Last week I was listening to the CEO of Circuit City Jim Marcum and executives from FTI Inc., the consultants to the company managing Chapter 7 and the restructuring process, talk about how and why Circuit City went bankrupt. The decline of Circuit City of course did not happen overnight nor was the crash in the real estate market and the global economy the only reason behind its fall (as mentioned in their disclosures). The external events, however, did accelerate the collapse of the company and make its recovery from bankruptcy almost impossible. (If CC could have raised approx $500 – $600 million in DIP, they would have made it. I believe CC got very close but the tight credit market made it difficult to get the final $100 million or so it needed.)

What led Circuit City downhill was years of mis-management, wrong investments, lack of collaboration between different units and mis-understanding of the market. More importantly what was really surprising was that despite investing heavily into their IT infrastructure (approx $200 million annually) and having all the crucial data needed for analysis on their fingertips, the executives could not take advantage of it. Looking around, I realized that this situation is not unique to Circuit City at all but is a problem that many corporations (mainly non-software) face today.

So what is the right amount of investment in IT and Why do companies fail to leverage their investments?

When the times are good, companies making decent profits invest in IT infrastructure without much analysis on the ROI and without setting up corporate wide policies. To start with the central IT/IS (Information Services) group immediately starts to revamp/build corporate infrastructure by outsourcing most part and hiring many project managers (who are not hands-on) within, making the IT department top heavy. While these projects are funded by either marketing or sales divisions in the company,  most engineering groups in the company having no clue that these initiatives can  also be leveraged within (in some cases they are not aware of the initiatives at all), start their own small IT projects. What this results in is not only redundancies (server infrastructure & developers) but also a company which relies on multiple platforms that really don’t talk to each other. This only leads to pockets of information everywhere that cannot be shared easily.

For example, while the IS groups supports Microsoft-based platforms, the engineering groups are deploying platforms based on J2EE, PHP, Perl and bunch of other technologies. While IS uses MS Enterprise Search server, engineering groups use a Google search appliance. While IS promotes SharePoint based technologies, the engineering groups customize open source wikis. This list goes on and on…

I don’t think there should be any doubt on whether all these groups are getting some ROI on their investments. They definitely are but in the overall scheme of things, this siloed strategy is not very beneficial to the company at all. There is no synergy between different initiatives or the divisions. This is very similar to each group/division building its own wheel perhaps with some ROI, but the maximum ROI can be achieved only when you are able to connect all 4 wheels with an axle, install an engine, a cabin, a control mechanism and finally a dashboard to monitor the performance.

What companies need to do in order to maximize their ROI is pretty obvious. Yet, many fail to do so. The biggest problem according to me is lack of communication and coordination of resources. In order to achieve maximum efficiency, companies should first through their IS/IT groups settle on a set of platforms or technologies. Second, these standards should be conveyed to every group/division in the company and a process created wherein every group has to go through the Corporate IS (even if it means building a simple website) for approval. Yes although it seems a somewhat bureaucratic, it helps in the long-term. On the other hand the IT division should also guarantee fast turn-around time in this process.  This leads to our third step where the IS/IT team should be resourced sufficiently to support initiatives across the company (both hardware & software). In doing so the company should focus on building internal expertise while outsourcing only major developmental tasks. In most cases platforms such as SharePoint can be deployed with simple tweaks by experts within and serve many purposes making outsourcing unnecessary. Moreover, before thinking about an external cloud strategy, IT divisions should first think about setting up an internal cloud for their entire company.  Fourth, now that most part of the infrastructure is on a single platform, efficient search and analysis tools should be deployed to map this data from across the company and make sense of it. For example, deploying a search server is just not enough, the  results will not make sense unless they are cataloged and categorized well. Last but not the least management and employees should be provided dashboard utilities and usage training (a small online tutorial for employees should do).

Perhaps what failed circuit city is a management heavy IT department, excess outsourcing and multiple IT initiatives all of which gathered terabytes of useful data but were very disconnected. If only the infrastructure was well-connected and the data made sense, different divisions could have communicated efficiently with each other and would have known what to do (for example advertising , retail store management (real estate division) and inventory/purchase divisions could have coordinated better). Ultimately, the management at the top would have looked at numbers or data not in isolation but in relation to each aspect thus getting a better and bigger picture of the organization.

All in all, the bottomline is NOT how much you invest and whether it results in some ROI  BUT whether you are maximizing your IT investments to the fullest. It is also NOT how many IT initiatives you have on-going BUT it is whether each initiative is being leveraged fully (10 projects executed well will yield better results than 50 projects that are half-baked). And last but not the least, it ultimately boils down to whether Executives leverage information (even in good times) that IT puts in their hands to take the company in the right direction.

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