The role of the CIO is evolving at an accelerating pace; the most effective CIOs are shifting their focus from inward-looking operational issues to an emerging set of outward-focused strategic opportunities that are central to their companies' financial and competitive success.

I call these new opportunities "customer-integrated systems," a new class of critical systems that link a company to its customers. The most effective customer-integrated systems embody a service-differentiated design, with the CIO insightfully tailoring systems linkages to evolving account relationships.

Three CIO eras

Over the past decades, the CIO role has moved through three eras.

First, CIOs developed horizontal systems that automated and linked their companies' core functions, like accounting, human resources, and inventory control. I think of this as the era of the Operational CIO.

Second, CIOs helped deploy a range of vertical systems that essentially tuned up these core functions in a variety of ways. I think of this as the era of the Tactical CIO.

While many of these vertical applications were important, they tended to be minimally-integrated with the overall business. All too often they amounted to a series of localized, uncoordinated improvements, each of which required significant organizational change.

This caused a big problem because the gating factor in IT systems effectiveness is a company's ability to absorb change. Even if each application nominally offered a positive ROI, all too many of these systems failed to achieve their promise – not because they were technically deficient, but rather because the organization was not able to make the changes needed to reap the benefits. CRM systems provide a well-documented example.

The Strategic CIO

Today, CIOs are facing an immensely important opportunity to develop systems that link their companies with their most important customers. These emerging systems are ushering in the era of the Strategic CIO.

These customer-integrated systems form the essential infrastructure for the company to secure and grow its islands of profit, and to convert the accounts in its sea of red ink from marginal performance to solid profit contribution. Strategic CIOs are becoming key players in creating and driving their company's most important business relationships, making them critical to their company's profitability and strategic future.

New business era

The source of this emerging CIO opportunity is rooted in a major change that occurred over the past 30 years in the way we do business. We have moved from one era of business into another without realizing it.

The Age of Mass Markets spanned most of the 20th century. In this era, the win strategy was clear: maximize production volume to gain economies of scale and lowest costs. This meant distributing product as widely as possible through mass distribution fueled by mass marketing.

Companies simply dropped their product at their customers' receiving docks, so distribution processes and costs were relatively uniform. Pricing was relatively uniform as well, so it was reasonable to manage both sales and operating activities separately from each other.

In this era, companies had little need for systems that comprehensively integrated them with their customers. It was entirely appropriate for CIOs to focus on horizontal systems, which automated their companies' core internal processes, and on vertical systems, which essentially tuned up these core processes in a variety of ways.

Customer-integrated systems

Today, all this is changing. In the current Age of Precision Markets, companies form very different relationships with different customers – some arm's length, some highly-integrated, and some between. These relationships have very different operational processes and cost structures, and at the same time, pricing varies widely from customer to customer.

This means that CIOs have to shift their focus toward developing a new set of customer-integrated systems that appropriately link their companies with their customers. Importantly, the nature of these links varies greatly from business segment to business segment, depending on the account relationship. And, in many cases, the nature and quality of the inter-company IT links will actually drive the profitability and share of wallet of the customer relationship.

The problem is that CIOs traditionally focus IT on internal processes and linkages. In all too many companies, these new externally-focused customer-integrated systems are largely off the radar screen.

Certainly, most companies today have elementary links such as web-based ordering and portals that display order status, but the true promise of customer-integrated systems is much more sweeping.

For the most important customers, customer-integrated systems will provide actual integration of selected functions between customer and supplier, creating very strong mutual benefits. For other customers, they will enable the flexible "showcase" projects that provide powerful new business initiatives. When well conceived, they will both reflect and accelerate a company's critical business relationships, improve profitability, and provide enormous competitive advantage.

These new customer-integrated systems create huge opportunities for both revenue growth and cost reduction for both partners. But they also present important challenges for CIOs in three areas: (1) tailoring the customer-integrated systems to the evolving relationships; (2) developing the actual intercompany systems, often in coordination with channel partners; and (3) managing both internal change and change within channel partners.

