Case study: awakening of an IT department

Most organizations are facing a multitude of challenges these days, including pressure on pricing and shorter lifecycles of new products. This requires organizations to become more flexible, focused on their core activities and enhance the capability to use new technologies to create or sustain a competitive advantage.

When the IT department is too sheltered

One of the companies busy transforming itself from a traditional, low IT density business model, to a highly digitalized business model is the company ‘Merchant’. It is a specialist in auctioning consumer products in high volumes (millions of items per day). To do so it has invested in an impressive amount of buildings which handle the inbound logistics, auction, outbound logistics and financial transaction.

In the last decade both producers and buyers of the products are increasingly looking for ways to improve efficiency, including the role of Merchant to align demand and supply. As a result are producers and buyers looking at Merchant for an improved service offering.

Traditionally, reliability and thus very thorough development, testing and operating procedures were the cornerstone of the IT department. A typical IT project would take at least a year from start to finish. And as the traditional business model required the physical buildings to perform the auction, it was Merchant (and subsequently their IT) which was calling the shots. Merchant had grown over the years into the largest company of its kind and the required investments in new physical infrastructure ensured a high entry barrier.

The introduction of the internet changed all that, even though Merchant was able to ignore it until quite recently. One of the ‘problems’ of the internet for Merchant is that it considerably lowers the barrier of entry. It allows the information flow required to auction a product to be disconnected from the physical flow. In the traditional business model, both flows were combined with documents travelling with the physical product. The internet also makes it easier for producer and buyer to find each other without the Merchant as a broker.

While the business very clearly saw these threats and scrambled to action, the IT department initially failed to appreciate the sense of urgency. During summer it was not uncommon that a project was on hold for three weeks because the developers were on a three week holiday. The difference in culture and economic model are depicted in the table.

 

	Traditional auction	Internet auction
Economic model	High fixed cost require high volumes to recover them. Economies of scale are crucial.	Increasing the number of users of the online system is crucial. The more producers and buyers the system use, the more attractive it becomes (‘positive feedback loop’).
Culture	Risk averse, efficiency focused.	Fight for talent to ensure own system is improved faster than competition’s offering.
Competition	Focus on costs and high level of standardization among business partners	Focus on attracting and retaining most talented employees.

 

Due to the lack of action from the internal IT department the business manager of Merchant responsible for the e-commerce domain engaged a third party supplier to build a pilot system. A pilot which was rolled out within three months. Since the introduction the transaction volume has grown exponentially and the system has become of strategic importance to Merchant. Subsequently the business has requested IT to insource the solution and incorporate it into the internal IT ecosystem. However, the ecosystem of Merchant was standardized on Microsoft and the external vendor used a non-compatible system from IBM. As a result will the system now be rebuild in dot-net.

Structural solution

The sense of urgency has in the meantime taken hold at management level within the IT department and several steps are undertaken to create a more agile and responsive department. Central in this approach is the need to differentiate based on the demand profile of the business (speed-to-market & innovation versus efficiency & reliability). More on this topic can be found in previous blogs, including here. The essence of the required change is however a cultural one. From a mindset of thinking in roadblocks to a mindset of thinking in possibilities.