BCS North London Branch Future SummIT The Value of IT to Business

1. BCS North London BranchFuture SummITThe Value of IT to Business 4 December 2002 David K. Henderson david.k.henderson@uk.ibm.com

2. The Hunt for Business Value from IT – in search of gold ! • is there an urgent need for a fresh, radical approach to addressing the business value created (or destroyed!) by IT ? • are leading organisations doing about it ? • will this happen? Why ? What ? When ?

3. The Hunt for Business Value from IT – in search of gold ! • is there an urgent need for a fresh, radical approach to addressing the business value created (or destroyed!) by IT ? • are leading organisations doing about it ? • will this happen? Why ? What ? When ?

4. Industry Drivers • Continuing consolidation of industries • Economic downturn / minimal growth • Elusive top-line growth • Decapitalisation & rise of market for third-party services • Globalisation & regionalisation • Collaboration intra- & extra-enterprise • Technology Drivers • IT industry is in turmoil – next major structural change? • Shift from monolithic solutions to componentisation (eg ERP) • Shift from application to infrastructure integration (eg EI) • Old reasons for big systems replacement no longer present (e.g., Y2K, euro) • High profile large project horror stories • Shift from long term projects to shorter, sharper project ‘clusters’ • Increasing demand for benefit definition & delivery So why does the market need a fresh, radical approach? Why ? Changing industry and technology drivers are causing rapid structural changes to the basis of competition and the way in which IT is deployed • Business Response • Hunting for Value • Extending information transparency across and beyond the enterprise • Implementing radically different business operating models, fast

5. A number of surveys indicate that organisations fail to measure and regularly monitor the value of their IT investments Why ? • Giga Information Group – 2001 IT Value Poll • 80% of organisations surveyed do not have a defined program to measure value derived from their IT spend • InformationWeek – 2001 Survey of 200 IT & Business Managers • 24% adhere to formal ROI measure & 34% use informal measures • 30% use a combination of formal and informal measures • 26% continue to monitor the value of their investments after implementation • 80% say the need to measure ROI is increased since last year • Higher focus on shorter term payback projects • Cost reduction projects have a higher profile than revenue generation • ROI should not be the only driver for all projects

6. Senior business executives are frustrated!……… Why ? David Murray, CEO of Commonwealth Bank Of Australia (CBA), recently challenged the technology industry at the World Congress on IT. He expressed the frustration of many CEOs about the false expectations set up by the information technology industry. • IT investment has destroyed business value • “The IT industry in the United States has single-handedly wrecked the world economy over the last couple of years.” • Valuing IT investment is critical • “The bank needs to measure the results of its IT investments. “The question is, 'How did we do?” • “CEOs need to force business units and IT to define measurable objectives and then carefully track the ongoing results against the plan.” • “General Electric's new chairman has leveraged its Six Sigma measurement model to track net investments against EPS growth.” • IT vendors create too much hype • ”There are areas where the expectations clearly exceed delivery – most importantly, productivity loss from the complexity of blending the old and the new. The IT industry has made it difficult to integrate new technologies with legacy systems, and it’s so often time-consuming and costly to do this.” • Large-scale projects often fail • ”We have several times failed on projects that are too large, and, ultimately, too costly and simply do not work.” Source: Forrester 2002

7. How can I ensure that my CIO takes costs out of IT infrastructure & services without destroying business value? How can we measure the value-creation potential of future IT-centred investment? How can we measure IT’s contribution to the value of our business today? How do we know if my potential CRMS investment will create more business value than my ERP replacement? They’re both $50m+ investments with sound business cases, but it’s like comparing an orange with an apple – and we can’t afford both! How can we ensure that we are making the best IT investment choices out of those available? How can we ensure that business & IT investment decisions are wholly aligned? Why have we been unable to integrate our IT planning process within our business planning process? CEOs and CxOs are now asking much more difficult questions (often of the CIO!), such as…………… Why ? How can I ensure that my CIO decommissions legacy IT systems without endangering business operations or value?

