25 Oct WTN Leadership Interview: Jorge Lopez, Gartner, “The current and future scenario for CEOs, CIOs and IT.”
Editor’s Note: Jorge Lopez, Vice President, distinguished analyst, CIO Research, Gartner and I recently discussed at Gartner’s IT Symposium/expo 2009, the impact of the evolving role of the CIO in a fast changing economy against a backdrop of mergers and acquisitions, and an economy where we have huge job losses.
Mike Klein A recent CIO survey published by IBM gives the impression that the CIO is being put in a schizophrenic position on any given day, week, or month. On one hand, being asked to be a visionary, innovative, and a strategist in any given day or hour, or to be a pragmatist and the next day, those priorities change. What’s your viewpoint on this?
Jorge Lopez:One way to manage the different styles is to understand what is called for by the external environment. There are three economic future scenarios and what they mean for IT. The first one is called Prevent Creative Destruction. The second one is called Creative Destruction at Work and the third is called Trust Restoration.
Prevent Creative Destruction is essentially a lock down scenario where society says it needs to slow down the pace of change; we call the CIO in this instance the compliant CIO, where responding to regulation is your top priority, your job is to avoid risk because the economic environment is also risky and society wants to slow down the pace of change. We would be seeing high regulation and high government intervention.
The second one, we call the tight-rope walking CIO because CIOs are in a situation where society has said, “Well, we need some growth.” So we have to do some things like cut taxes or other things that will stimulate the economy. What then comes out is you still have regulations in place because people won’t trust business yet. The CIO, therefore, has regulatory responsibilities. At the same time, they have to deal with the entrepreneurial needs that are being driven by competitive pressures. While executives like to focus, this actually requires a form of behavior that is schizophrenic because CIOs have to deal with two different masters. So, I think, it’s a recognition of the fact that they are on a tight rope.
The third is called the entrepreneurial CIO, where the only risk is, “if I don’t take advantage of the new opportunity then I can get fired.” So, you have to quickly move to new opportunities and be more the visionary you’re talking about. But that’s when you have an environment that promotes entrepreneurship. One thing I can say as I have talked to a few CEOs recently of midsize companies and they said this is the most hostile environment for entrepreneurship that they’ve seen in their lifetimes.
I think that the tightrope walking CIO is probably a likely type of behavior we’re going to see going forward for a while.
Mike Kleinz:The current economy is changing at a tremendous velocity. CEOs, CFOs, and all C-level executives are faced with many difficult choices. Almost every organization is looking at divesting assets that are not core to their business. If they have large cash reserves they’re moving into a very quick mergers and acquisitions phase and at the same time from the CIO perspective, they’re facing IT vendor consolidation. How does this fit into what you’re looking at in terms of CEO concerns both this year and as we move into 2010 on those three issues?
Jorge Lopez: I think they fit into the framework that we’ve had consistently over the past year that 2009 and then going into 2010, we’re looking at restructuring continuing to be the number one thing that the CEOs are focusing on. So to your point, let’s divest the assets, which are no longer strategic. Let’s go and acquire assets which can increase and improve and accelerate our strategy and let’s also make sure that we’ve got ourselves in a place we’re going to be operating with the lowest break even point we can have going forward because one of the bigger concerns concerns we have is to reduce the risk exposure of the enterprise to another downturn. Two-thirds of the CEOs are saying that they would manage quite conservatively now versus when they went into the last downturn, meaning that they’re going to make sure that they cut their costs generally and also de-leverage their debt. In every way try to make sure that the impact of any future downturn is less than it was when they went into the current one. And it also, it gives them a platform for the substantial upside if you get a recovery going in the positive direction that they didn’t expect.
Mike Klein: There are certain industries like utilities in which revenues have gone down because major customers who could have been a GM plant or another manufacturer that shut down operations, and on the consumer side, the customer unable to pay their bills. Their stock valuations are now very low, but yet they have huge cash reserves. In these types of regulated industries, what kind of concerns are you hearing about and what kinds of advice can you give to a CEO?
Jorge Lopez:Outside of businesses and governmental institutions, the customers that these utilities and other regulated industries have are consumers. We are now at a place where we have 15.2 million people unemployed. If you were to try to build back to get to 5% of employment, which is considered full employment, that would mean that you would have to grow the employment base by a quarter million jobs per month every month for the next five years. That’s a sobering thought. At the peak of the dotcom bubble, when employment growth was extraordinary for the economy, the job growth rate was 150,000 per month. What we’re seeing is potential long-term, slow and difficult growth. We have a consumer-driven economy where three-fourths of our economy is trying to recover and build back up based upon the fact that consumers themselves are also going to be cutting their own debt. So, we go beyond the regulated CEOs, all consumer-facing CEOs, it’s going to be a long tough haul. So, plan for long-term, slow growth with conservative management, and keep cash in reserve. Make sure that you’re always looking ahead to ensure that you understand when in fact there might be another downturn ahead. So, in case you have to cut further, you’re ready to do it.
Mike Klein: CEOs and boards are thinking about taking their companies private if they have large cash reserves and a depressed stock price. Is now the time to get around some of the regulatory laws and to privatize the company?
Jorge Lopez: From a public-company perspective that would have been the state of affairs when the stock market was truly in the tank. Looking at where the stock market is now, there’s a sense that things are a little bit better than they had been and maybe things are not as big a bargain as they were. There is a benefit to public market financing. We want to have a public company to have access to that because if you go private, then you tend to go and get private sources of financing. Whether public or private right now, financing is difficult to get. So, it’s a judgment call from a CEO perspective whether for their particular industry they’ll be able to get financing and whether being public or not is in their best interest. I think that the binary decision is not whether or not it’s a good time to go private and get rid of the regulations, it’s really “can I get access to capital?”
Mike Klein: What are you hearing from the CEOs in terms of their stance on further IT investment at a time when they’re looking to do M&A?
Jorge Lopez: I don’t believe that other than that we know that 8-out-of-10 CEOs are saying that 2010 will be very good to excellent time to acquire. What we don’t usually talk about is the experience of the last big M&A private equity boom. Once the deals start materializing the amount of money available for costs like commissions is large and it tends to squash any other concerns that may materialize. Once the deal start it takes a life of its own and it takes a very strong leader to step back and say, “No, this isn’t the right way to go.” Perhaps, you’ve seen some of those situations happen, and where some of us will say, “This is too difficult, doesn’t make sense. Culturally, there’s no fit. Let’s not go forward here.” If you’re able to get out of 10 items, six or eight of them to fit, and the one that’s sticking out is IT, the CIO needs to understand that this deal is probably going to go forward and really the question is “how are you going to make it work versus being concerned about why it won’t work,” CIOs will need to spend a lot more time on making these combinations work.