms of business processes and employee awareness based on IT. These reforms can be successful only when a CEO expresses a fundamental policy and takes the lead in implementing reforms and all employees play their respective parts in accordance with such policy. Advances in Technology Facilitate Shifts to New Business Formats By improving companies capabilities to use information, IT can be an effective means of continually strengthening existing businesses. In addition, rapid advances in IT have been accelerating the following trends: Shifting products provided by companies to a digital format (achieving product functions by the use of software, rather than by mechanical components) Virtual product development (conducting product design and trial manufacturing on computers) Directly supplying products to consumers (suppliers deliver products directly to individual consumers) Self-service use of products and/or services (consumers select products and/or services via a network) As we pass 2010, the next-generation network infrastructure such as NGN (next-generation network) and high-speed wireless communications will be in place. Such progress will at last make the ubiquitous network a reality, in which a variety of information terminals used by individual consumers and RFIDs (radio frequency identification tags) that are attached to objects located everywhere are connected via high-speed, highly reliable and highly secure networks. We will see the emergence of an increasing number of companies, i.e., innovators that are quick to incorporate these advances and establish a new business format for relationships with new customers and transacting parties, thereby creating unprecedented value. In contrast, companies that are unable to positively deal with technological advances, but consider them a threat Copyright 2008 by Nomura Research Institute, Ltd. 2

4 that jeopardizes their existing principal business because they have large existing business assets that must be protected, and shrink from taking on the challenge of major changes, might quickly lose their leading positions. Arena of Change Moves from the Manufacturing Industry to the Service Industry IT could be the technology that brings about destructive innovation that replaces an industry s leading companies. These changes have occurred, ahead of other industries, in the manufacturing industry where IT can be the origin of major components, such as information devices, communications equipment, copiers and home appliances. These changes have resulted in many instances of the replacement of leading companies. The next arena for change will be the service industry about which experts point out delays in the use of IT to improve productivity. How successfully a company can respond to technological advances depends entirely on the leadership of the CEO who steers a company s efforts in taking on these changes. IT-Based Management is Important Growth Scenario Currently, in Japan where an accelerating trend towards fewer children and a graying society is a major problem, heated discussions are being held as to how to allocate limited assets among generations in such fields as pension, health insurance, social security, income tax and consumption tax. While these discussions are, of course, important, the question remains whether we should simply focus on the matter of allocating limited assets. What are essential as we move on into the future are measures to increase assets. Whether the subject is a country or a company, we cannot think of a bright future without a strategy for growth. The promotion of IT-based management is vital as one of the growth scenarios for Japan. IT-Based Management Creates Innovation I IT Innovation: Expectations vs. Reality 1 What is IT Innovation? First of all, I want to define the term innovation that implies a wide range of meanings. While the term innovation often connotes technological aspects in Japan, this paper treats it in a broader sense from a business perspective. It is, therefore, defined as creating new value for customers that, in turn, increases business value. Among innovations in many fields, this paper deals with innovation for which IT (information technology) plays important roles, which I call IT innovation. The specific meaning of IT innovation is innovation that can never be achieved without the use of IT. With the expansion of areas where IT is utilized, the number of cases in which IT innovation has been realized has steadily been increasing. For example, the system of takkyubin (home delivery service) to accurately deliver more than a billion packages annually in a manner meeting the needs of each customer cannot possibly happen without IT. This is a good example of IT innovation. When we turn to Internet-related cases, we see the emergence of a number of novel services using IT. This paper tries to identify the factors that are necessary for a company in particular, the CIO (chief information officer) and the IT department to establish systematic processes that continuously yield IT innovation. The paper will also clarify what should be implemented to achieve this purpose. In order to answer these questions in a specific manner, this paper introduces two cases involving US companies that are actively promoting IT innovation ahead of other companies. 