Last week we provided a brief overview of the four stages of IT maturity and why they should matter for your business, regardless of the industry. Today we will take a closer look at Stage 1, which, as the title of this post suggests, is not really a long term option for remaining competitive in a digital economy.

Why do companies get stuck in Stage 1?

A number of the companies in Stage 1 of the IT maturity scale are there because they do not associate much value to technology initiatives, or think advanced technological capabilities are not necessary in their industry. Some companies might even feel they are already more advanced than their closest competition, and potentially already leading their industryThis is an extremely risky stance given that a lot of disruption actually comes from either a new entrant to the industry, or differing industries introducing alternative solutions. We’ve seen how this plays out in the real world in cases like the taxi industry (Uber/Lyft), Blockbuster (Netflix), and some upcoming disruptions like U-Haul (Dolly), and the trucking industry (Cargomatic/Transfix).

Another of usual suspects in Stage 1 are companies in heavily monopolized industries.  Without competition, companies tend to focus on bottom line revenue, and see no need to evolve and keep up with market demands. They are complacent with their market share, and often protect it through political channels and other barriers to entry, not through product enhancements or innovation.

Finally, we also see a number of companies in Stage 1 due to financial distress.  Either by a strategic choice, or maybe a restructuring plan. But in either case this group typically has plans to move quickly into stage two when budgets allow, whereas the prior two groups tend to stay in stage one for an extended period of time.

How do you know if you are in stage 1?

Businesses in Stage 1 of IT maturity scale often view IT as a necessary evil: something that they must tolerate for the essentials like email and payroll, but not a game-changer that can transform their organization or industry. Thus, we see that cost control is the primary motivator in their IT decisions. These businesses tend to forego things like business continuity, top of the line systems, elaborate software solutions, custom tools, and process automation solutions, and focus budgets on the basics.

As such, companies in Stage 1 have IT budgets that are usually far below the industry average. For example, a small business of 15–20 employees may be spending under 20K annually on IT, while a Stage 2 company of the same size may be spending 3 or 4 times that amount.  For a company having 50+ employees, the industry average for technology spend is anywhere from 3% to 5% of gross revenue. A stage 1 company, on the other hand will most likely be way under this amount.

In Stage 1, we typically do not see permanent IT resources in place, nor managed services contracts.  Companies are either using a break/fix IT contract (highly reactive support services), or leveraging an existing employee in the office (an admin, financial person, or even a relative of the owner); whoever happens to be the person who knows the most about “computers”.

Stage 1 companies also see little to no return on investment from their technology efforts as their investments are mostly on basic infrastructure and support. Two areas that do not typically provide real value to companies.

What is the downside of stage 1?

The issues facing Stage 1 companies are many. They lack the capabilities to capitalize on existing technology to drive down costs, increase profit margins, implement scalability, and enhance the customer experience.

Appropriate technology investments can directly impact a company’s ability to scale profitably and businesses ignoring this are doing so at the expense of profit margin. Scaling is very resource-demanding and costly, but even more so without the right infrastructure in place. Maintaining profit margin in Stage 1 can be difficult as well, whereas companies that scale with technology tend to increase their profit margin and are able to leverage that against weaker competition. What you may be saving on IT spend today, you most likely are spending 5-10x as much in other areas, due to inefficiencies with business processes.

Stability is also a common issue here: companies at Stage 1 tend to only invest in the specific system or component causing issues and tend to ignore everything else. This often leads to cascading issues and urgent “fires” as the new components provide additional stress on the system. This is similar to replacing the tires on your ’85 Lebaron convertible without addressing that major alignment issue, the holes in the roof and four blown out shocks. This sometimes may get you where you need to go, but it’s not pretty and in the long run, not even the most cost effective.

When is it time to move on?

If it hasn’t been clear up until this point, the answer is NOW!  Almost all businesses have competition of some sort, and that competition is constantly evaluating different ways to get ahead.  Today the way to get a head is with technology, and pretty much every business knows it.  If you are lucky enough to have no competition, you don’t really have much to worry about, but if you are like the rest of the world, you need to start taking technology seriously.  It needs to be a core competency, and your competitors are most likely already ahead of you on the IT maturity scale.  In fact, it is very likely that they are already in Stage 2 or 3, so Stage 1 could ultimately lead to slow death. To stay relevant in today’s world, you must advance your IT capabilities. Market demands are forcing businesses to increase their technical capabilities, and doing so in Stage 1 is nearly impossible.

How do I begin to transition to stage 2?

The main objective in Stage 2 is to build a stable platform your company can leverage to be more successful. To get to Stage2, you’ll need to focus your energies and investments on activities that will help that happen.

Instead of measuring IT by budget alone, making the transition to Stage 2 will require introducing system performance metrics like SLAs, uptime standards, and response time for issues. The goal is to start building a very stable environment that will give your business the ability to leverage technology throughout. You should also invest in new tools for each department (HR, sales & marketing, accounting, and more) to streamline their processes and give them the resources they need to achieve your business goals, and invest in training your employees to leverage your new IT capabilities effectively. Identify the areas of your business that can benefit from tools that manage and automate processes, and help your employees gain comfort with their new methods of operation.

The reality is that moving to Stage 2 is a difficult and complex process. You’ll need to leverage the right business IT resources, whether that is part of your core team or a trusted external business partner.