What role should IT play when IT-intensive sectors such as banking, logistics, and telecommunications innovate? Today, IT managers are key team players in the development and delivery of new products and services—initiatives generally sparked and led by business-unit leaders. Could other models of innovation allow companies to launch products faster, more successfully, and less expensively? Would IT play a very different role in these new models?

During the next few years, answers to these questions will come from the telecom industry. With revenues from landline services flat or declining, and growth shifting to wireless and new services such as satellite TV, the telcos are under tremendous pressure to cut their operating costs even as they envision, develop, and launch compelling new offerings that expand their horizon. The pressure to change—and fast—also gives their chief information officers an opportunity to redefine the role of the IT function and even of the CIO.

In the thick of these changes is Shaygan Kheradpir, the CIO of Verizon, a New York-based telecom company with upward of $67 billion in revenues in 2003, more than 200,000 employees around the world, and a desire to transform itself quickly. Verizon hopes, in just a few years, to shed its past as a regional telephone company and to embrace a future as a broad-based provider of communications products and services and of innovative communications applications.

Kheradpir joined the company in 2000, when Bell Atlantic merged with GTE to form Verizon. He was president of its e-business group, which was separate from IT, until January 2002, when he became CIO, responsible for both e-business and information technology. In that role, Kheradpir has cut expenses by more than a third. Further, by shifting the bulk of Verizon's IT expenditures from maintenance of the existing system to the development and support of new business capabilities, he has changed an internally oriented IT organization into one focused firmly on markets and customers. Today Verizon's IT organization is innovating more and more aggressively. It recently led the charge to create a new offering: a service that allows consumers to link and manage their communications across devices and locations.

In an interview at Verizon's New York headquarters with Andrew Appel, a leader of McKinsey's global IT practice in North America, and Safroadu Yeboah-Amankwah, a principal in the telecommunications practice, Kheradpir outlines the intense atmosphere in which he operates and explains his unique approach to changing IT so that it realizes the company's business goals.

The Quarterly: What impact did changes in the industry have on Verizon's competitive offerings?

Shaygan Kheradpir: For the past 20 years, people have predicted that different forms of communications across telecom, media, and software would converge. For a long time, this didn't happen; now it's happening very rapidly. Not long ago, the world we live in was digital. I don't mean this in a technology sense, but if you think of digital as ones or zeros—as one thing or another—then not long ago you were either at home or you were at work. Either you delivered telephone services or you were a media company. But the world has changed: it's become more analog. Again, I mean this metaphorically: it is more of a continuum. I may be at home and working or at work and solving problems at home. Cell phones are not just phones; they are also cameras and they can send text messages. Televisions are becoming interactive and tied to the Web. Cable companies are offering telephone services. Verizon is historically a telephone company, but today we're a full-fledged communications company, into all aspects of networking, communications applications, and media.

In terms of offers to customers, the line between cable companies and traditional telecom operators is blurring. Convergence is changing the competitive environment of the communications world and therefore has profound implications for the products and services we deliver—on how we make them operational, support them, and take them to market. It's very different. The expectation is that convergence will happen quickly over the next few years.

The Quarterly: Given the changing environment, what major challenges do Verizon—and the IT organization—face?

Shaygan Kheradpir: Our biggest challenge is getting three crucial things right, all at the same time. We have to do these things as a company, but because IT is embedded in everything we do at Verizon, they are also IT challenges. The first is to continue to improve the company's cost structure for this environment. And if IT doesn't execute, that's going to be hard to accomplish. We must become more efficient every year, and that means not only reducing IT costs but also making sure that any function in the company that can be automated gets automated. It also means that employees must have real-time access to any information or control they need to serve the customer—that is, enabling every employee to become a knowledge worker and leaving transactional work to machines. Second, we have to be very fast getting out new products with a great customer experience; unless IT executes, that's going to be difficult also. And third, we have to deliver products that customers want in this new, converged space. For that, IT must partner with the lines of business to figure out the winning formula. We have to do all three things right, simultaneously. That's our grand challenge.

The Quarterly: Let's talk about those challenges, starting with the cost side. You have dramatically reduced IT costs since becoming CIO. Can you walk us through your efforts over the past couple of years?

Shaygan Kheradpir: Yes, but let me set the context for you, because the answer is rooted in how we handled the merger. In 2000, when Bell Atlantic and GTE merged to form Verizon, we essentially were merging three Fortune 50 companies with big legacy systems: GTE, Bell Atlantic, and Nynex.¹ There were two ways we could integrate the IT systems of the companies to become more efficient. We could merge these systems together first—the traditional way—making one billing system, one ordering system, and so on, and then modernize them for the Internet-driven world. Or we could merge and modernize simultaneously, using Web services, at the time the new and rising—that is, the Internet—way of constructing systems. Back in 2000, the Web services methodology wasn't as pervasive in the IT industry, but our computer scientists and architects were convinced that we could catch this new wave early, thereby achieving our internal integration and market-facing requirements at the same time.

