Why IT and HR must report to CEO

A structure where IT and HR do not report directly to the CEO is built on a poor grasp of how a business really operates.

The Human Capital Telescope with Brett Chulu

A business is an ecosystem made up of three logically-connected subsystems whose intended output is financial success. Management scholars and practitioners broadly agree that people and information systems, internal processes and external customers are the three key subsystems of a business ecosystem. The logic of making money – the key motive for operating a business – is deceptively simple.

To make money the business must satisfy the needs of potential customers. To satisfy these needs the business in turn needs to set up internal processes that create and deliver the right products and services.

People and information systems directly drive internal processes that create and deliver products and services, which ultimately result in customers voting with their wallets in favour of your business. You would think this no-brainer is wisdom our businesses effortlessly apply. Disappointingly, it is not.

Using our business ecosystem approach, senior finance executives such as the Finance Director almost always report directly to the CEO. No qualms here. It’s logical – business exists to make money.

In Zimbabwe, senior marketing executives largely report to CEOs. That’s expected. The external customer part of the business ecosystem is directly linked to bringing money into the business.

Operations executives in Zimbabwe, more often than not, report directly to the CEO. Again, straightforward logic demands this. If products and services are not created, there will be nothing to sell.

Beyond this, surprisingly, the CEO’s interest seems to diminish. As evidenced by how a number of Zimbabwean businesses are structured, business leaders unfortunately seem to stop at the operations level of the business ecosystem’s logic. Occasionally, CEOs may take direct interest in people and information systems when faults in these areas threaten operations; the possibility of strikes, for instance. Why not invest in ongoing interest?

Uncompensated business risks
Primarily, our CEOs are pressured to prioritise those things that directly impact on bringing in money now. They have to meet the quarterly numbers.

Beating quarterly numbers is what they are measured on. This results in ultra-short-termism.  It is not often that things go wrong within IT and people-related systems. When these do occur, they can be very, very fatal to a business’s existence.

Short-termism focus explains why IT and HR are the step-children of the business. It is only the administrative tasks of IT and HR that have visible short-term impact on operations. Thus IT and HR, by default, have been looked up to clean up the ‘nuisances’ brought by the need to fulfill certain administrative and compliance tasks.

This is very unfortunate and illogical, if not outright dangerous thinking. Here is why: Going by the business ecosystem logic, people and information systems are the foundation of any business. Internal processes are the pillars of the business, founded in people and information systems.

Products/ services and the ultimate financial gain for which a business exists rest on the operations pillar. If the foundation be weak, the whole business edifice will collapse. Does it make sense then for CEOs to focus so much on everything except the foundation? By having IT and HR report indirectly to the CEO, businesses are effectively outsourcing the management of their business foundation to third parties. That is very strange logic.

Some of the dangers of a CEO’s indirect interest in IT and HR.

Imagine what will happen if all of a sudden you discover that the software your business uses no longer has support from the developer because it has been phased out.

This means that if there is a major problem with the management information system, entire operations will literally stop. No operations – no money, remember?  Now if your IT is only there for maintenance purposes, what are the chances that major long-term problems will be nursed, only to explode many years down the line?

Imagine the impact on key customers. Remember the 20-80 rule: Just a handful of customers bring in the most money? If you upset your key customers who bring in the most, what are the chances of business collapse when they place their money votes elsewhere?  We can’t even begin to talk of IT helping companies to do intelligence on IT-based disruptions that can destroy a business. With the buy-hardware-and-clean-viruses type of IT management we tend to have, would you expect them to bring insights such as big-bang disruption to their CEOs?

Similarly, people-related issues such as culture, and succession, for instance, do not impact on your immediate quarterly numbers. When you get a strong competitor down the line, that’s when you will know what difference organisational culture can make to your quarterly numbers.

One of the excuses business leaders use to justify why IT and HR report through other executives such as Finance and Operations is lack of understanding of the business by IT and HR executives. It’s not a strong argument. CEOs, if genuine, should make sure IT and HR executives are developed to understand the business to the levels expected.

Reflect on it
People and information systems are the foundation of business. Having IT and HR report indirectly to the CEO is very poor risk management.

Chulu is a Strategic HR consultant who is pioneering innovative Strategic HR practices in both listed and unlisted companies. — brettchulu@consultant.com.