2 Actual Status of IT Utilization to Achieve Innovation The Survey on IT Utilization by User Companies that was conducted by Nomura Research Institute (NRI) in 2007 and directed at the CIOs of leading Japanese companies revealed two interesting trends (Figure 1). The percentage of respondents who consider that the use of IT for innovation is unnecessary, to begin with is low. This means considerable expectations are given to IT as the driving force of innovation. In reality, however, the percentage of respondents who consider that with respect to the use of IT for innovation, a company s expectation is nearly achieved at a satisfactory level is low. These results suggest that many companies give considerable expectations to the use of IT for innovation. Actually, however, such use is not yet at a satisfactory level in many companies, causing gaps between expectations and reality. II Bringing about IT Innovation by Systematic Processes 1 Systematically Promoting IT Innovation In fields such as product development, systematic approaches have long been taken to facilitate innovation Copyright 2008 by Nomura Research Institute, Ltd. 3

5 Figure 1. Utilization of IT for Innovation (As Compared to Companies Expectations) A: Products/services B: Business processes (product planning and development) C: Business processes (manufacturing and delivery) D: Business processes (after-sales services) E: Business model N = (1) The percentage of respondents who consider that the utilization of IT for innovation is unnecessary, to begin with is low. (2) The percentage of respondents who consider that a company s expectation is nearly achieved (at a satisfactory level) with respect to the utilization of IT for innovation is also low. (2) (1) Expectation is nearly achieved (%) Note: Innovation refers to creating new value for customers that, in turn, increases business value. Source: Survey on IT Utilization by User Companies conducted by Nomura Research Institute in 2007 Somewhat inadequate Inadequate Utilization of IT is not necessary Unknown; no answer A: Use of IT for product/service innovation (IT is incorporated in products/services) B: Use of IT for business process innovation (product planning and development processes) C: Use of IT for business process innovation (product manufacturing and delivery processes) D: Use of IT for business process innovation (after-sales service processes) E: Use of IT for business model innovation under the concept of continuously producing innovation based on established processes rather than by treating innovation as a yield generated by chance. Recently, similar approaches have been taken to bring about IT innovation. For example, an increasing number of major companies in other countries have been establishing dedicated teams to promote innovation within IT departments, thereby systematically facilitating IT innovation. Unfortunately, we find that almost no Japanese companies have been systematically promoting IT innovation under such a concept. Nevertheless, in light of the gaps between expectations and reality as revealed by the survey, there is a possibility that such moves may expand among Japanese companies in the future. 2 Relationships between a Business Operations Department and an IT Department To generate IT innovation, discussions are often held regarding the roles of a business operations department and an IT department. The primary point of discussion is which department is to take the lead and what roles are to be shared by both departments. Because this is a vital point that concerns this entire paper, I want to clarify the concept in the following paragraphs. Because innovation is defined as creating new value for customers, innovation essentially falls under the domain of business operations. This is also true in the case of IT innovation where IT plays a vital role. In this sense, a business operations department should take the lead. However, it is rarely possible for a business operations department alone to complete IT innovation. The support of an IT department is essential. In particular, in many cases where a variety of business operations departments are involved, nothing moves forward in any reasonable way without the strong support of an IT department sometimes the IT department must play a leading role. In conducting individual IT innovation projects, the role sharing should be as described above. On the other hand, the task of developing companywide systematic processes to continuously bring about IT innovation, which is the theme of this paper, is beyond the scope that individual business operations departments can handle. A CIO and an IT department (a group of IT experts) are expected to assume leadership in dealing with this task because they are in a position where they can take an extensive view of an entire company. These relationships are outlined in Table 1. Table 1. Relationships between a Business Operations Department and an IT Department Individual IT innovation projects Developing systematic processes that continuously bring about IT innovation Business operations department Takes the lead Provides support IT department Provides support (however, strong support is necessary) Takes the lead Copyright 2008 by Nomura Research Institute, Ltd. 4