So we leveraged our Verizon.com initiative—the company's transactional site—in order to launch our merge-and-modernize program "wrapping" the former companies' legacy systems in Web services; for example, a customer-service record became a common Web service across the Verizon footprint. IT teams created hundreds of these Web services, and we were then able to build a vast array of national applications quickly on top of them. These applications included Verizon.com itself, self-service voice portals, customer-service-rep desktops, work flow systems, provisioning systems, and many others.

Over time the wrapper has become quite thick, in most cases replacing the legacy systems' business rules—and, in some cases, their data too, hence replacing the legacy systems altogether. This approach has worked very well for Verizon: we accelerated systems unification, thereby driving IT costs down. More important, we deliver business functionality much more quickly, because our developers now can readily reuse these Web services and because software development via Web services is easier and less error prone.

The Quarterly: What other methods did you use to take costs out?

Shaygan Kheradpir: We were lucky that the merger between Bell Atlantic and GTE happened as the forces of IT commoditization, virtualization, and globalization were rising. We noticed these forces early on and have tried to leverage them to the maximum. The commoditization of IT gear was accelerated as a result of the dot-com crash, so you could find much cheaper gear at places like eBay. Virtualization methods have driven hardware utilization levels much higher. And global sourcing has allowed us to deliver more IT work and to shoot for a round-the-clock delivery model.

Our use of these forces, together with the merge-and-modernize initiative, has yielded two good outcomes: a better IT cost structure—from slightly over 6 percent of revenue to about 4 percent—and the freeing up of resources so that we can focus more on the customer.

The Quarterly: When you say that IT is more focused on the customer, what do you mean? What does IT do differently today?

Shaygan Kheradpir: If you wound the clock back five years, the list of IT accomplishments would look different. On the list then would have been such things as enterprise resource planning and the consolidation of data centers. Five or ten years ago, we were more internally focused. Today we're very product focused, outward to the customer. It's not that we don't do some of those internally focused things today. But the priorities, the muscle, and most of the energy are now focused on the external market. That means getting products out faster, whether fiber to the premises, DSL, long distance, wholesale, enterprise, or bundles; helping to define products for the new, converged market; and giving our employees more time to serve the customer, through automation, a tighter end-to-end work flow, and real-time information, collaboration, and control. Our priorities are explicitly laid out, and all IT employees know how their work makes a contribution—at the start of each year they make the linkages themselves—and how it is mapped to specific business outcomes for revenue, efficiency, and customer satisfaction. This is how we measure and reward.

The Quarterly: Have you learned any lessons from this transition to a customer- and market-focused IT organization?

Shaygan Kheradpir: One change is that we learned the importance of rapidly fine-tuning the customer experience throughout and after the implementation of a new product or application. That goes for either an internal or an external customer for all IT releases. IT used to deliver a big thing and then turn its attention to the big thing's next release, keeping what it had delivered stable and continuing to improve processes over time. We would make the big thing operational and keep working on it, and over a period of time the penetration curves for the big thing would go up to where we wanted them. Today we recognize the need to get penetration numbers up the curve much faster, particularly for stuff aimed at external customers. For these, getting the curves up fast can make the difference between being number one or two in the market. For both internal and external customers, it has become very important to get the customer experience right the first time and to delight the customer almost right out of the box.

So we now have two development teams working on selected projects. One development team, the core team, is deep in the bowels of the engine. And the other development team, which we call the customer experience team, worries about the metrics for customer acceptance during development and works on getting things to the right level quickly. This team essentially puts probes on the engine as it is being built, constantly testing the market reaction. An example of a probe might be a mechanism for measuring the usage level of a certain feature. Another might track which descriptions of features drive inquiries to the call center because users don't understand them. By monitoring the application from both a technical and a usage standpoint, the customer experience team gets the data it needs to fine-tune the system. It then either goes back to the core team or sometimes makes the changes itself. The customer experience team owns the user interface. It goes to the core team when the changes it wants have an impact on, for instance, some element of the software or IT infrastructure. The customer experience team does its work both during and after a release.

The Quarterly: What's the challenge of managing development in that way?

