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CONFIDENTIAL Managing IT through a CHALLENGING ECONOMY Microsoft – Achieve More event Hong Kong, March 6, 2009

MCKINSEY - Managing IT in Downturn

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Page 1: MCKINSEY - Managing IT in Downturn

CONFIDENTIAL

Managing IT through a

CHALLENGING

ECONOMY

Microsoft – Achieve More event

Hong Kong, March 6, 2009

Page 2: MCKINSEY - Managing IT in Downturn

1

5 KEY IT TRENDS IN THE CURRENT DOWNTURN

• CIOs and corporate finance collaborate on generating ideas to use IT assets as a lever to generate cash, including areas in outsourcing management, leasing of assets, and vendor financing

• CIOs need to evaluate IT investments for new business capabilities in a fact-based way in brokering with business units to allocate more precious IT budgets

• CIOs should enhance relationships with internal legal and corporate-affair teams and be prepared to seek solutions at manageable cost to meet increasing government and regulatory mandates

• CIOs need to be ready to explain what it would take to improve the value equation for IT investment when CEOs tend to shut off discretionary projects during the downturn

Source: McKinsey analysis

• CIOs need to dynamically manage vendor relationships as a portfolio as the offshoring and outsourcing landscape shifts rapidly with downward pressure on aggregate demand, local government sponsored initiatives, mergers and new entrants

IT and corporate finance merge

Tension around IT budgets increases

The “last” IT projects?

Regulators demand more from IT

The outsourcing and Offshoring landscape shifts

Page 3: MCKINSEY - Managing IT in Downturn

2

Note: Before recession ranking based on years 1998 and 1999; after recession ranking on 2004 and 2005

Source: CPAT; Compustat; McKinsey analysis

DOWNTURN WAS A DISRUPTIVE MOMENT FOR INDUSTRIAL LEADERS

Half of leaders lost their position after a recession

Competitive landscape shift after the downturn in 2000(IT industry example)

Overall IT industry

Lea

ders

Lag

gard

s

Aft

er

rece

ssio

n

Before recession

LeadersLaggards

11%

10%

11%

68%

Software

Lea

ders

Lag

gard

s

Aft

er

rece

ssio

n

Before recession

LeadersLaggards

11%

10%

10%

69%

System hardware

Lea

ders

Lag

gard

s

Aft

er

rece

ssio

n

Before recession

LeadersLaggards

11%

10%

10%

69%

Semiconductors

Lea

ders

Lag

gard

s

Aft

er

rece

ssio

n

Before recession

LeadersLaggards

15%

5%

7%

73%

IT ServiceLea

ders

Lag

gard

s

Aft

er

rece

ssio

n

Before recession

LeadersLaggards

9%

12%

13%

66%

Percent of companies

Page 4: MCKINSEY - Managing IT in Downturn

3

• Strengthen core business or capture emerging opportunities through acquisition

• Regain focus via pruning non-core or unprofitable assets

• Focus sales & marketing on high value segments

• Optimize pricing structure

• Launch new product offering in high growth areas

POST-RECESSION LEADERS EXCELLED IN 3 ASPECTS

Initiate strategy transformation

Improve business efficiency

Drive smart growth

Leadership after downturn

• Outsource non-essential manufacturing

• Streamline product portfolio

• Improve procurement management

• Accelerate cash conversion cycle

Source: McKinsey analysis

Page 5: MCKINSEY - Managing IT in Downturn

4

IT spending typically fell much faster than GDP during past recessions…

IT ROLE WILL BE MORE CHALLENGING IN CURRENT DOWNTURN GIVEN LIKELY FLAT OR REDUCED IT SPENDING

08

06

04

02

00

98

94

92

90

88

86

82

80

84

78

76

74

96

70

72

-10

-5

0

5

10

15

20

25

30

35

US GDP and IT spending growthPercent change

Source: BEA; Economist; 2008 McKinsey Quarterly Survey on information and technology strategy

GDP growth (2000 dollars)

IT spending growth

Recessionary periods

…and McKinsey survey shows that ~75% CEOs expect flat or decreased IT operating expenses

By how much, if at all, do you expect your organization’s IT operating expense will change in 2009?(Percent of respondents, N = 548)

U.S. DATA

GDP

IT

Year

-6.3

-13.2

74-75

-7.5

-12.3

78-82

-3.7

-8.5

89-91

-3.7

-27.0

01-02

13

Don’t know

43

23Increase

21

No change

Decrease

Page 6: MCKINSEY - Managing IT in Downturn

5

IT CAN SUPPORT BUSINESS IN CURRENT DOWNTURN BY IMPROVING IT AND BROAD BUSINESS PERFORMANCE AND BY ENABLING BUSINESS TRANSFORMATION

