A new McKinsey study shows a clear connection between good business management and good IT management

Courtesy of Optimize Which came first, the IT chicken or the business egg? When McKinsey Consulting studied 100 manufacturing companies in France, Germany, the United Kingdom, and the United States, it found that IT investments have little hope of making an impact on a company’s bottom line unless they are accompanied by first-rate management practices.
McKinsey rated companies in three key areas: lean manufacturing, which cuts waste in the production process; performance management, which sets clear goals and rewards the employees who reach them; and talent management, which attracts and develops high-caliber people. According to the firm, those companies that had the highest marks in these three areas became more productive, with or without higher spending on IT. With excellent IT, however, the payoff is even greater; that is, the whole is greater than the sum of its parts.

Contributing Web editor Howard Baldwin talked to McKinsey consultants John Dowdy, a director, and Stephen Dorgan, an associate principal, both of whom work in McKinsey’s London office, about the insights gained from this survey.

Q: So what’s the lesson to be learned from this?

Dorgan: For me, the big takeaway is that you have to have the right management practices in place before you invest in IT, rather than investing in IT and then hoping to improve management practice and behaviors.

Dowdy: When we started, we looked at the three aspects of management: production, operations, and talent. I was expecting to find that some companies would be good at one thing and others would be good at something else. I was thinking that a company might be successful because it has great people or a good shop-floor layout. But there were numerous complementary indications; that is, if you are good at operations, you are also good at hanging on to great people. It turns out there’s this thing called great management, and just as someone might be good at one of those three areas, there’s a similar positive relationship between good management and effective use of IT.

People who just improve management practices get a benefit, and people who invest in IT without good management get a negative result. So on your path to improved productivity, you’re better off putting management practices first. People who improve management practices and invest in IT get the most benefit at all.

Q: Are there certain combinations of the three aspects you looked at plus IT that work better than others?

Dorgan: There is no one silver bullet. People who are good at one dimension tend to be good at all dimensions. That was a surprise to us, because we expected to find different mental models on how to be great. Companies are usually famous for doing one thing well but not others.

Q: No one’s perfect, of course. So if you want to improve a facet of your company, do you focus on your strengths?

Dowdy: Actually, no. The most effective thing to do if you want to improve overall productivity is to invest in the weakest of those three dimensions, aside from IT. A company that’s good at getting people and that has good operational performance should invest in IT. But if you’re weak on the shop floor, don’t invest in IT. If you’re a CIO, you should assess the relative strength in each of these areas. If there’s an area that’s lagging, make an incremental investment to bring it forward.

Q: But don’t invest in IT first?

Dowdy: No, invest at the pace at which the company can improve. Invest in chunks that the company can digest. If IT tries to make a great leap forward, it can leave the company behind; the departments can’t absorb the potential benefits. In other words, you can’t look at IT as a panacea. You have to improve across all levels of performance. If you get too far ahead at any one, you don’t derive benefits.

Q: But how do you keep your fingers on the pace of improvement? How can you tell how good you are at finance, or manufacturing, or human resources?

Dorgan: By benchmarking yourself against your competitors. Very few companies do that. It’s not rocket science to get a feel for strengths and weaknesses.

Dowdy: You don’t need an outsider to tell you these things. If you’ve seen 100 operations, it’s easier to tell how you’re doing. If all you’ve ever seen is one plant, it’s hard to assess. Most experienced business executives have seen a lot of different companies in their sector and can figure out where the weak link is.

But you have to have the will to improve. If you’re not consciously seeking to improve your performance, it’s easy to convince yourself that everything’s OK. You have to have the will to give yourself a rough assessment. Some of the very best companies are the ones that are most critical of their own performance. This is all related—the people who are always searching for the areas to improve perform better. Great managers create the impetus for change, in good times and bad.

Source: Biz Intelligence Pipeline