Shaygan Kheradpir: Just making sure that these two teams pretty much work as one and solve problems together. That's the challenge. And what we typically do is have conference calls at 8 PM or 9 PM or 10 PM with both teams. The probes say one thing, the development team says another, and we have to figure it out. Sometimes the probes are wrong. Sometimes the probes are right and something needs to be fixed. Then we decide who's going to fix it.

A second challenge is getting the right people on the customer experience team. We need people who think very analytically about complex problems, because almost anything we do is complicated. Delivering something could require us to hook into dozens of systems and to operate at a scale and reliability that only a few companies in the world achieve. So people on the customer experience team are typically very experienced architects and engineers. They have to be very strong analytically, with hands-on experience. Also, we augment the team with people who have an eye for design and strong business skills in terms of knowing how to structure reports for the business lines.

The Quarterly: How many projects a year can you do this way?

Shaygan Kheradpir: We can't do it for everything—not yet. So we've taken this approach with our strategic initiatives, such as consumer broadband, the expansion into the enterprise customer segment, and a new communications product called iobi.² We've also taken this approach with some core automation initiatives that were strategic for the company.

The Quarterly: Let's turn to another challenge: the role of IT in innovation.

Shaygan Kheradpir: IT has two roles to play here. The first is to support core innovation. For instance, Verizon is putting fiber into homes. We have to deliver the systems for provisioning and overall servicing, and all of this is different from plain old telephony over copper wires. It's more like operating Internet technologies and services. The second role we play is helping the company succeed with new products and services in this new converging market. One example of that is iobi. IT envisioned the product. IT built it. Now we're partnering closely with Verizon's marketing and sales teams—with retail and enterprise product teams—to take this to market.

The Quarterly: What do you mean by products and services for a converging space? What are telecom companies like Verizon—and competitors in media and software—aiming at?

Shaygan Kheradpir: Think back to the PC revolution. For ten years before the PC came on the scene, we were programming on microprocessors. Microprocessors alone didn't make the PC market. What made the difference was that software was eventually put on top of the hardware, so that people could put applications on it. Suddenly you had the PC revolution.

Now fast-forward 25 years and we're at the same place, except that instead of having only the hardware in your PC box there is also the hardware of your connected devices. Increasingly, people hop from one connected device to another throughout their daily lives—BlackBerry, cell phone, work phone, PC, laptop, music and camera phone, TV, game console. The number of connected devices we use and carry increases every year, and more and more they are as much for our personal as for our professional lives. Family rooms are becoming more technically interesting than offices!

What if we did today the same thing that happened 25 years ago—wrap a layer of software, but this time around the hardware of connected devices, so that people could build applications on top of all this? The applications of such a platform are limitless and will be centered as much on the user's quality of life as on business productivity. The enabling technologies and applications here are the next big thing for the convergence market and the IT industry as a whole.

Verizon's iobi platform is all about this. It will enable people to remotely control their content and events on any device; the content here could be calls, voice mails, files, notes, pictures, music, video. For example, I'd like to know instantly anywhere in the world if my kid's school calls any of my devices and be able to bring the call to where I am. I'd like to contact any individual or group in my business or personal circle at any time, using any device, and with the communication method of my choice. I'd like to have my media available to me at all times on any connected device capable of rendering them. I'd like to be notified to take my prescription wherever I am. I'd like to have an "off" button to hold all forms of communication. Of course, most applications on such a platform will be created by other companies—independent software vendors and so forth—which have intimate knowledge of a special vertical segment of life or business. Many of the applications will be as unpredictable as PC spreadsheets were back in the early '80s.

The Quarterly: Given IT's new role in innovation, are you creating new operating approaches, such as new processes for envisioning or pursuing innovations, within the IT function?

Shaygan Kheradpir: Yes. The way we're going at this is to create a number of mini start-ups, or virtual teams, within Verizon, to chase potential ideas. As these start-up teams develop their ideas, they tackle a broad array of issues, including technology scalability, customer needs, regulatory and legal constraints, and what it takes to break the consumer's cost and impulse barrier, to create an experience that delights customers from the start. Start-ups can't be successful if they can't solve all those problems. As soon as we see a team gaining momentum—that there's life there and that it has reached a certain level—then we make sure that we do what's needed to scale up to go to market. That's our operating approach right now.

The Quarterly: How satisfied are you with your current pipeline of start-ups?

Shaygan Kheradpir: You can never be satisfied. Every night I go home and think of things we as a team should be doing but are not. And that's one of the leadership challenges we face. We have to gauge when the pressure on the system is reaching its limits and when you can push the system another step. If we can push something a month or a quarter ahead, it could make the difference between winning and losing. Or we could push too hard and crater the whole thing. But it's a challenge that is also fun for us. It is new for us. There's a lot to learn, but we're learning fast.