Lets assume in this hypothetical situation that Microsoft’s new CEO, Satya Nardella, wants to develop a new strategy for Microsoft and appoints Bain to the role. Is Bain preparing an IT strategy for a technology company or is Bain preparing a technology company’s corporate strategy?
To develop Microsoft’s corporate strategy, the team assembled would be a generalist team of consultants. The consultants would need to develop Microsoft’s plan for the future and develop a set of detailed recommendations on how Microsoft should pursue that plan.
Typical questions we would answer in a corporate strategy study include:
1 – What type of company should Microsoft be?
2 – Should Microsoft remain in hardware and software?
3 – If both, which segments should be exited?
4 – How should Microsoft organize its divisions/people to remain competitive?
5 – Where should Microsoft focus its investments?
These are pretty much the main questions in any corporate strategy study. If we were developing the corporate strategy for a healthcare, financial services or even mining company, we would ask and answer very similar questions.
However, the emphasis will change for this Microsoft study, the analyses will obviously differ and the study structure will be different.
That is because no two studies are the same.
As you can see, in a corporate strategy study the purpose or raison d’etre of Microsoft must be determined. This is very different from IT strategy. The type of consulting mindset applied in these broad studies is different.
Generalist skills are far more useful. We do not really need technologists on the consulting teams, even though a partner could have a technology background or IT strategy background. The challenge with stacking a consulting study with software specialists, for example, is that they naturally gravitate towards software issues and solutions.
That is a massive flaw in staffing. What if Microsoft should not be in software? Would the software specialists be able to put aside their biases and recommend a different path? Could the software specialists even credibly analyze the hardware business?
It is a myth to assume you need seasoned IT strategy consultants on a technology company corporate strategy study. Given the wide range of options a company can pursue, it is important the consultants do not have blinders when they approach a problem.
Earlier, I mentioned that the partner should have a technology or IT strategy background. Why will this not force the partner into a bias?
No! Well, usually not!
This is because a partner at Bain or BCG is first trained to attack a problem from first principles. Only once this habit becomes second nature will he find a sector he/she enjoys. Therefore, he/she never uses his/her sector knowledge as the first port of call when analyzing a problem.
This is the way I was trained. Only when I became a partner did I end up specializing in a sector.
If this were the definition of corporate strategy, how would the IT strategy differ for Microsoft?
For one, Microsoft’s IT strategy cannot be done before Microsoft’s corporate strategy is done. This is best explained in an example.
Let’s assume Microsoft went ahead before completing its corporate strategy and developed an IT strategy which recommended deploying IT teams to work alongside the hardware and software divisions to encourage greater collaboration.
Moreover, since Microsoft had invested little in the hardware divisions, most of the IT budget would be spent on bringing the hardware surface levels to parity with the software surface levels.
This would appear to be a reasonable IT strategy. It would seem sensible to the divisional leaders of Microsoft and they would roll it out. Everyone seems happy.
Lets assume 3 months after this IT strategy is rolled out Microsoft completes its corporate strategy which recommends two things which impact the IT strategy:
1 – IT will be tightly integrated and controlled.
2 – Microsoft will exit the hardware business.
This is clearly the opposite of the IT strategy. So which one is “correct”?
The corporate strategy is always “correct”, because the role of IT strategy is to support the corporate strategy. The same way the corporate finance strategy must support the corporate strategy and the same way the operations strategy must support the corporate strategy.
While the corporate strategy can be wrong, it can never be wrong relative to the IT strategy, since the IT strategy only exists to support the corporate strategy.
The sentence above is probably the most important line in this article. If Microsoft’s head of IT talks about how the IT strategy is correct but the corporate strategy is wrong, he is making a massive logic mistake.
If the IT strategy exists solely to support the corporate strategy, and the correct corporate strategy is yet to be developed, how can the manager know the IT strategy correctly supports a corporate strategy which does not yet exist?
This is not to say the IT department’s performance could not be great. If the corporate strategy is wrong, and IT is perfectly organized to support that incorrect corporate strategy, IT could be doing a great job at accomplishing the wrong goals.
However, this is not IT’s fault. Therefore, an IT department could have brilliant performance while following the correct IT strategy to support an incorrect corporate strategy.
You cannot fault the IT department for this though. They are simply doing what is expected of them. It is not their fault the corporate strategy is incorrect. And it is far from their role to question the corporate strategy.
Therefore, when considering the role of the IT department you have to consider its performance on IT metrics and the department’s adherence to the corporate strategy.
You can think about this as a river. The corporate strategy is developed upstream and informs the IT strategy below it.
Now you can see how IT strategy differs from a technology company corporate strategy and how they are linked.
1 – Microsoft’s corporate strategy will explain when, where, how and with which resources a company will compete.
2 – Microsoft’s corporate strategy is used by it’s business units to develop their business unit strategies.
3 – This business unit strategies are then broken down to set metrics and targets throughout the business unit.
4 – The IT team needs to look at the initiatives both the corporate office and business divisions will rollout to implement the corporate and business unit strategies.
5 – IT needs to then look at their budget/resources and determine the initiatives IT must roll out to support the corporate and business unit initiatives.
6 – IT must also think about the systems, process and governance changes it needs to make to ensure the IT initiatives roll out smoothly.
IT and corporate strategy are functional skills. A functional skill is any consulting skill which can be applied across any sector. It is not confined to a particular sector. Operations, organizational design and corporate finance are other examples of consulting functional skills.
In other words, all types of companies from healthcare groups to transportation companies need help with IT, corporate strategy or corporate finance.
Technology Company Corporate Strategy
The skills to be an outstanding corporate strategy consultant for a technology company are exactly the same skills needed to be an outstanding corporate strategy consultant at any Fortune 500 company. This is crucial to understand.