6 3 Important Points in Developing Systematic Processes What are the important points in developing systematic processes that continuously bring about IT innovation? By clarifying these points, I want to use them as themes in examining specific cases in subsequent chapters. Specifically, the points can be summarized into three topics: (1) A cycle of activities to develop new ideas (2) Methodology for developing concepts (3) Schemes to increase the ability to realize concepts As you probably notice, these points serve as basic elements not only for IT innovation, but also for the introduction of novel products and/or new businesses. Nevertheless, there are difficulties inherent in IT innovation. In introducing specific cases in the subsequent chapters, I will clarify solutions to these three topics, while incorporating such matters inherent in IT innovation. III Cases of IT Innovation in US Companies The two US companies whose IT innovation is examined in this paper are outlined below: Case 1: Multinational Manufacturer A Company A operates business extensively for general consumers such as daily necessities, health care products and foodstuffs. With plants and sales offices located throughout the world including Japan, more than 100,000 employees work for this multinational company. The company has long been taking a company-wide approach to IT innovation, and has actually been producing a number of innovative products. More advanced use of IT than had been made previously is now being made. In particular, recently, the company has been actively involved in achieving IT innovation and has been strengthening its promotion of IT innovation by setting up a dedicated team (an innovation team) within its IT department. Case 2: Hi-tech Equipment Manufacturer B The principal business of Company B includes the production and sales of hi-tech components and equipment for corporate customers. The company also operates globally with nearly 100,000 employees working at plants and sales offices located all over the world. Because the company operates in the hi-tech manufacturing industry where far-reaching changes frequently occur, the company is always ready for taking on new situations. As the industry s leading company, Company B continues to create innovative products and is noted as an innovative company. In the past, there were times when activities to use IT were inadequate. However, since the mid-1990s, rapid progress has been made in innovative activities. Currently, Company B is well known as an advanced IT utilization company. In the same way as with Company A, Company B has also established a dedicated team for innovation within its IT department. However, the roles assigned to this team largely differ from those assigned to the team in Company A. While Company A s innovation team assumes the roles of promoting and implementing individual innovation projects, Company B s innovation team is devoted to creating an environment that facilitates IT innovation by business operations departments and the IT department, rather than directly handling individual projects. By assigning these roles to the innovation team, Company B endeavors to increase the number of employees who can bring about IT innovation, thereby facilitating new achievements based on IT. 1 A Cycle of Activities to Discover New Ideas The starting point of IT innovation is a good to-the-point idea that can lead to remarkable improvements in customer value. How to discover such an idea constitutes the first issue. When personnel at the management level have such ideas, it is relatively easy to bring them to the table for discussion. However, when employees engaged in frontline operations such as business and IT operations have such ideas, it is difficult to identify them. What complicates the situation even more is that a single person does not necessarily have a complete idea. In many cases, it is often only after various ideas are combined that a concept that can lead to IT innovation becomes apparent. As such, in order to address this issue, activities to systematically discover ideas that can lead to IT innovation become necessary. (1) Company A: A dedicated team looks for ideas At Company A, the innovation team established within the IT department assumes the role of seeking out ideas. While the innovation team consists of only a small number of employees who account for only a small percentage of all employees in the IT department, it conducts activities in accordance with an annual cycle (shown in Figure 2), and is successful in continuously yielding IT innovations. In April of each year, team members visit each business operations department to collect data on the issues they face and ideas to resolve such issues. The problems and ideas collected are analyzed to discover common factors and areas where such Copyright 2008 by Nomura Research Institute, Ltd. 5

7 Figure 2. Cycle of Innovation Team Activities Discovering ideas Identifying promising ideas Forming a concept (three months) Proposing the concept Planning a project Implementing a business/ system development project Visiting business operations departments Gathering major problems and ideas to resolve such problems Identifying common factors and areas where ideas could have a large impact Holding frequent discussions directly with the CIO and high-ranking managers of business operations departments to identify promising ideas Thoroughly working out the concept (jointly with business operations departments) Presenting demonstrations to key persons (both business operations and IT departments) Convincing key persons A project is planned jointly by the business operations department and the IT department Note: CIO = Chief Information Officer ideas could have a large impact. In parallel with these activities, informal discussions are frequently held with the CIO and high-ranking managers of the business operations departments to select especially