Avoiding the Alignment Trap in IT

Charles Schwab & Co., the big financial services company, grew up around its information technology capabilities. IT was the key factor that 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 the online trading business. But in the next few years competitors caught up to Schwab, and some surpassed it. Several brokerage houses, both discount and full service, were frequently able to beat Schwab on price.

Surprising as it seems, given the company’s strategy of using technology to distance itself from competitors, IT had become part of Schwab’s problem. By the company’s own reckoning, IT staffers’ responses to business requests had become slow and expensive. IT engineers had to spend more time than ever fixing bugs in the systems. Meanwhile, several big, ambitious projects were overdue — including the tax-lot accounting system Schwab had envisioned to serve its most profitable customers — and the slow progress of these projects was preventing the company from responding effectively to competition. Still, the company kept throwing money at projects because it didn’t see an alternative. “We said, we have to keep spending money because we’re half pregnant and you can’t be half pregnant,” recalls Deborah McWhinney, president of Schwab Institutional. A red flag went up when Schwab found itself spending 18% of 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.

The fact that a company as tech savvy as Schwab could find itself in this predicament is instructive. It underscores a growing realization we have found among the companies we work with that the usual diagnoses of IT’s troubles — and the usual prescriptions for fixing those troubles — are often misguided. For many years now, companies seeking to deliver higher business performance by harnessing IT have focused on alignment. By alignment, we mean the degree to which the IT group understands the priorities of the business and expends its resources, pursues projects and provides information consistent with them. Almost every company we have worked with recognizes that IT and business priorities must be tightly linked.