Should Shareholders be involved in Complex IT Decisions?

Dead. The server was dead. As a result, during the next four days 2,300 Delta Airlines flights were cancelled, with thousands of passengers affected. Yet another blow had been struck to the traditional IT model.

The issue was a fire(!) in an in-house data center causing a massive outage as the internal systems failed to cope. Gary Leff, a specialist in airline-loyalty programs, said it is a miracle that the systems work so well most of the time, given that they are legacy systems grafted onto other legacy systems, meaning airlines can’t possibly be fully prepared for every circumstance that could cause a problem.

 

"Use the cloud!” I hear you all scream

It is true that the use of a cloud platform such as AWS or Azure with clever and heavy use of automation software would most likely have solved the underlying hardware issues. Unfortunately though, this is not the base issue.

As pointed out in the excellent Economist article, airlines and banks were the earliest users of electronic ticketing and banking systems. The result of this early adoption is that many of their systems are old, complex, hard to maintain and upgrade. This makes them very costly to replace. If these companies wanted to move to the cloud, a full scale replacement of the application(s) would be required. Replacing an airline backend system would most likely cost several billion and take 5+ years. This is a massive decision and a complex undertaking.

 

The flip side

Airlines may of course be out-innovated if they don’t upgrade and therefore remain unable to serve their customers in the manner that is expected in the 21st century. As a result, they may eventually go bust altogether.

British Airways announced on Thursday 1 September that it would cut back on the ‘Business Class only’ flights to New York, after having launched the service to compete with the likes of JetSmarter, Wheels Up and Surf Air. This further underlines the point that, without biting the bullet, traditional airlines relying on antiquated systems may suffer real deterioration in shareholder value unless more robust action is taken.

 

What’s the problem?

Are the really big decisions being taken? Are company executives able to secure long term shareholder value and guarantee a sustainable business model?

Research shows that the professional life span of a banking or airline CEO is not long enough to incentivise them to undertake the massive risks and challenges of moving to a new software platform (5+ years and longevity). ‘Too much risk’ they say…

 

Who ultimately pays the price for a non-decision?

The answer is shareholders of course. Those who are committed for extended periods of time will eventually lose out. The logical follow on question is, should shareholders take a more active role in complex IT decisions, freeing the CEO / executive team from such responsibility?

You might argue that the CEO’s interests are linked to those of shareholders, since they should also be a shareholder themselves, and their pay should be linked to share price and shareholder value. Whilst this is true in theory, in the majority of cases these rewards are still heavily skewed towards the CEO’s performance in the short term, not the longer term.

Besides this, too many CEOs today, across all industries, park the responsibility of IT at the CIO’s/CTO’s door as if IT is just a supporting function. In the world of sharing economy, IoT and general digitalisation, this is a strategy fraught with dangers.

 

A long term vision is vital for survival

The opportunity for transformation presented by cloud and open source technologies threatens most, if not all, industries out there. Running a business is no longer just a case of strong accounting and governance practices; there is now a much stronger focus on the innovation and creation of new products and services. This focus is no longer just required to address market opportunity. It is now a matter of survival.

Unfortunately, shareholders in most cases also take a short term view, especially when companies are listed. This is perhaps why a lot of companies struggle in the long term, unless they operate in industries protected by significant barriers to entry. The sharing and gig economies are turning most industries on their head. 
If shareholders truly care about the company they’ve invested in, they should perhaps take a closer look at complex IT decisions which secure long term shareholder value. If they don’t, but hold onto their shares, they will eventually be the real losers in all of this.