promising ideas. Based on the selected ideas, a concept of IT innovation is formed together with the relevant business operations department over a three-month period. Finally, a project is planned jointly with the relevant business operations department, for which procedures are taken to obtain company approval as an important project for the next fiscal year. Based on the approval obtained, appropriate personnel and budget are secured to establish the project. Subsequently, a newly established project team will take the lead to implement specific activities to realize the concept. Innovation team members also attend major meetings to assess the project and give advice. Through these innovation team activities, Company A has been successful in strengthening the processes from discovering ideas to forming concepts (these processes correspond to the stage before company approval is obtained as an important project), for which the company was weak in the past. As such, these activities have contributed to the discovery of good ideas without leaving them buried and hidden from view and ensuring that, based on these discovered ideas, a project is established and a budget allocated. The following section examines why Company A started these activities. A major background stems from the problems the company faced in the processes to determine the establishment of system projects. In Company A, each business operations department was vested with the right to determine system projects. A system project determined by a business operations department was implemented jointly with the relevant business operations department and the IT department. The problem encountered in this flow of system project implementation was that while it was apparent that each project was important for the relevant business operations department, full consideration was not given to the following issues: What is important from a company-wide perspective (from the customer standpoint)? What is seen if individual issues facing each business operations department are combined? As a result, at Company A, the situation prevailed where ideas that have a great impact and could lead to IT innovation were difficult to materialize. To improve this situation, the innovation team was established. The flow indicated in Figure 3 was also set to enable linking all candidate projects of the business operations departments and considering such candidate projects from a customer perspective. Direct discussions with the CIO and high-ranking managers of each operations department (who are at positions where they can make decisions from a company-wide perspective) were enabled without going through line managers. These measures constitute major factors in successfully discovering good ideas. (2) Company B: Striving to improve the abilities of frontline employees to generate ideas Company B has realized a scheme of discovering good ideas by improving the abilities of frontline employees in business operations departments and the IT department to generate ideas. The concept behind these efforts is that if the bases for many ideas to arise dynamically are provided with the aim of achieving IT innovation, good ideas will emerge and people will work on those ideas to further refine them. Specifically, Company B has adopted two chief distinctive approaches. One approach refers to the activities of the innovation team to promote the creation of venues in which employees in the business operations departments and the IT department gather to discuss ideas for IT innovation. These venues include workshops, Copyright 2008 by Nomura Research Institute, Ltd. 6

8 Figure 3. Discovering Ideas by the Innovation Team Business Operations Department A... Candidate projects Study Study Study A seed of IT innovation falls Business Operations Department B In the course of study, good ideas are not properly treated or disappear Budget compilation for system development projects for the relevant fiscal year Business Operations Department A Implementation of system development project... Candidate projects Study Study Study A seed of IT innovation falls Business Operations Department B Implementation of system development project Discovering ideas The innovation team gathers data on major issues and ideas to resolve such issues. Identifying promising ideas Common factors and areas where ideas could have a large impact are identified. Direct discussions with the CIO and high-ranking managers of the business operations department (who are at positions in which they can make decisions from a company-wide perspective) without going through line managers. study meetings and training courses for IT innovation. More than 80 of these sessions are held annually, which means that such sessions are being held once or twice a week somewhere in the world. The total number of participants in these sessions is said to be more than 1,000 per year. During these sessions, managers and staff members of business operations departments and the IT department enthusiastically engage in discussions. What is interesting in this approach is that the IT department arranges these sessions, rather than the training department. Another approach is that the IT innovation team disseminates the concepts of IT innovation that have already been successfully adopted throughout the company. The innovation team endeavors to discover ways of thinking, technologies and ideas that have successfully been adopted by a business operations department (or in an area) in realizing IT innovation and that can also be used in other departments, and accumulates them. The team then disseminates the accumulated thoughts, technologies and ideas among other business operations and IT departments to enable them to use such concepts to generate ideas that are suitable for their respective departments. As such, the company-wide dissemination of successfully adopted concepts of IT innovation has enabled other business operations and IT departments to envision the realization of IT innovation in a more specific form. These activities bring about significant effects in improving the abilities of employees engaged in frontline operations to generate ideas. 