State of the CIO 2014: The Great Schism

When CIOs live in the IT house on the hill, they live well.

In our 13th annual State of the CIO survey, 25 percent of the 722 CIOs we surveyed report that the IT group is perceived by colleagues as a true business peer--or even a game-changer--that can create and launch new products and open new markets. These first-class CIOs identify their top activities as driving business innovation, cultivating partnerships and developing business strategy. They control the majority--65 percent--of spending on IT. They have an excellent relationship with the CEO, reporting to him and sitting on the executive committee. They draw on deep bench strength in the IT group and focus on external activities, such as meeting with customers. And like the CEO and the rest of the C-suite, these CIOs enjoy extra pay when the company reaches sales and profit goals. That's good stuff.

[Related: More Coverage: The Role of the CIO]

Toiling far from that exalted place, we find the 48 percent of CIOs who acknowledge that their IT groups are viewed by fellow employees as a cost center or service provider. Life isn't so grand there. Their top activities are improving IT operations, deploying new systems and controlling IT costs. Managing IT crises is also high on the list. That sounds like a CIO job description from 1995.

Whether an IT group is a game-changer or a cost center is the subjective judgment of our survey respondents from around the world. We had a strong global response this year, with 41 percent of respondents coming from Europe, the Middle East or Africa. Yet if someone self-reports that they're viewed as a cost center, that's pretty telling. As we plow through this period of digital disruption, where established rules for competing may no longer apply, some CIOs now question what they want for themselves. The profession is changing fast in an atmosphere where colleagues sometimes look upon a traditional IT group as a hindrance to corporate success.

Take heart: Our 2014 State of the CIO research reveals that core measures look good. For example, 44 percent of CIOs report to the CEO, up from 39 percent last year. Tenure is steady at almost six years, while average pay is holding at $219,500. CIOs are carving out significant time to focus on building relationships with business leaders, some spending up to 25 percent of a typical week on it.

But the alarming split in the profession--between CIOs at the top of their game and those who aren't--will alter careers, and perhaps corporate futures as well. There are glaring differences in what the CEO wants this year from each kind of CIO. Cost-center CIOs must finish a major enterprise project, simplify IT and cut technology spending by a set percentage. Game-changers are being asked to lead product innovation efforts and enable global expansion. They make more--$249,000, compared to a cost-center CIO's $182,000--and report healthier relationships with the CEO and CFO. While the percentage of CIOs overall who report to the CEO is up, among game-changers that number is at 64 percent, while for cost-center CIOs it's only 37 percent.

"There is a polarization to what's happening," says Rich Adduci, CIO of Boston Scientific, a $7.2 billion medical device maker.

This fracturing threatens the vitality of the CIO role. The divide is not due only to seemingly less capable CIOs; both the executive and the company play a part. In times of tumult--and the current dismantling and remaking of whole industries certainly qualifies--leaders often don't know quite what they want. A strategic CIO and an organization that views IT as simply a cost to be managed are as badly mismatched as a tactical CIO trying to keep up at a place that demands fresh thinking from IT. As Adduci puts it, "Either the CIO will win people over, either way, or he will get gone."

We see the angst. While 86 percent of CIOs in our survey say their role is becoming more important to business and 90 percent say being a CIO is increasingly challenging, just 65 percent say the CIO role is becoming more rewarding. And a worrisome 28 percent of respondents say they feel CIOs are being sidelined (see "Slip Slidin' Away?" above).

The question is, what can we learn from top CIOs who are flourishing in the new digital age?

Keys to the Castle

When you talk to leading CIOs about how they think and what they do, two major themes emerge: compensation and customers. Sixty-one percent of CIOs in our survey have part of their compensation tied to a specific corporate revenue or profit goal. These CIOs also report having far different priorities and expectations than the 38 percent of CIOs whose pay is not tied to financial performance. Those priorities and expectations fall into the category of strategic, outward-facing items, such as improving products and services, addressing increasing competition and enabling growth in emerging markets. In other words, the sort of endeavors discussed in private meetings of the board of directors.

Properly motivating CIOs, and all of IT, to get the most valuable performance out of them is a no-brainer for Chris Hjelm, CIO of Kroger, a $96.8 billion grocery chain. He and nearly every employee at Kroger earns bonuses based on the company's financial results. In fact, Hjelm's entire bonus depends on achieving such objectives. Doing so ensures everyone is working toward the same goal, he says.

And that goal, of course, is serving the customer.

While customer focus is a high priority, nearly half of the CIOs in our survey--47 percent--have difficulty getting their IT staff to be more business-oriented and customer-facing. This figure climbs to 50 percent for respondents outside North America, significantly higher than the 42 percent for North American respondents. CIOs who can't drag technical staff into this new world sometimes just have to replace them.

Hjelm tries to keep his staff laser-focused on customers. That's not hard in the grocery business because everyone shops. But he also strives to show even his back-office IT staff how their work affects sales, customer satisfaction and other corporate metrics. For example, an engineer in the data center knows that systems availability directly affects revenue. "It's vital they understand," he says.