8. Why ! Businesses have grown in size and scope…..and complexity! For example, large retail financial services providers have moved to expand their offers by increasing their geographic, product, and channel breadth. While this has provided opportunities for growth, it has also greatly increased business complexity. • Channel • Channel • Channel Product Specific Delivery • Growth has been through a combination of internal expansion and acquisitions • New products, channels, and lines of business are often only partially integrated • Organizations continue to be structured along product and/or geographic lines rather than customer segments Marketing Sales & Distribution Geography Product Manufacture Geography Geography Operations Shared Facilities Product Silo 1 Product Silo 2 Product Silo 3 In many cases, the addition of new products and channels has been in reaction to real or perceived competitive threats. Few institutions have taken a holistic view of their business and determined how to move forward with a fully integrated approach.

9. The Hunt for Business Value from IT – in search of gold ! • is there an urgent need for a fresh, radical approach to addressing the business value created (or destroyed!) by IT ? • are leading organisations doing about it ? • will this happen? Why ? What ? When ?

10. Leading organisations are focusing on five key areas…. What? • Justification - demanding measurable & sustainable business value from IT investments • Prioritisation - integrating business & IT Planning • Simplification -adopting radically new fused business/IT modelling approaches • Realisation - tracking delivery of measurable business benefits through & beyond solutions delivery projects • Agility - moving to managing solutions delivery projects as a portfolio programme ….and each of them involves an IT Heresy!

11. Shareholder Value Corporate value - Debt = Cash in Determined by: • Sales growth • Cash profit margins • Cash tax • Fixed assets (CAPEX) • Working capital Future cash flows Corporate value = Discounted at the Weighted Average Cost of Capital Cash out • WACC Cost of equity Cost of debt Capital structure JUSTIFICATION – ROI is not enough! Business leaders are demanding use of more sophisticated techniques, such as Shareholder Value assessment What ? • Growth duration period

12. Business and IT Strategy Separate Business and IT Strategy Aligned Business and IT Strategy Integrated Business is increasingly seeking to operate here Business Strategy Business Strategy Integrated Strategy IT Strategy IT still often operates with traditional performance measures derived from this traditional role IT Strategy IT Integrates Business IT Enables Business IT Supports Business Business Model Facilitation & Value Creation Process Automation & Optimisation Task Automation & Communications Infrastructure 2. PRIORITISATION - IT metrics are self-serving.They are out of step with business reality; integrated planning is the answer What ? It is challenging to measurably demonstrate IT’s value to the business due to differing ‘strategic’ positioning

13. Mass Retail Segment Private Banking Segment Sub-Prime Segment Mass Affluent Segment Ultra High Net Worth Segment A component model provides business flexibility and process optimization • Distribution is tuned to the customer segment • ‘Assembled’ product combinations re-use Manufacturing capabilities regardless of source • Operations achieve enterprise-wide scale economies Distribution Sector differentiated marketing, sales and delivery Parameterised Product Assembly Manufacturing Product options support and component based product manufacture Low Cost, High Quality Servicing Operations Generalised operations and shared facilities 3. SIMPLIFICATION – Integration can be bad for your health! Integrate only those areas of the business & supporting IT that make sound BUSINESS sense What ?