2 Methodology for Developing Concepts What is most noticeable in comparing companies that have successfully achieved IT innovations and those that have not is the difference in activities at the stage of developing IT innovation concepts. Successful companies emphasize the stage of developing concepts and have their methodology (success patterns) for studies. The methodology consists of three elements, i.e., cooperation between business operations departments and the IT department, study methods and study processes. The following sections explain important points in each of these three elements. (1) Cooperation between business operations departments and the IT department The first element relates to the formation of teamwork as seen in a three-legged race by the business operations department and the IT department in generating ideas and developing the concept for IT innovation. In studying ideas that can lead to IT innovation, not all people concerned know how to start and everything is totally in a fog at the first stage. In this situation, IT innovation cannot successfully be brought about if the roles are divided in such a manner as that the business operations department focuses on the business aspect and the IT department focuses on the system aspect, and then, the two functions are linked. A relay method in which studies are first made by the business operations department after which the IT department joins does not bring about successful results as well. What is needed is the formation of teamwork by the business operations department and the IT department to move towards the creation of new customer value. Company A has set up this structure of teamwork in the following way in which the innovation team joins the process from as early as the stage of discovering ideas for IT innovation held by the employees of the business Copyright 2008 by Nomura Research Institute, Ltd. 7

9 operations department. At Company B, the structure of teamwork has been spontaneously established by means of a strong base of communication secured between the business operations departments and the IT department. If the means of linkage adopted by the two companies are compared, the ideal form of cooperation is that adopted by Company B. As is clear from the cases of Companies A and B, in order to establish a teamwork structure among the business operations departments and the IT department, it is necessary for the IT department to adapt itself to the business world. Specifically, the IT department must use the language and terms used in business operations and must consider the development of a system from a customer perspective. (2) Study methods The second element relates to the need to take a thorough approach to pursuing value, rather than functions, in discussing the concept. Essentially, at the stage of developing the concept, consideration should not be given to a means of realizing the concept and the required functions. Instead, discussions must be focused on what to realize as new value. However, what is often actually done is the design of the outline of a new business/system without knowing what is actually being done. In this approach, the stage of developing the concept is treated as the preliminary process of a full-scale new business/system design. In order to avoid a situation in which discussions are unknowingly directed towards the functions to be realized, both Companies A and B have taken the following measures. 1) Use of a prototype To prevent a function-oriented approach, it is important to discuss the concept by viewing an object that will ultimately be created. For this purpose, creating a prototype (screen images, simple system, highly visible workflow drawings, etc.), rather than explanations and drawings written on paper, helps project members actually feel what a new business/system will be like. By viewing this prototype, project members can discuss what will satisfy customer needs and what a new business/system should be to meet such customer needs. 