Build a lean IT infrastructure, processes and operation through a set of initiatives including:• Better demand management via value-based service portfolio selection and

service level adjustment• Integrating and streamlining the operation of IT hardware and software

components• Consolidating sourcing and fully leveraging skills outsourcing• Lean IT operation processes

Use IT as a lever to support improvement in efficiency and effectiveness

across a variety of business processes and functions, including• Developing customer insights and refining pricing discipline

• Optimizing delivery scheduling and inventory management

• Enhancing the management and utilization of support staffs

• Improving decision making, risk and performance management processes

Leverage IT to enable the execution of new business transformation strategy, including

• Providing tangible operation tools to enable frontline transformation early on

• Delivering new systems to encode transformative mindset, processes, and

capabilities• Enabling integrated information and KPI-centric performance system for

decision-making and for tracking

Source: McKinsey analysis

DescriptionIT efforts

Improving IT efficiency and effectiveness

Leveraging IT to drive business improvement

Enabling business transformation via IT

Page 7: MCKINSEY - Managing IT in Downturn

6

Leveraging IT to drive business improvement

Enabling business transformation via IT

10 LEVERS ARE KEYS FOR RAPID IMPROVEMENT IN IT EFFECTIVENESS AND EFFECTIVENESS

* sample of 30 companies in various industries

Source: McKinsey team analysis

Illustrated cases in next 2 pages

IT efforts

Improving IT efficiency and effectiveness

2-4%

21-48%

Total savings in the first 12 months

Demandmanagement

Technologymanagement

Sourcing

Processimprovements

7-24%

6-11%

6-9%

Savings potential Percent of IT costs*

Ten key levers for IT efficiency & effectiveness

• Project portfolio review• Value realization audit• Service level adjustments

• Contract consolidation and renegotiation

• Optimized skills sourcing

• Application sunsetting

• Server consolidation

• Network optimization

• Selective Lean IT

• Helpdesk optimization

Page 8: MCKINSEY - Managing IT in Downturn

7

A LEADING ASIA FINANCIAL INSTITUTE ADOPTED VALUE-FOCUSED PORTFOLIO MANAGEMENT FOR QUICK IT EFFICIENCY IMPROVEMENT

Keep

Rescope/ defer

Source: McKinsey analysis

The bank reduced 10% of total USD 0.4 billion IT budget,through aligning IT portfolio with business priority, focusing on 42 strategic projects,closing low priority projects.

IMPACT

From traditional approach…

To value-focused approach

5

10

15

20

0

25

NB

V

KeepRescope/

defer

Size of project spend

Size of project spend

Hurdlerate

0

10

15

20

25

5

NB

V

Keep

Rescope/ defer

Page 9: MCKINSEY - Managing IT in Downturn

8

Enabling business transformation via IT

Improving IT efficiency and effectiveness

IT CAN ACHIEVE MUCH MORE IMPACT ON BUSINESS PERFORMANCE IMPROVEMENT BEYOND IT EFFICIENCY IMPROVEMENT ITSELF

* Assumes run rate at 6-18 months (timing to achieve run-rate impact varies across examples) ** McKinsey 2008 survey

Source: McKinsey experience

Leveraging IT to drive business improvement

IT efforts

Technology enablement in the business efficiency and effectiveness can provide up to 10x the impact of IT efficiency programs…

IT impact on run-rate EBIT* (illustrative examples)

Percent

15% IT cost reduction

1.0-2.0Merchandising

3.0-4.0Supply chain

3.0-5.0Pricing

0.5

… and McKinsey survey shows executives consider improving business processes is the highest priority in IT initiatives**

Percent of respondents (N = 548)

102

42

41

34

Improve effective and efficiency of

business processes

Improve IT costs

Provide managers with information

for planning

Ensure compliance with regulations

Page 10: MCKINSEY - Managing IT in Downturn

9

IT CAN CREATE HIGH-POTENTIAL OPPORTUNITIES ACROSS BUSINESS PROCESSES IN VARIOUS INDUSTRIES

Finance

Back-office functions

Business processes

HR Risk Legal Facilities ITPerformance management

Manu-facture*

Fulfill and bill

Process orders

InvoiceManage logistics

Ship to custo-mer

Process returns

Collect

Design for manufacture

Source ma-terials

Schedule opera-tions

ProduceManage inven-tory

Develop

Market and sell

Research market

Design products

Proto-type and test

EngineerManage library

Develop campaigns

Market to custo-mers

Respond to inquiries

Manage sales

SupportOperate contact center

Manage prob-lems

Manage self-service

Dispatch field service

• Improve the management and utilization of field forces and of customer support centers

