Charles Schwab & Co. grew up around its information technology capabilities. IT allowed the young discount-brokerage house to offer customers lower prices on trades than traditional brokers. Later, as discount brokerage became more of a commodity business, Schwab transformed itself into a full-service, online broker, and by 1998 it was earning a significant share of its profits in online trading. But in the years following, other brokerage houses caught up to Schwab, some even surpassing it.
Surprisingly, IT had become part of Schwab's problem. IT staffers' responses to business requests had become slow and expensive, and IT engineers had to spend more time than ever fixing their systems' bugs. Meanwhile, several big, ambitious projects were overdue -- including a tax-lot accounting system Schwab had envisioned serving its most profitable customers. But the company couldn't respond effectively to the competition while these projects were under way.
Still, the company kept throwing money at the project. In fact, Schwab found itself spending 18% of its revenue on IT while three of its leading competitors were spending 13% or less -- a cost disadvantage amounting to hundreds of millions of dollars annually.
That a company as tech savvy as Schwab could find itself in this predicament underscores how misguided the typical diagnoses and prescriptions of IT trouble are. For years, companies that wanted to harness IT have focused on alignment -- the degree to which the IT group expends resources, pursues projects and provides information consistent with the business' priorities. In fact, it's a mantra among executives: Align IT and succeed.But even at companies that focus on alignment, sometimes aspects of the business dependent on IT don't perform well. Why? Because poor performance comes not just from misalignment but also from the complexity of the systems, applications and other infrastructures.Of course, complexity develops for understandable reasons. IT engineers running amok didn't cause Schwab's IT system to become enormously complicated. Rather, the company's various divisions were driving independent initiatives, each designed to address different needs. Some of these business constituencies conflicted and created a set of Byzantine, overlapping systems: They satisfied individual units in the short term, but didn't advance the company as a whole.When companies create labyrinths of new complexities on top of the old, they make system enhancements and infrastructure improvements ever more difficult to implement and leave significant benefits untapped. Costs rise, delays mount and the fragmentation makes it difficult for managers to coordinate across business units. In essence, companies can align IT performance to business objectives all they want, but if IT is performing poorly, objectives still won't get accomplished. And that, in a nutshell, is the alignment trap.There are, however, two basic principles that can make organizations more effective. The first is to focus on simplicity. Often the cheapest and quickest way to respond to individual demands for improvement is to implement something that increases complexity. However, implementing companywide standards, replacing legacy systems and eliminating add-ons would be better. It would require greater time and money to build new solutions on a simplified, standardized infrastructure, but would lead to lower costs later.Companies also need to hold IT and the business accountable for delivering expected results on time and on budget -- something many companies observe only in the breach. True accountability will reflect organizational changes: Executives get the information they need to measure IT progress; they hold IT people accountable for outcomes; line managers give IT the resources it needs and then work closely with IT leaders to exercise joint supervision of individual initiatives. This can mean radically restructuring the way IT operates. Charles Schwab itself has recently taken some substantial steps in this direction. The company's Cambridge Initiative, launched in 2004, enables active traders to track their trades and analyze their portfolios. Unlike earlier IT projects at Schwab, it was created on a separate platform rather than overlaid on the corporate mainframe, and it came in on time and on budget. Perhaps more important, it provided customers with additional value while reducing Schwab's costs to competitive levels: Overall cost per trade was reduced more than 50%, while average time to execute trades at peak times decreased 80%. Clients showed their approval by increasing their trades and bringing more assets to bear, reigniting Schwab's growth. With IT both effective and aligned, companies can put IT where it belongs in the 21st century: at the heart of the business processes defining marketplace positions.