I originally wrote this for my column at bMighty.com, and so I am reposting it here because it is an important issue for IT management.

Who do you think holds more sway over a business's strategy and planning -- someone who reports to the CEO or someone who reports to the director of operations? The obvious answer here is the person who reports to the CEO, but in many organizations where IT plays a strategic role, the person in charge of IT isn't part of the leadership team. Historically, IT leaders have often reported to the CFO or whoever is in charge of the financial operations due to the financial area being one of the biggest customers of IT. As a business grows and matures, that may not always be the best choice.

The first part of determining where IT fits on the organizational chart is to examine the role of IT within the business. In a business where IT merely provides employees with computers for e-mail and servers for file storage, it doesn't make sense to have the person in charge of IT reporting to the CEO. The same goes for when IT is focused on providing services internally to improve the basic efficiency of the business's operations. In the former case, IT might report to a person like the lead accountant or an assistant vice president to keep some of the management burden off the higher-level executive management. In the case of the latter, it would make sense for the IT manager to report to the chief operating officer or director of operations.

As IT reaches a point of stability and can begin taking on additional projects beyond basic organizational efficiency, it becomes possible to look at the strategic opportunities that IT can take advantage of. If the IT department is building and managing advanced customer relationship management (CRM) systems or ERP systems, the IT manager better be reporting to someone much higher than the lead accountant. Systems such as these affect the capabilities of the business to work with suppliers and customers and impact processes across the whole organization. In those situations, having a CIO or VP of IT becomes critical to the success of those projects and the business as a whole.

How can you tell when IT needs to be at a higher level in your business? Competitive advantage. Competitive advantage can be built through multiple strategies. Michael Porter's book, Competitive Advantage (Free Press; 1998), lists three main strategies:

1. Cost leadership
2. Differentiation
3. Focus

Cost leadership is accomplished by having the lowest cost of operations among your competitors while still maintaining a reasonable level of quality. Due to the difficulties and challenges of being the cost leader, there's usually only one within a given industry. If multiple companies attempt to be the cost leader, fierce price competition is almost always present. IT can help with reducing costs in a number of ways, including by providing services such as just-in-time inventory systems for minimizing inventory costs, data mining past orders for targeted marketing of new products, and supporting videoconferencing to reduce travel expenses.

In order to create competitive advantage through differentiation, a business has to offer products or services that only it can offer. While having a unique product or service is critical, of course, the business must charge a price that customers think is fair. Apple exemplifies this strategy with its iPod line. In an organization where IT builds differentiation, the IT department is likely directly involved in the production of the products and services. Dell's ability to provide customized computers on a large scale and in rapid fashion wouldn't be possible without the support of IT on its Web site, its manufacturing process, and its inventory management system.

Competitive advantage also can be gained by having a focus on one particular area of an industry. In his book, Porter described focus as having either a cost or differentiation emphasis within a specific market. By narrowing the broader market into a smaller market segment, the business can focus on the costs of serving that market segment or on the specific products of that market segment. Business intelligence systems usually play a significant role here as it increases the speed with which the organization can recognize what makes its market segment different from the market as a whole.

If IT plays a role in enabling the competitive advantages of your business, then IT management needs to be at the same level as the CFO, COO, and other CxO titles. The head of IT who sits at your executive team meetings will be much more capable of providing the capabilities the business needs to build and sustain competitive advantage than the head of IT who sits on the other end of the building passing information through one of the other top management leaders.