14. Value Drivers/ Influence Diagrams Key Performance Indicators (KPIs) Shareholder Value Improvement Target (£/$ Billions) 1 2 Price Volume 3 Revenue NOPAT* Material Costs Labor Costs Design and R&D Costs Manufacturing Costs Marketing & Sales Costs What level of planned benefit can we expect from the technology implementation? EBIT Margin Business Enablers Cash Tax What are the KPIs that link to key operating drivers of the business? What target level of KPI performance is needed to achieve top-level shareholder value improvement goals? Financial Value Drivers Industry Structure Competitive Position Sustainability What are the key operating drivers of the business that influence cash flow generation/shareholder value? Competitive Advantage Period Working Capital Property Plant & Equipment Benefit Booking Enabler Tracking Invested Capital Action Tracking 6 5 Process Capital Charge 7 Capital Structure Cost Debt Cost of Equity WACC Targets Actual Technology Process • Consolidate CSCs in NA, EMEA • Identify, re-deploy or eliminate required # FTEs Are planned improvements in business performance reflected in management reports? Technology • Re-align sales force w/ top key a/cs • Re-deploy or eliminate non-performance sales reps Organisation Who is responsible for providing enablers and what is required timing? Organisation • Consolidate IT organizations in NA, EMEA, AsiaPac • Identify, re-deploy or eliminate required # FTEs What actions are required by management to achieve planned benefit levels? 4. REALISATION – A Business Case is not just for Christmas! Realise business benefits throughout & beyond the delivery project What ? 4 What types of business enablers are required to drive planned benefit streams?

15. Generation I Generation II Generation III Generation n Develop business information model Reporting & Business Map required & actual sources & use Analysis Define sourcing and delivery tasks Develop core marketing & dist. MIS Develop remaining MIS schema Develop requirements and bus.case Application Application Electronic Electronic Identify and select long term approach Capture Capture Develop basic STP approach and framework Complete integration with NACC Identify quick hits Implement eApps, STP Implement quick hits Develop reqs & identify quick hits Field Workbench Field Workbench Implement quick hits Identify & select imp approach Implement field pilot Refine & roll out across organization Assess distributed product functions Design and select solution approach Product Profile Product Profile Phase 1 Product Profile integration with MIS Phase 2 - Prod. Profile information for Broker/Dealers Phase 3 – Prod. Profile Integration with fees and commissions Phase 4 – Prod. Profile Integration with selected systems Develop requirements for commissions and identify quick hits Implement short term fixes (BP&S) Commissions Fees and Develop F&C capability Develop detailed requirements for var. comp. Identify quick hits for variable comp Implement quick hits for var. comp. Develop Variable Compensation capability Develop & apply TX cost model Processing Assess requirements & options & identify quick hits Administration & Contract Implement quick hits Rationalize admin systems Inforce 5. AGILITY - Multi-year monolithic projects are OUT!Think project portfolios, regular review points v ‘I’ve started, so I’ll finish’, regular change ripples v intermittent tidal waves Based on the various analyses, corrective tasks for the systems, process and organisation are identified. These are then filtered and prioritised against criteria (examples shown below) and assembled into a multi-phased and multi threaded implementation plan What ? • Selection Hurdle – • does the task identify a significant deliverable that delivers material benefit within 6 months • does the task detail benefits that will provide a 8x ROI over the anticipated life of the solution (<3 years) • does the outline approach have acceptable levels of implementation risk • Prioritization – • does the task target areas of the business aligned to the business strategy – if so progress • does the task resolve critical dependencies or constraints in other areas of the business that might constrain the strategy in the future • does the task identify benefits in areas not directly or indirectly aligned to the strategy, but that can be implemented without constraining aligned projects and having a compelling business case • Dependencies - • are there any start/mid term/end dependencies on other identified tasks • are the required resources available and has the business community the capacity to absorb the changes • are there any known dates, time limits or conditions that constrain the execution of the project TASKS Business Considerations Budgetary Constraints Business Impact Payback Period Selection & Prioritization Principles Critical Dependencies Technical Feasibility Delivery Risk Technical Considerations

16. The Hunt for Business Value from IT – in search of gold ! • is there an urgent need for a fresh, radical approach to addressing the business value created (or destroyed!) by IT ? • are leading organisations doing about it ? • will this happen? Why ? What ? When ?

17. When will this happen? When?

18. BCS North London BranchFuture SummITThe Value of IT to Business 4 December 2002 David K. Henderson david.k.henderson@uk.ibm.com