IT centralization is back in fashion

When the economy plummeted at the end of 2008, the Western U.S. branch of The Salvation Army was ahead of the cost-cutting game. CIO Clarence White had centralized the IT organization a year or two earlier, and he had consolidated the database and storage servers from the business units into a single data center in Long Beach, Calif.

The move wasn’t aimed at cutting costs, but “the timing was good,” White says. It reduced the charitable organization’s technology footprint, encouraged more virtualization and lowered maintenance and power costs. “It was an unanticipated benefit,” he says. “We looked like geniuses.”

And White says that for the first time he feels that the organization has a strong disaster recovery strategy, thanks to consolidated storage and a fully replicated set of servers in a remote data center in Phoenix.

For decades, the pendulum has swung between centralized IT organizations and decentralized operations featuring small IT groups in each business unit. But with the urgent need to cut costs today, there’s a good argument to be made for the former arrangement. With technology assets in one place, it’s easier to take advantage of developments such as virtualization, storage de-duplication, cloud computing and outsourcing, all of which promise to lower costs.

Centralization also makes it easier to create an effective disaster recovery strategy, minimize labor redundancies, get volume discounts on technology purchases, and lower maintenance and training costs through standardization, proponents say.

The Org Chart Isn’t the Cure-all

In the mid-1990s, pundits favored a hybrid IT organizational structure, with a central, shared-services unit to handle IT supply, plus a distributed network of people at the business units to manage IT demand.

But a 2008 study by consulting firm Booz & Co. concluded that the hybrid model has produced “somewhat disappointing” results.

The consulting firm’s survey of 1,500 IT executives and their internal business customers found that the IT organizations perceived as most effective were centralized operations. For example, centralized IT organizations are better at quickly turning executive decisions into action and are more likely to be aligned with business strategy, the study said.

That sounds like a victory for centralization, but the Booz study found that juggling the organizational chart isn’t really the key to greater IT effectiveness. Even more important factors, the study reported, are “decision rights” (how technology investment decisions are made) and “information flows” (how IT communicates with the business).

In addition, the Booz survey found that the most effective IT organizations have CIOs who report directly to the CEO, and CIOs who have an innovative or entrepreneurial approach.

— Mitch Betts

There’s some statistical evidence of a tilt toward IT centralization. In Computerworld’s recent Forecast survey, 37% of 312 respondents said it’s likely that their IT units will become more centralized in the next 12 months. And in a 2009 IBM survey of 2,500 CIOs worldwide, 76% of respondents said they anticipated having a strongly centralized infrastructure in five years.

Under a more powerful corporate CIO, IBM itself last year completed a shift to centralized IT management, reducing the number of data centers it operates from 155 to five and trimming its portfolio of applications from 15,000 to 4,500 — so far.

IT management consultant Harwell Thrasher says he hasn’t seen direct evidence of more companies centralizing their IT organizations, but in this economy he can easily imagine why they might. The three reasons to centralize, he says, are to lower costs, improve efficiency and gain better control over operations.

With technologies such as virtualization and remote management making centralized infrastructures more economical, companies that at one time deferred to decentralized IT groups may now say, “We’re in so much trouble economically that we’re going to have to centralize even though it may hurt you,” Thrasher contends.

“IT centralization works best when each aspect of IT is considered separately,” he wrote on his blog, “Making IT Clear,” back in 2008. He suggested that it’s best to centralize functions such as help desks, contracts, high-volume and high-dollar purchasing, standards, disaster recovery planning, data warehousing, and development and support of corporatewide systems such as e-mail and Web servers.

Scottrade Inc. is a good example of a decentralized business supported by a centralized IT organization. The online broker has more than 430 branches throughout the U.S., but the infrastructure to enable online trading and customer support is in a data center in St. Louis, with a disaster recovery center in Scottsdale, Ariz. Front-line support is provided by brokers in the branches, but all other calls are handled by a centralized tech support group.

The centralized model makes it easier to maintain the systems and keep them up and running, says CIO Ian Patterson. This is crucial for a brokerage — it can’t have downtime when the markets are open, he says.

The Other Side

But centralization has its drawbacks, such as possible decreases in innovation and responsiveness to the needs of business units. In report last year, Mark McDonald, an analyst at Gartner Inc., recommended that CIOs consider a hybrid approach that combines the benefits of each model and manages the weaknesses. “CIOs do not have to choose one extreme or the other,” he wrote.

For the hybrid model, McDonald conjures the image of a dinner fork, with business-facing IT resources as the tines, and centralized IT services as the base and handle. The goal is to be responsive to business needs while preserving economies of scale.

Moving to the Center

In the next year, will your IT department be more centralized?

