Spend Where IT Matters

1. WCO-ZXJ269-20080225-02 CONFIDENTIAL Spend Where IT Matters Technology Executive’s Peer Group Document February 27, 2008 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

2. WCO-ZXJ269-20080225-02 How CEOs and business leaders often think of IT investments . . .

3. 3.6 WCO-ZXJ269-20080225-02 IT spending varies widely by industry, but averages 3.6% of revenue Organizations with more than $1 billion revenue IT spending as a percentage of revenue by industry, 2005 Percent IT spending per employee by industry/sector, 2005 Dollars 2,187 Education 3,205 Metals and natural resources 3,915 Transportation 4,817 Hospitality and travel 5,150 Food and beverage processing 5,716 Professional services 5,978 Retail 6,310 Consumer products 6,687 Construction and engineering 7,670 Government 8,540 Manufacturing 8,575 Electronics 8,669 Chemicals 9,983 Media 10,325 Information technology 11,703 Pharmaceuticals and medical products 14,079 Utilities 14,329 Healthcare 16,687 Energy 18,244 Telecommunications 20,143 Insurance 20,144 Banking and financial services 11,131 Database average Source: Gartner Consulting Worldwide IT benchmark Service

4. While most spending goes to “staying in the race,” CIOs routinely seek a broader role 12 “Change the rules” “Win the race” “Stay in the race” • Reliability, regulatory compliance, cost management WCO-ZXJ269-20080225-02 Percent of IT spending 100 Meaning IT’s contribution • IT is now the cost of doing business in this market, a “commodity” not a differentiator 65 • IT helps compete and win by differentiated products, services, or prices; faster rollout or deployment; or better margins • On-time, on-budget project delivery • IT enables new markets or services, brings significantly lower price points, or transforms the industry value chain • Strategy-setting and counsel across the business 23 12 2007 Source: Gartner Worldwide IT Benchmark Report 2006: Volume 1: IT Spending & Staffing Analysis; McKinsey Business Technology practice

5. WCO-ZXJ269-20080225-02 How to spend where it matters 1 Inventory your spend by business process, not by system 2 Map your processes by value and degree of IT enablement 3 Spot which processes need the most IT enablement 4 Assign a service level to applications according to process

6. 1.1 4.1 3.1 3.2 4.2 1.2 1.3 3.3 4.3 1.4 4.4 3.4 4.4 1.5 3.5 3.6 4.5 1.6 Operate call center 2% Design for manufacture 5% Develop campaigns 3% Research market 4% Process orders 5% Invoice 2% Market to customers 4% Source materials 4% Select products 3% Dispatch field service 1% Design products 5% Manage logistics 3% Manage problems 1% Respond to inquiries 1% Schedule operations 4% Produce 2% Ship to customer 4% Manage self-service 1% Prototype and test 4% Validate sales 2% Process returns 9% Manage inventory 3% Engineer 3% Improve quality 2% Manage library 1% Collect 7% 1.0 Develop 20% 2.1 2.2 2.3 2.4 2.0 Market and sell 10% 3.0 Manufacture 20% 4.0 Fulfill and bill 30% 5.1 5.2 5.3 5.4 5.0 Support 5% 7.0 8.0 9.0 10.0 11.0 6.0 HR 2% Risk 1% Legal 1% Facilities 1% IT 5% Finance 5% Step 1: Inventory your spend by business process, not by system ILLUSTRATIVE Percent of IT spend Source: McKinsey Business Technology Practice

7. Current state World-class Meets needs IT enablement Broken Low (stay) Medium (win) High (change) Strategic value Step 2: Map your processes by value and degree of IT enablement Low spend Develop Fulfill and bill Market and sell Support High spend Manufacture Manage business • IT supports the least strategic areas just as well as the most strategic • Spending is higher in many non-strategic areas • A significant number of strategic capabilities are “broken” Source: McKinsey Business Technology practice

8. Current state Prototype and test World-class Research market Process orders Finance Meets needs IT enablement Manage logistics Manage library Market to customers Manage inventory Broken Low (stay) Medium (win) High (change) Strategic value Step 3: Spot which processes need the most improvement in IT enablement Low spend Develop Fulfill and bill Market and sell Support High spend Manufacture Manage business • IT over delivers on order processing and finance, and can maintain lower spending levels • Strategic areas of product development need better IT enablement • Several non-strategic areas, such as logistics and inventory management, are broken and need basic improvements Source: McKinsey Business Technology practice

9. Step 4: Assign a service level to applications according to strategic value and need for enhancement DRAFT Current state World-class Service levels Break- fix resp. time Hours Enhan- Cement Hours Support classes Pro-ject Break- fix2 • Gold •  •  160 •  • 2-4 Meets needs IT enablement • Silver  4 •  40 •  • 2-4 • Bronze   •  • 1 day • No sup-port*     Broken Low (stay) Medium (win) High (change) Strategic value Source: McKinsey Business Technology practice

10. WCO-ZXJ269-20080225-02 Questions for the group • What proportion of your budget goes to “stay,” “win,” and “change”? What do you want it to be? • Which processes consume the bulk of your budget? • Which processes are the most strategic? • Which strategic processes need the most improvement in IT capabilities? • How do you set application support levels?