No CIO can succed today without developing antennae sensitive to customer behavior, says Cora Carmody, CIO of Jacobs Engineering Group, a $10.9 billion technical services provider.

Carmody meets regularly with customers, including recently with NASA and an Australian mining company. She does it to learn about their issues, but also to share her IT expertise. Recently, one of Jacobs' colleagues told her that his external customer was concerned about controlling IT costs, so Carmody offered to do a presentation on the topic for the customer.

"I've always done that," she says. It's a way to build IT's credibility within the company as well as collect sparks about potential new products and services, she says.

New ideas come from imagining what consumers go through, says Rick Roy, CIO of CUNA Mutual Group, a privately held company that provides insurance, asset management and other services to credit unions and their members. That's how a lucrative new mobile product was born at CUNA Mutual two years ago. At a car dealer, a consumer wants a loan but may not want to work with the dealership or head home to contact banks. CUNA Mutual came up with a smartphone app that lets customers get a car loan from their credit unions, then and there.

"If you work your way backwards from the consumer, you think about what kinds of things they're looking to do," Roy says. "How can we help?"

About $1 billion in loans have been secured this way so far, he says.

GAF goes even further. Adam Noble, CIO at the $3 billion privately held building materials manufacturer, last year started to send IT staffers to collaborate with external customers directly. Noble brought his internal experts in security, mobile and cloud to talk about, among other topics, why it's better to do business with GAF. "People buy your products, yes, but they also buy from you because you have service no one else offers," he says. "We [in IT] are collaborating directly with customers to help run their businesses better." GAF expects to expand a product offering and service this year based on this work, he says, but declines to provide details.

The experience has been a morale booster and an education for his internal experts. "Individuals in my organization get to explore and get exposure," he says.

Step Up, No Excuses

One thing thriving CIOs have in common is that they continually strive to make the IT group indispensable in diverse areas of the business.

Don't wait to be asked into the business fray, Carmody says. Prove IT's worth by stepping into critical situations. Jacobs acquires a lot of companies, and Carmody has carved out a specialty for her IT group in those situations. When Jacobs recently submitted an offer to buy construction consulting company Sinclair Knight Merz for $1.2 billion, Carmody appointed one of her vice presidents to the due diligence team before the deal and another to lead the integration after.

At Kroger, Hjelm has set up a research-and-development group within IT that invents new technologies and new ways to apply established ones. This R&D team is behind one of the grocery industry's most visible customer innovations in years: Kroger's QueVision system, which uses analytics to predict the shopping rhythms of customers and then suggests how to staff checkout lanes to cut wait times. An infrared camera counts people coming into the store. Based on time of day and day of the week, a proprietary algorithm predicts how long each person will shop. A digital display at the front of the store shows how many checkout lanes are currently open and how many will be open in 30 minutes. The system has reduced the time between when a shopper steps into a line and when the check-out process starts from four minutes to 30 seconds.

"We are pushing the envelope on what's possible," Hjelm says.

Rearrange IT

Some of the most intriguing modern technologies move way beyond the IT group and encompass the whole company. For example, Gartner says a digital industrial revolution--3-D printing that will enable next-generation manufacturing--will redefine how companies compete. Crowdsourcing ideas online will become the norm in engineering, advertising, product development and other departments. These aren't discrete projects with defined borders; they are new ways for companies to operate.

The elevation of IT's importance will force CIOs to change the operating model of the IT group. That includes more outsourcing and more internal "islands of specialization," according to a recent study by A.T. Kearney. The consulting company predicts we'll see more nimble, autonomous teams of IT experts in fields such as mobility or customer experience starting to collaborate closely with business groups to move fast on new ideas.

Kroger has a team dedicated to mobile computing. "Iterative development requires a closer relationship between business and IT professionals," Hjelm says. That's especially true when you are tweaking your mobile app every six weeks. Next up: using grocery lists and store maps to help shoppers navigate the store as efficiently as possible.

CIOs must recognize that old IT structures may no longer work, says Mike Heim, CIO of Whirlpool. Since joining the $18.1 billion appliance manufacturer in May 2012, Heim has reorganized IT to better respond to business demands--he calls it "aligning our operating model to the business model." It took his outsider's eye to spot the need. Before coming to Whirlpool, he spent 33 years at Eli Lilly, the last eight as global CIO. Pharmaceuticals and appliances couldn't be more different, he says. Lilly is a high-margin business focused on corporate customers. Whirlpool is a lower-margin consumer business with quick product cycle times.

What he learned quickly about Whirlpool was that different parts of the world require different shapes, sizes and functions in their appliances, which means the giant global company is a surprisingly regional business, he says. Yet when he arrived, he found a centralized IT organization that was slow to respond to local needs and too focused on internal IT processes and metrics rather than business metrics. IT defined itself as a supplier rather than an innovator, he says. "The model created IT scale but not competitive business advantage."

Heim moved e-commerce and applications to regional offices under regional CIOs. Now both nuances and broad differences in local markets get quicker IT attention and, therefore, faster business results, he says.

Relationship Problems

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