2) The business operations department should play a leading role It is the business operations department having close contact with customers that knows what a new business/system should be like. However, it is often difficult for the business operations department alone to skillfully imagine and express the outcome. This is where the IT department comes for support. In other words, rather than striving to consider what a new business/system should be, the IT department should make efforts to elicit such a stance from the business operations department. Specifically, the IT department should show cases of IT innovation that were achieved by other departments. Otherwise, the IT department should help project members actually see the ultimate stance by repeating prototype modifications. (3) Study processes The third element concerns the creation of processes appropriate for study methods. For example, Company A inspected and improved the overall processes of a new business/system development project to adapt to the study methods explained in Item (2). The upper row of Figure 4 shows the conventional flow of a new business/system development project. Within this flow, a substantial part of a project is often determined after the project plan is formulated (i.e., a Figure 4. Company A s Improvement of Study Processes for a Business/System Development Project No breakthroughs can be achieved within this flow Conventional Developing a business/ system concept No meaningful activities conducted Project plan (budget, organization) Business design Definition of requirements Study of business migration Design, development Training, preparing manuals Testing System introduction Three-month period of developing a concept After improvement Establishing customer value scenario Prototype Verification using a pilot system Project plan (organization, budget) Business design Definition of requirements Study of business migration Design, development... Copyright 2008 by Nomura Research Institute, Ltd. 8

10 project organization is set up and a budget is allocated). However, because important factors such as the scope of study, budget, organization and period are fixed after the formulation of a project plan, a substantial part of a project must be determined within a fixed scope. In addition, because the number of people concerned increases, the number of restrictions they impose also increases, making it more difficult for project members to display new ideas freely. Company A considered that it would be difficult to expect any breakthroughs that could lead to IT innovation under this flow, and provided a three-month period for developing a concept before the formulation of a project plan, where the study methods explained in Item (2) are applied to generate novel concepts. While a three-month period of developing a concept essentially corresponds to the conventional step of developing a business/system concept in the upper row of Figure 4, in most cases no meaningful activities expected of this conventional step have been conducted other than those in which a considerably large system is developed. Company A has restored the originally expected status by providing the three-month period. 3 Schemes to Increase the Ability to Realize Concepts A concept that can lead to IT innovation always contains a number of issues that are difficult to resolve such as realizing mutually contradictory requirements at a one-step higher level or realizing what is considered irrational. It can be said that because difficult issues are included in a concept, realization of a concept can bring about IT innovation. Nevertheless, its realization entails many difficulties. To resolve the difficulties and realize the concept, the capabilities of an organization to implement projects, such as project management capability and the capability of promoting organizational reforms, play a large part. In addition, certain elements are specific to IT innovation. For example, the following three elements play major roles in increasing the ability to realize a concept. (1) 80 percent rules Developing a business/system that can realize 100 percent of a concept does not always bring about IT innovation. When we see actual cases of innovation in the world, we often find cases in which a concept is initially introduced in a market in an imperfect status. As the concept is gradually accepted by customers, a cycle of improvement is activated and the concept is developed into innovation. Similar characteristics can be found in IT innovation. Even if less than perfect, the first step should be taken by developing a new business/system and creating customer value. Based on the effects obtained through this first step, a reinvestment and improvement cycle should be activated to accelerate the pursuit of customer value. This way of thinking is vital for increasing the ability to realize any concept that contains difficult issues. Company A follows the 80 percent rule. After completing the stage of developing a concept and before going on to the next stage of developing a new business/system on a full-scale basis, the business operations department responsible for the relevant project is questioned as to whether customer value can be created even under the condition where the concept is only 80 percent realized. Realization of the remaining 20 percent is to occur in improvement cycles after the development of the new business/system. This way of thinking gives priority to the realization of the concept to some extent at the initial stage, rather than pursuing 100 percent realization. (2) Verification using a pilot system As is clear from the flow of developing a concept at Company A (Figure 4), during the three-month period of developing a concept, verification using a pilot system based on a prototype is implemented for the business operations department. Through this verification, Company A precludes concepts that are unrealistic and difficult for employees engaged in frontline operations to accept and adopt. This means that by reflecting verification involving the employees engaged in frontline operations, the concepts themselves are made useful and effective. This process helps prevent failures, such as situations where changes were made to business, but the changes were poorly planned, or a system was developed, but