For CIOs, this is exciting new territory that opens vast opportunities to produce huge, new, sustainable value.

Differentiated customer-integrated systems

One of the most important factors in designing and managing customer-integrated systems is the need to differentiate and tailor them for different business segments. In most companies, defining and building these differentiated customer-integrated systems is one of the biggest strategic imperatives.

Yet most companies today are implicitly viewing their customer systems through a one-size-fits-all lens. Instead, customer-integrated systems must be thoughtfully designed to differentially reflect the needs of different classes of account relationships.

Think about this service-differentiated account classification: (1) strategic accounts are major accounts with a willingness and ability to form integrated supply chain partnerships; (2) integrated accounts are large accounts, important but often somewhat smaller than strategic accounts, with less willingness to join in supply chain innovations; (3) emerging accounts are smaller accounts that are very innovative and generally fast-growing; and (4) stable accounts are smaller accounts that are generally reluctant to innovate significantly. Each account cluster requires a very different set of account relationships, supply chain structures, and customer-integrated systems.

Strategic accounts. These major accounts require a high degree of supply chain and planning integration, customization, and innovation. This creates the important need for a critical set of custom-tailored customer-integrated systems.

First, the supplier and the strategic account should develop an aligned, long-term business strategy. This typically involves a three- to five-year year shared strategic plan for the relationship, and joint long-range planning. The relationship should be innovative and involve shared risk. For example, one strategic account wanted to develop a process for picking up product at a major supplier's factories, rather than having it shipped from the distribution centers. As another example, several major suppliers are working with their strategic accounts to develop RFID systems to track products as they move along the joint supply chain.

Second, the companies' supply chains should be fully integrated. This should involve both supply chain processes and systems. Replenishment should be continuous, often involving vendor-managed inventory, rather than discrete orders. Some suppliers are pioneering efforts to develop new vendor management processes and systems that extend all the way to the retailer's shelf, rather than to the distribution center. For strategic accounts, the supplier should dedicate cross-functional account teams and significant resources to understand the account's structure and business.

It is essential for the Strategic CIO, in parallel, to devote significant resources to working with strategic accounts to design and develop coordinated, integrated customer-integrated systems with enough flexibility to accommodate rapid strategic innovation. Importantly, the Strategic CIO and the team on-site have to be capable of coordinated change management, not only with their customer IT counterparts, but also with operating managers both within their own company and within the customer. This is very complex because the Strategic CIO has to be adept at working with key channel partners who have their own IT priorities and agendas.

Integrated accounts. These important accounts warrant significant care and resources, but not extensive customization. This can be seen in two areas.

First, a major supplier and integrated account should develop in advance an aligned business plan and scorecard. The joint business plan will not be as customized as in the case of a strategic account. The plan should have a shorter time horizon, perhaps one year, and the relationship should be collaborative and trustworthy.

Second, the companies' supply chains should be aligned and coordinated, but not necessarily fully integrated. The supplier should use existing internal processes to respond to orders from integrated accounts. Vendor-managed inventory systems may be appropriate for these accounts, as they are a cost-saving measure.

Here, the Strategic CIO faces a far more manageable set of challenges. While more traditional approaches like web-based ordering and order tracking may suffice for core activities, more complex systems support is needed for intercompany systems like vendor-managed inventory.

Importantly, integrated accounts have the potential to grow into strategic accounts, so it is important for the Strategic CIO to develop a strong set of relationships with his or her counterparts both in the customer IT group and among customer operating managers so they can be ramped up later. In many cases, strong coordinated customer-integrated systems can nudge an integrated account into becoming a strategic account, with the Strategic CIO directly driving major increases in revenue and profitability.

Because there is a long lead time in developing and installing coordinated systems, it is imperative for the Strategic CIO to map the IT terrain for integrated accounts as well as for strategic accounts.

Emerging accounts. These smaller accounts are very innovative and fast growing. They warrant significant supplier attention both because of their growth, and because they provide a low-risk opportunity for the supplier to develop new systems and processes. Yet, because they are small, there needs to be a limit to the investment.