* Neither likely nor unlikely: 45.2%
* Likely: 25.3%
* Very likely: 11.9%
* Unlikely: 11.9%
* Very unlikely: 5.8%

Source: Computerworld survey of 312 IT managers, September 2009; percentages don’t add up to 100 because of rounding.

Indeed, certain functions are better left decentralized, Thrasher says, citing applications that are unique to a particular location, as well as business intelligence activity, even if it pulls from a centralized data warehouse.

A common mistake, he adds, is to pull all the IT people out of the distributed locations and assemble them in one place. “You need to have somebody out there who’s actually having lunch with people, talking to them on a day-to-day basis and keeping the relationship managed,” he says.

That’s a mistake White avoided. The motivation behind his centralization effort at The Salvation Army was to get rid of the “little IT departments” in the business units and transform the formerly generalist IT directors into specialists in particular technologies.

Before, White says, he had dotted-line authority over those directors, whose technology knowledge was more broad than deep, and there was rampant duplication of services. As technology grew in complexity, he says, it was impossible for the directors to know enough about every system to properly strategize. “As an organization, we couldn’t leverage their strength and share technologies adequately across the business,” he says.

White reorganized the existing staff into a consolidated IT department by assigning a technology specialty to each of the directors, who remained in the business units. Assignments were made based on the directors’ areas of interest. One of their jobs as specialists, he explains, is to provide support if they’re the closest resource to the problem.

White describes the reorganization as an “astonishing” success, but he acknowledges that the transition had its rough spots. “There was a lot of opposition that had to be worn down over time. People like having their own IT guys, and they don’t always trust I’ll have their best interests at heart,” he says.

Tension and conflict are inevitable when you’re balancing the interests of the business units with the broader needs of the organization, White adds. The key is developing trust over time by communicating and delivering on promises. “We publish a road map of what we intend to do and communicate what we’ve done, while also providing them an opportunity to tell us what they want us to do,” he says. “As soon as you do some impressive things, people buy into it more.”

Constant Upkeep

Mike Twohig, CIO at Clean Harbors Inc., an environmental services company in Norwell, Mass., is a true believer in centralization, but he says it requires constant vigilance to make sure the field locations get the service they deserve.

At Clean Harbors, a central IT group develops, maintains, supports and runs a Web-based application infrastructure for the company’s 175 locations worldwide. The IT staff is based at headquarters, save for six or seven PC technicians who work in the larger field offices primarily to ensure coverage across different time zones. IT uses remote access technology to perform phone, network, PC and help desk support.

The setup has many benefits, says Twohig. For one, it makes it easier to integrate newly acquired companies. Clean Harbors’ last acquisition was a $500 million company with 4,000 users in 50 locations, and everyone was up and running within 24 hours. “You couldn’t do that without a centralized model,” he says. “We put them on a Web browser and managed everything from here.”

In addition, it allows IT staff and management to quickly assess problems and find solutions. With all the data and most of the staff in one place, “we can quickly interact with a variety of people and data in a minute’s notice,” Twohig says.

Costs are definitely lower with a centralized model, he notes. Through virtualization efforts in the past five years, the need for additional servers has been completely eliminated, he says. Disaster recovery costs less, as does regulatory compliance. These savings more than offset the increase in bandwidth and infrastructure spending.

Twohig acknowledges that he revisits the centralized approach from time to time, especially as the company grows. “There are valid arguments for where centralization can hurt you,” he notes. For example, a centralized operation can’t take advantage of lower-cost geographic areas or low-cost labor markets.

But he counters that there are plenty of savings to be had in reducing travel, securing and maintaining just one data center, simplifying procurement, having fewer shipping locations and reducing redundant staff positions, processes and systems.

Like White, Twohig does get pushback from the field, which, he says, is never 100% comfortable with the centralized model. “There are people who still say, ‘What’s the ivory tower going to do next?’ ” he adds. To offset the isolation and frustration that business users may experience, Twohig encourages staffers to use the phone or instant messaging rather than e-mail. He has also enabled instant Web meetings, integrated with Microsoft Outlook. To stay on top of business requirements, project managers are linked with business people throughout the organization to get feedback on their technology needs.

There are still some outliers that Twohig wants to rein in. Clean Harbors still has three payroll companies, in the U.S., Canada and the U.K. And it has two groups that manage cell phones. In both cases, he’s looking to consolidate. “When you start down this path, you have to pursue it with hunger,” he says.

Twohig says he regularly reassesses IT processes, policies and service quality to make sure they’re appropriate for the entire organization, including remote offices. The key, he says, is two-way communication between central IT and local managers, including frequent checks to see whether an IT policy or service still makes sense. “What is good today may not work a year from now when processes change or volume is added, or users in the field turn over and need to be trained.”

Is centralization for everyone? According to Twohig, the answer is yes. “I would argue that it should be a goal,” he says. “But it requires deliberate action, from the top down.”

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