no one uses the system, and increases the extent of realization of the concept. (3) Importance of IT technology To realize concepts that contain many difficult issues, IT technology also plays an important role. When we see actual cases of IT innovation, we find many in which IT technology serves as the driving force of breakthroughs. Both Companies A and B understand this importance and support the strengthening of IT technology chiefly by their IT departments. In the case of Company A, although the company does not have its own IT technology, the company endeavors to explore the procurement routes of IT technology. In exploring the routes, the company can meet and talk with skilled engineers and receives suggestions on how best to use IT technology for their business. This experience helps the company use IT technology skillfully, which serves as the driving force in realizing IT innovation. Copyright 2008 by Nomura Research Institute, Ltd. 9

11 Table 2. Systematic Processes for Realizing IT Innovation at Companies A and B in the US A Cycle of Activities to Discover New Ideas Methodology for Developing Concepts Schemes to Increase the Ability to Realize Concepts Company A (1) A dedicated team (innovation team) discovers promising ideas that have remained unnoticed at work sites. (2) The dedicated team reviews individual ideas from a customer perspective, and discusses such ideas directly with the CIO and high-ranking managers of the business operations departments. (1) A dedicated team joins the business operations department from the stage of discovering ideas, forming teamwork between the business operations department and the IT department. (2) Priority is given to a value-oriented approach over a function-oriented approach. Use of a prototype The relevant business operations department should play a leading role (3) A period of developing concepts is provided before the formulation of a project plan. (1) Priority is given to the realization of concepts to some extent by means of the 80 percent rule. The remaining 20 percent is realized within improvement cycles. (2) During the period of developing concepts, verification of a pilot system is implemented jointly with the business side to make the concepts feasible. (3) Importance is given to IT technology that functions as the driving force in realizing IT innovation. Company B (1) A dedicated team creates venues to discuss ideas for IT innovation to strengthen the abilities of employees engaged in frontline operations to generate ideas. (2) The dedicated team disseminates the concepts of IT innovation throughout the company that were realized to promote the generation of ideas by employees engaged in frontline operations. (1) Against the backdrop of a strong communication base between business and IT, teamwork between business and IT is spontaneously formed. (2) Same as (2) for Company A. Same as (2) and (3) for Company A. Figure 5. Steps towards Developing Systematic Processes to Continuously Generate IT Innovation <Generally required period> * Cases of large companies operating globally Step 3: Evolving the methodology About 2 ~ 3 years Evolving the methodology among IT and business operations departments Increasing the number of employees who can promote IT innovation and strengthening the capability of an organization to drive IT inovation Step 2: Building up achievements and establishing methodology by the dedicated team Identifying a concept, and realizing that concept through repeated trial and error Establishing the methodology and being free from a way of thinking that involves a chance yield of innovation About 2 ~ 3 years Step 1: Achieving operational excellence About 5 years Fulfilling the primary mission of the IT department - Securing system quality, cost effectiveness and speed - Implementing efficient IT operation Securing human resources who can engage in IT innovation activities Table 2 outlines the systematic processes adopted by Companies A and B, as explained so far, to realize IT innovation. IV Steps towards Developing Systematic Processes In Chapter III, the cases of two companies in the US are used as a means of examining the important points in the processes from the stage of generating ideas to the stage of realizing IT innovation. Lastly, consideration is given to the steps of activities to establish systematic processes (Figure 5). As described in the beginning of this paper, the CIO and the IT department must play leading roles in promoting these activities. 1 Achieving Operational Excellence Operational excellence refers to a philosophy of securing quality, cost effectiveness and speed, and of Copyright 2008 by Nomura Research Institute, Ltd. 10