The supplier should provide service that is both functionally excellent and flexible. The service must be efficient and largely standardized, or costs will quickly go out of control. However, the supplier often can justify meeting some unique needs, especially if the innovation can be scaled to the larger account base. These accounts are important because they force the supplier to push the innovation envelope.

These emerging accounts present yet another challenge for Strategic CIOs developing their customer-integrated systems. The core coordinative systems can be relatively standardized, like those of integrated accounts. But these accounts need a very flexible overlay of systems that enable coordinated innovation and continuous limited "showcase" experiments. These supporting systems can be ad hoc in nature, but they require thoughtful planning to understand how to scale quickly if the innovations are spread rapidly into the strategic accounts.

Stable accounts. These accounts typically cause a disproportionate amount of costs because many are unsophisticated and have idiosyncratic processes. For example, a stable account may order by fax rather than EDI, and may have unusual shipping specifications.

The key to supplying this group profitably is to offer a menu of service offerings, along with clear rules of engagement, such as minimum order sizes for various lead times, weekly ordering, and shipments to distribution centers only. In this way, the supplier can provide very reliable, consistent, cost-efficient service. This will ensure transactional efficiency for both the supplier and customer.

The customer-integrated systems objective for these accounts is to drive down costs by providing efficient means of transacting business. This is the area of customer-integrated systems that most companies have been focusing on recently because the pathway is clear, and the payback is compelling.

The danger, however, is to view these minimal cost-oriented customer-integrated systems as a one-size-fits-all solution sufficient for the whole account base. The most important accounts – strategic accounts, integrated accounts, and emerging accounts – require completely different types of customer-integrated systems. At stake are the company's major revenue and profit streams.

One Strategic CIO's experience

Here's how the CIO of a major service provider has made the transition to Strategic CIO. He found that his strategic accounts are demanding exactly the types of integration described above, and this was pulling him to be extremely customer-focused.

This CIO now spends 30-50% of his time either in business development or working with existing customers. Customer-integrated systems implementation investments (software and personnel) have already become equal to or greater than the investment in internal company systems.

The problem he encountered is that the customer-integrated systems were so critical and fast-growing, the company's horizontal and vertical systems couldn't support them. Consequently, the CIO has been investing in parallel in strengthening the company's ERP system, and pulling some formerly-independent vertical applications into the ERP system, putting them under direct IT control.

The key success factors: a solid internal data model, efficient core processes, and excellent mid-level IT managers who can take projects to completion while seeing the strategic big picture.

The three-dimensional CIO

Today, CIOs have an enormous new opportunity to shape their companies' future.

Horizontal systems were essential to ensure that a company's core activities were efficient, and vertical systems were important to tune up and enhance a wide range of company activities. I think of these as forming two important dimensions of the CIO role.

But the third dimension, customer-integrated systems, enables a company to construct its essential links to its accounts. Today, the Strategic CIO directly drives revenues, profits, and competitive advantage.

If the Strategic CIO is effective, the company's performance and market positioning will accelerate. But if the CIO neglects this critical opportunity, the company will be left further and further behind. This is the most important challenge facing CIOs today.

The successful Strategic CIOs develop a new set of skills and capabilities in four critical areas:

• Coordinating with counterpart managers within the company to develop and populate the service differentiation categories;
• Tailoring the company's customer-integrated systems to the account relationships;
• Working with counterpart IT managers in accounts to conceptualize and develop the joint systems; and
• Managing change, both internal and in channel partners.
  We are entering the era of the Strategic CIO. Today, the Strategic CIO faces an historic opportunity to directly drive the company's financial success, and to shape its strategic future.

In this era of the Strategic CIO, the company's success depends on it.

Jonathan L.S. Byrnes, Senior Lecturer at MIT, is an acknowledged authority on profitability management. His extensive experience spans virtually every industry, including healthcare, transportation, software, retail, financial services, distribution, and others.

www.islandsofprofitbook.com