Taking Risks – But Only So Far

When you chat with nearly a dozen IT leaders, it’s striking to hear them talk about how they’re comfortable with a certain amount of risk – and even some failures – when selecting information technology and vendors. “We’re not afraid of failure here. We try to go out on the edge as far as we can,” says Paul LeFort, CIO at UnitedHealth Group Corp. in Minneapolis. “We take the risk because having a six months’ advantage over a competitor with a new technology is very important. We figure if we’re not failing about 30% of the time in making our technology choices, we’re probably not doing our job.” IT leaders say their organizations learn from such failures. Likewise, for Rick Nolle, risk isn’t a scary or foreign concept, or even a four-letter word. As vice president of systems at Reinsurance Group of America Inc. in St. Louis, Nolle’s company assesses risk in multimillion-dollar insurance policies every day.

He says he’s willing to take some chances when he hires a vendor or buys big-ticket systems because taking risks leads to innovation.

Of course, risk-taking can go only so far. In corporate America, risk is a factor that needs to be managed. In the IT field, the risks range from dead-end technology choices and belly-up vendors to buggy software and crashing networks.

So how do IT leaders manage those risks?

Picking the right technology and vendor involves painstakingly testing products, reviewing the credentials and backgrounds of vendors, comparing notes with peers and demonstrating a willingness to partner with – or invest in – start-up vendors with hot technologies.

It helps to have an ultraclear technology strategy and a companywide understanding of the goal, Nolle says. “Here, it’s like JFK saying, ‘We’ll get to the moon at the end of the decade,’ ” he says.

Some IT leaders say the first step is to get the CEO and the board of directors involved in the biggest technology choices, although there is some debate about how much board-level input is ideal. “Companies are well-versed in making checklists and acting as a kind of Consumer Reports when picking technology. But they are incredibly bad at what I call ‘continuous convergence’ – at picking a technology point on the horizon to be moving toward,” says analyst Howard Rubin at Rubin Systems Inc. in Pound Ridge, N.Y.

He says that kind of goal-setting needs to happen at the very top – even above the CIO level – and include the CEO’s staff and the board of directors. Rubin says he would have boards set up “technology investment subcommittees,” just as companies have had compensation committees for years.

Giving such high-level attention to IT decisions raises the chances that an application will have business benefits such as reduced costs, improved employee retention or an enlarged revenue and customer base, Rubin says.

Board-Level Roles

Tsvi Gal, former chief technology officer at Merrill Lynch & Co. in New York, agrees. “It is becoming clearer that at least one board member should become the champion and overseer of IT,” says Gal, who is now co-founder of and chief technology officer at Global Bandwidth Inc. in New York. He says having the CIO join the executive management committee is “hardly sufficient.”

Nolle says CEO involvement in IT is fine, but he questions how involved boards of directors need to be. “Our IT department is very involved with the (chief operating officer) and the CEO with a lot of our decisions for spending on large purchases, but I can’t imagine anything more,” he says. “That’s why you hire a bright manager to run things.”

Dawn Lepore, vice chairman and CIO at Charles Schwab & Co. in San Francisco, sits on the boards of several firms. “I do not think it is a board’s responsibility to help drive details of the company’s technical strategy,” she says, the key word being “details.” Lepore says she’s on the board “to advise, help and support the company in areas technical and otherwise.”

At UnitedHealth, LeFort values the business side’s involvement in technology decisions. Purchases costing more than $1 million are reviewed by an executive council of six IT leaders. For IT decisions that involve purchases of more than $10 million, the company president and an executive council of five business-division executives conducts the review.

“Business executive involvement matters so much because 85% of our capital expenditures are for IT,” LeFort adds. “And most savvy CIO veterans know that three-fourths of the success of a project has nothing to do with technology itself – it’s the business side taking an interest. So you have to make sure the business side is wired to the decision.”

Unfortunately, says Joe Auer, a consultant at International Computer Negotiations Inc. in Winter Park, Fla., there’s a dearth of board-level interest in IT strategies and initiatives at Fortune 1,000 companies. Firms will heavily involve the board of directors in a decision to spend $10 million for a plant, yet they often give less consideration to a $10 million IT purchase, says Auer, a Computerworld columnist.

The company’s relationship with major vendors should be managed by executives at the CIO level or higher, he says.

“The initiative needs to be multidisciplined, with legal, operations and technical people on a team doing everything from managing spending and consolidating buying power to keeping vendors from running rampant,” Auer says.

Aside from board-level involvement in big technology choices, the classic IT approach of thoroughly testing products is still a very important step, analysts say. But Auer urges companies to test new products in a controlled laboratory environment first – not in production systems or in end-user hands.

Auer warns against installing products on a “trial” basis, because end users may become dependent on them. Then, if the company says it wants to keep the product, “the customer has lost all negotiating power over cost and other contract terms,” Auer says. About 75% of trial products end up being used by customers, he notes. So he strongly recommends that companies never install a product on a trial basis, unless contract terms and dollars are already negotiated should the company decide to keep the product.

Of course, IT leaders say they find testing and evaluating products in their work environments – sometimes in labs and sometimes in a user environment – essential.

Gal and others say the principal value in testing is usually to see if an unknown new product will scale to many thousands, or even millions, of end users. New and unusual products are fair game for testing “because this is a brave new world, and you must try to be ahead of the competition,” Gal says.

Because there is inherent risk in trying unproven products from start-up companies, IT leaders say they and their staffs do an enormous amount of background checking on companies and their previous customers, using every tool at their disposal. They use the same techniques with mainstream vendors.

In picking service providers or new technology and vendors, large firms consult trade publications and online reviews, scour reports from multiple consultants and seek advice from peers as well as customer references. At Merrill Lynch, a small technical group has been set up to do a full comparative review of new products and and their vendors.

IT leaders also say they’re open to investing company money in an IT start-up – or even buying the company – if the start-up’s technology could provide them with an edge. The goal is to get special access to hot technologies and workers with advanced skills. “We’re interested in putting the technology to work before others do,” says LeFort. UnitedHealth has $30 million to invest in IT companies.

Gal says if a small company with an important new technology is “really hot, we might help them go public and underwrite them.”

The choice of which companies to invest in is sometimes more an art than a science. “We meet, and we look in their eyes, and it is partly intuitive,” Gal says. “Yes, I want to know if the CEO was selling shoes in his prior job. But I make decisions based on 25 years of experience and from sitting on boards and helping companies that succeed and others that don’t.”