12 implementing efficient IT operations, which constitutes the primary mission of the IT department. What must first be done is to ensure the achievement of this primary mission. If the IT department were to start IT innovation activities without fully achieving this mission, cooperation would not be obtained from the business operations departments. Achieving operational excellence should be considered as a prerequisite for the IT department to conduct IT innovation activities. If operational excellence is achieved, the efficiency of daily IT operations will be improved, generating human resources that can be assigned for IT innovation activities. This is another effect that can be brought about by the achievement of operational excellence. 2 A Dedicated Team Must Accumulate Achievements and Establish Methodology The next step requires the creation of a dedicated team, even if it consists of only a small number of members. Because the routine operations of the IT department are those that support a company s daily business activities, priority is likely to be given to routine work if employees of the IT department attempt to handle both routine and innovation operations. Accordingly, it is essential to separate these operations by establishing a dedicated team for innovation and to provide an environment where these members can concentrate on innovation activities. Then, two missions must be assigned to this dedicated team. The first mission is to accumulate the achievements of IT innovation. Because IT innovation relates directly to the creation of customer value and business value, IT innovation activities are nothing less than business activities themselves. Accordingly, business operations departments naturally expect results from IT innovation. To persuade business operations departments to strive to realize IT innovation, the first essential course of action is to build up the achievements, rather than creating mechanisms without showing any results. For example, the IT department should work jointly with a business operations department to identify a specific concept, engage in repeated trial and error, and realize that concept. The dedicated team must build up the results by experiencing the pains involved in realization. The second mission is to establish appropriate methodology for IT innovation. To continuously achieve IT innovation, rather than considering it as something yielded by chance, methodology that is backed by processes and study methods must be established in the course of implementing actual projects. Methodology here does not mean explicit knowledge such as manuals, but refers to something that contains both explicit and tacit knowledge and is close to proficiency or expertise. The goal to be achieved at the second step is to create a dedicated team, even if small, that can fulfill the two missions of achievements and methodology, thereby having the capability to generate IT innovation. 3 Evolution of Methodology Last of all, the methodology thus established must be disseminated among the IT department and business operations departments to increase the number of employees who can promote IT innovation. This is the third step. Because only a dedicated team is engaged in IT innovation activities at Step 2, the number of projects that can be implemented is limited. In addition, if a situation continues where only the dedicated team conducts IT innovation activities, a climate in which IT innovation is the responsibility of only the dedicated team may prevail, creating an adverse effect. Accordingly, this third step must ultimately be reached, in which the methodology is evolved (the number of members who can promote IT innovation is increased). To evolve the methodology, methods close to activities to support the business operations departments must be adopted. Specifically, rather than simply distributing manuals and materials that explain the methodology, members who have relevant knowledge or proficiency similar to that of the innovation team members should join discussions held in the particular business operations department to explain such experience. In the cases of the companies introduced in Chapter III, about five years are required to complete Step 1, about two to three years for Step 2, and about two to three years are required to generally disseminate the methodology throughout the company (Step 3), although there is no end to Step 3 activities. Accordingly, the companies spent about ten years in total to go through all of these steps. While this is one yardstick for large companies that operate globally, such long-term activities are generally required to establish systematic processes to continuously generate IT innovation. For this purpose, strong commitment of the CIO and other management executives to support these activities is indispensable. 4 The IT Department as Innovator During the 1960s and 1970s when companies introduced computer systems and remarkably improved the efficiency of clerical processing, the computer system departments of the time gave rise to what can be exactly expressed as innovation. Originally, the IT department was an innovator. In this sense, generating innovation is the ultimate goal of the IT department. The significance of the Copyright 2008 by Nomura Research Institute, Ltd. 11

13 existence of internal IT departments that handle work that could not be achieved by outsourcing or other means is nothing less than giving rise to the sort of IT innovation that is explained in this paper. A company will encounter a number of difficulties until it reaches the stage of acquiring the capability to generate IT innovation. Nevertheless, the CIO and the IT department should display leadership in addressing these challenges, and should contribute to the improvement of a company s competitiveness. At the same time, the IT department should endeavor to institute the ultimate significance of its existence. Koki YODOKAWA is an executive fellow at NRI. His specialties include IT-based corporate innovation. Yukio OKOCHI is a senior consultant in NRI s Process and IT Management Research Office. His specialties include ITbased business innovations, business process design and IT governance. Copyright 2008 by Nomura Research Institute, Ltd. 12

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