IT's Star Turn

To thrive in the 21st century service economy, startups and old-line companies alike must shift their IT geeks to the front lines of innovation

The fundamental shift of the U.S. economy from one based on industry to one based on services has been covered in this column and elsewhere. While some companies—and indeed industries—still resist the trend, the innovators have recognized that the production of value lies in the creation of services, and have adapted accordingly.

Even product-based companies have shifted their focus from the production of physical goods to the delivery of device-enabled services products. But here's the related innovation trend that no one is talking about: Increasingly, those services are being driven by scalable technologies. The information technology departments once seen as back-room cost centers are becoming key players in the execution of innovation, and hence, the creation of value in the new marketplace. Just look at the numbers.

U.S. Leads in IT infrastructure

Our shift toward a service-based economy paralleled our increased investment in IT. According to the 2005 European Innovation Scoreboard, which looked at IT investment in developed countries as a percentage of gross domestic product, the U.S. led the world in 2004 with 9.25%. In aggregate terms this amounts to about $1.1 trillion dollars. In that same year, our investment in new factories fell to $16.2 billion as reported by The Wall Street Journal ("U.S. Birthrate for Factories Is Steadily Falling," March 15, 2006), meaning that for every $1 dollar invested in factories we invested about $68 in computer systems.

Server farms, mainframes, and networked PCs have displaced factories as today's primary industrial complex. And increasingly, and across sectors, those technologies are being deployed in the name of services.

Data are the "raw material" of today. "Any product that is not closely associated with a service today, will be in 10 years," said Kevin Fong, managing director of Silicon Valley's renowned Mayfield venture capital fund, at a recent Institute of Design strategy conference. "Today we only fund devices that are connected to services."

Hardware, in other words, is only a means to an end. Let another country build it—there's little action or profit associated with the majority of commodity products. What is bankable for investors is the recurring revenue streams associated with service contracts, the value created for consumers in using those services, and the data and meta-data the associated network can assimilate and analyze. Consider Medtronic's (MDT) CareLink Network, which uses an implanted cardiac device (IAD) that enables physicians to remotely monitor patients. On average, the device has eliminated the need for 50% of post-op clinical visits for heart surgery patients, allowing physicians to see twice as many patients, doubling the doctors' productivity.

Such device-enabled services are the shape of things to come. The "factory" that creates the new value for all concerned stakeholders is essentially the computer system that collects, analyzes, and disseminates the data.

Terms of engagement

For Medtronic, or any company that embraces device-enabled services, this innovative shift has a ripple effect. To be successful, Medtronic must create a compelling new business model; it must sell an intangible new service with a plethora of user-interaction touch points, and it must become an expert at systems integration in one of the most highly fragmented and complex environments known. All of these things are hard, but if the company can't get the systems' pieces worked out, the potential for this high impact innovation to survive is nonexistent. Further, if Medtronic's IT team can't implement this shift quickly, the opportunity will pass to someone else given that the technology itself is relatively mature.

Where is IT in the innovation conversation? With IT being so essential to the innovation equation, and with so much riding on the IT department's ability to build and maintain the systems that will drive customer delight, you'd think there would be more talk about the role of IT in innovation strategy.

But let me ask, how engaged are chief information officers in innovation initiatives? Are members of your IT department full-time members of innovation project teams? Or do they exhibit a "call me when you need me" approach? Or worse still, a "Put your request in the queue, I'll get to it when I can" attitude?

Based on my research, the majority of IT departments sit on the sidelines of innovation discussions when they should be central players. Systems consultants as well as corporate representatives say that, typically, IT departments are tactical rather than strategic, reactive rather that proactive, and isolated rather than integrated. Few in the IT ranks speak "business model," which is unfortunate given that so much customer and shareholder value is dependent on IT solutions to facilitate critical network connections.

Is the chief executive accountable for this predicament? Or the CIO or human resources? It doesn't really matter, as long as it's corrected. The situation is reminiscent of the drive toward fast cycle times in new product development in the early '90s, when marketing and engineering functions had to emerge from their silos and learn how to work together in parallel. That change was driven by senior management who demanded both speed and quality.

Rethinking the equation

Whether you are a product company, a service company, or somewhere in between, IT is central to your innovation success. This idea has never been more important than now due to a variety of factors. Systems-centric disruptive technologies abound. On-demand availability of software and storage is relatively cheap by comparison with yesterday's capital intensive tools, allowing average entrepreneurs to build complex business solutions large companies can't even dream of. Demand for user-friendly solutions has never been higher. Current examples like the iPhone show us that user experience nirvana is possible—and we want it, now!

Savvy companies like Medtronic, Zipcar, and IBM (IBM) that have come of age in the past decade or have instituted major systems overhauls are doing well in their sectors because they have put IT at the core of their operations. By comparison, many old-line companies are struggling with legacy know-how and systems that impede their ability to act quickly, much less provide direction and leadership for the innovation leaders who are so dependent on them. This is an acute problem; many corporate innovation executives I know no longer consult their IT departments. Despite the risk of exposing new business strategies to potentially untrustworthy third parties during the "fuzzy front end" stage, they simply go outside. "You get tired of hearing, 'no, we can't do that' all the time," said one practitioner at a Peer Insight forum recently.

In order to support the robust innovation pipelines that many corporations aim to build, we have to rethink how we integrate IT into our organizations, particularly as it relates to driving innovation. Start with the IT leadership team, where more executive bench strength will be needed. IT managers should be well-versed on managing cross-functional initiatives, and should understand the company's business end-to-end. These managers will need to guide innovation teams in regular technology road mapping and system architecting sessions. Interaction design and rapid prototyping of customer touchpoints will be the standard, not the exception. Iteration and user testing of new software concepts will be a core capability. Likewise, IT must be engaged and mentored by business managers as the opportunities to learn and collaborate go both ways.

More IT resources required? You bet. Getting to world class in this domain is worth the cost. But better strategy and prioritization would also help in making current budget dollars stretch to accommodate the types of organizational development matters outlined here.

Cultivating an IT capability that can meet the challenges thrown at it by your newly developed innovation capability can be difficult given today's environment. Suffice it to say, these two capabilities will be inextricably linked for the foreseeable future.

    Before it's here, it's on the Bloomberg Terminal.