It is a myth to assume a BTO consultant will be leading the charge at a Microsoft study. BTO consultants will work on IT strategy and not technology company corporate strategy.
That is not to say some BTO consultants may not be on the technology company corporate strategy study, but they certainly will not be the dominant group.
Technologists and technology companies like to believe the rules of economics do not apply to them. They do apply, just in a different context. Yet, they most definitely apply.
In Season 2 of The Consulting Offer, Kevin P. Coyne, former McKinsey Worldwide Strategy Co-Leader teaches a case to demonstrate that the principles of corporate strategy do apply to technology companies.
This implies that a deep knowledge of technology, software, coding, outsourcing etc., does not make you a better corporate strategy consultant in technology. It probably makes you a weaker consultant since you may have biases and may rely too much on subject matter expertise versus basic problem solving skills.
By this same logic someone who understands cars, car dealerships and owns sports cars will not necessarily be a great corporate strategy consultant to Ford, GM or VW.
That is the equivalent of saying that just because you love eating, you will be a great chef. Eating requires the time to eat, an appetite and money to pay the bill.
Being a great chef requires organizational skills to run the kitchen, a great palate, good recipes, the ability to cook and a restaurant.
Eating and cooking are allied roles but require vastly different skills.
Coming back to corporate strategies for technology companies, let’s imagine this scenario as we lay out the approach to this study.
Let’s assume a government like Canada or the UK decided to take the IT departments from three government companies: transit, power company and distribution company, merge them and list them on the stock exchange.
They hope this would create a technology behemoth, anchored in London, Toronto or even the US. Newco, the name we will use, will have access to service level agreements and lucrative contracts from the transit, distribution and power companies and, therefore, be viable.
Of this base, Newco could then become more commercially oriented and compete internationally.
The government wants to know “if this is a viable strategy and if they should proceed on this path.”
Therefore, the decision on providing the “go / no go” to the government is a technology company corporate strategy study.
It is not an IT strategy because the direction is being set for a technology company. Only when the direction is set, can the IT strategy be done for the IT department within Newco.
Structuring a Corporate Strategy Study
One of the main challenges in corporate strategy studies is the urge to analyze everything. Many assume that simply having lots of analyses, data and pretty charts implies the recommendation is sound.
That could not be further from the case.
This hypothetical Newco study is a classic case to illustrate that point. Most teams would treat this as a full corporate strategy study lasting 8 to 12 weeks with a 4 to 7 person case team.
However, if you read the problem statement carefully, you will realize this study contains a break point: the “go / no-go” decision.
The decision to proceed is a little vague. What does it actually mean?
Does go mean “go ahead and form Newco” or does go mean, “go ahead and do a more detailed analyses now that we know Newco is viable.”
Let’s assume “go ahead and form Newco” is the full-scale interpretation of the brief.
Let’s assume “go ahead and do a more detailed analyses now that we know Newco is viable” is the phased interpretation of the brief.
This vagueness in interpretation matters in structuring the study.
In the full-scale interpretation, you will do the full corporate strategy study, while in the phased-interpretation you would do just enough work to see if the entity was viable.
If it were viable, you would, thereafter, conduct a more detailed study to determine the conditions under which it was viable.
In the phased-interpretation, imagine taking the full-scale 12-week corporate strategy study and breaking it into 2 parts:
1 – a 4-week study to see if the entity was viable
2 – an 8-week study to determine the conditions under which it was viable
This may seem like a minor point since it is essentially the same thing. Is it not the same 12-week study broken into 2 phases?
It is not.
There are five differences with the phased-interpretation:
- The client gets a quicker answer.
- The fee for the first phase is smaller.
- The fee for the combined phase 1 and 2 is larger than the fee for the full-scale study.
- It is much easier to enter new clients/sectors with phased studies.
- It is easier to get past government procurement monitors.
The 4-week phase gives the client a faster answer from a top-down view and, if it is not viable, weeks 5 to 12 will not go ahead.
In the full-study interpretation, the client will have to pay for 12 weeks of work for a 50% chance the new entity is not viable.
As you can see, in the phased interpretation, the same work is done but the client benefits with a faster answer and what appears to be a lower fee structure since they are comparing a 4-week fee with a rival firms’ 8-week fee.
However, if you add up the 4-week fee and 8-week fee, it would work out to more than the rival firms’ 12-week fee. Why is this?
Once the client is “locked-in” to the consultant’s style of working, becomes comfortable with their approach etc., it is much easier to command a higher fee for the 8-week phase. In fact, since the rival firms do not know how the study was structured, they find it hard to compete for the remainder of the work.
So look at what we did here:
1 – We took the problem brief, which was open to interpretation to phase the study and restructured it.
2 – The phasing benefits the client by providing a faster initial decision over a shorter period of time.
3 – The consulting study team uses the phasing to produce more focused analyses to answer the very specific question of viability: this cuts down their work load significantly without reducing the quality of the analyses.
4 – The consulting firm benefits from a higher overall fee since they charge parity fees, to competitors in phase one, but for a small time period, but much higher than parity in phase 2.
The key thing to understand here is that this is not an example of a firm charging lower prices for the analyses to gain the implementation work. The 4-week and 8-week phases are both strategy analyses but broken up into a top-down and bottom-up phase of analyses.
The rates in Phase 2 are higher than in Phase 1 and so is the margin.
This is the opposite of what most firms do: they charge a small fee for the analyses with average rates and then a huge fee for implementation at very low margins.
Strategy firms actually charge even more for the second phase, since the second phase is more strategy work.
This gives you an insight into how partners structure studies and tackle corporate strategy for large technology companies. There is a large amount of adaptations which should be done to meet the needs of a client. An experienced partner and engagement manager will not apply cookie-cutter studies to every client.
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Image from Jon Herbert under cc.