• Sharpen awareness of risk exposure• Improve decision making and per-

formance management processes

* Applicable to companies with manufacturing operations

Source:McKinsey analysis

• Streamline supply chain and logistics to improve delivery scheduling and to optimize inventory

• Develop insights into customer segments

• strengthen pricing discipline to reduce pricing leakage and promote best practices in sales

Optimizing business processes and systems

New insights gained from data

Page 11: MCKINSEY - Managing IT in Downturn

10

The telco company was able to reduce their pricing leakage andincrease revenue on new contracts by 3-5%,improvingmargins by 15-20+%, in a 6-12 month period

A TELECOMMUNICATION COMPANY IMPROVED SALES PERFORMANCE THROUGH IT-ENABLED INTEGRATED INFORMATION SERVICES

Source: McKinsey analysis

Pilot and rollout changes

Identify opportunities across all value drivers

• Developed a set of dashboards to track performance across the sales organization

• Deployed data analysis tools to Identify revenue gaps based on issues resulting from poor sales practices with discounting and policies

• Linked contracts, sales, customer, and order information across business units to provide an integrated view of business information

• Automated links between sales performance and compensation

Inexpensive links to bring data together

Key initiatives

IMPACT

Page 12: MCKINSEY - Managing IT in Downturn

11

Improving IT efficiency and effectiveness

Leveraging IT to drive business improvement

IT IS CRUCIAL TO ENABLE BUSINESS TRANSFORMATION

Source: McKinsey Quarterly Survey on information and technology strategy, Oct 2008

Enabling business transformation via IT

IT efforts

Business transformation is ranked as a top target in building ITcapabilities, in order to further company goalsPercentage of respondents ranking No. 1 (N = 548)

33

9

32

19

20

38

15

Current

34

Ideal

Transformative role

Supports differentiated

performance

Improves business

efficiency

Lowest IT cost

Page 13: MCKINSEY - Managing IT in Downturn

12

Improving IT efficiency and effectiveness

Leveraging IT to drive business improvement

IT CAN DRIVE OVERALL BUSINESS TRANSFORMATION

Source: McKinsey analysis

Enabling business transformation via IT

IT efforts

Key levers IT role in support business transformation

• Augmented MIS for managing and

tracking KPI

• Analysis and reporting capability for

tracking key initiatives

• Simple temporary tools targeting

core business values

• Rapid prototyping with clear benefits

• Systems to embed new processes

and rules

• Integrated and transparent

information

• Reporting and workflow automation

• Knowledge sharing and community

exchange platform

• Delivering tangible

operational changes for

frontline personnel early on in a business transformation

process

• Empowering management to

lead through the provision of

relevant information

• Enabling personnel to foster

new mindsets, capabilities,

and behavior

Page 14: MCKINSEY - Managing IT in Downturn

13

A JAPAN-BASED GLOBAL BANK ENABLED NEW OPERATING MODELS VIA IMPLEMENTING NEW IT ARCHITECTURE AND SYSTEMS

Source: McKinsey analysis

New operating model

New IT architecture

Develop and rollout new system • Prioritization by business value

creation and time• Piloting at small BUs• Parallel rollout with operating

model

• Streamlined functionalities based on business domain definitions

• Standardized and simplified interfaces across tiers

• Leveraging existing components and packaged software

• New operating model enabling – New pricing model – Refined customer segmentations– Improved multi-channel

management– Enhanced sales process

Key initiatives

The bank expects to rollout new operational model within 18 months, improving its EBITA by over 0.5% with USD 100 Billions net incomes

IMPACT

Page 15: MCKINSEY - Managing IT in Downturn

14

5 KEY IT TRENDS FOR CIOS TO CONSIDER IN THE CURRENT DOWNTURN

• CIOs and corporate finance collaborate on generating ideas to use IT assets as a lever to generate cash, including areas in outsourcing management, leasing of assets, and vendor financing

• CIOs need to evaluate IT investments for new business capabilities in a fact-based way in brokering with business units to allocate more precious IT budgets

• CIOs should enhance relationships with internal legal and corporate-affair teams and be prepared to seek solutions at manageable cost to meet increasing government and regulatory mandates

• CIOs need to be ready to explain what it would take to improve the value equation for IT investment when CEOs tend to shut off discretionary projects during the downturn

Source: McKinsey analysis

• CIOs need to dynamically manage vendor relationships as a portfolio as the offshoring and outsourcing landscape shifts rapidly with downward pressure on aggregate demand, local government sponsored initiatives, mergers and new entrants

IT and corporate finance merge

Tension around IT budgets increases

The “last” IT projects?

Regulators demand more from IT

The outsourcing and Offshoring landscape shifts