Whitepaper 'How Value Driven Sourcing enables you to increase IT Value to the business tenfold' v 1.0

Onderzoek leert date en ICT-afdeling gemiddeld 71% besteedt aan beheer en onderhoud en dus

maar 29% aan innovatie. Met de Application Lifecycle Services in a Box van Capgemini helpen wij deze balans terug te brengen naar een gewenste 50/50, waardoor de snelheid van

applicatieontwikkeling toeneemt en een veel groter deel van het budget kan worden besteed aan innovatie en kwaliteit

Capgemini NederlandADM Whitepaper 1.0 February 2016

Application Development & MaintenanceWhitepaper

How Value Driven Sourcing enables your IT department

to increase its value to the business tenfold

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Auteur:Co van Leeuwen MBA RM,

Lead Application Development & Maintenance ServicesE-mail: [email protected]

Telefoon: 06-29527660


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Contents

1. MANAGEMENT SUMMARY.................................................................................................1

2. THE THREE KEY CHALLENGES OF THE CIO............................................................................2

3. UNLOCKING THE VALUE OF IT DEMANDS A 3 X 3 APPROACH..............................................3

4. THE FINANCIAL VALUE: IT SAVINGS CAN BE REINVESTED SO THEY MULTIPLY BY 10............5

5. FUTURE STATE DESIGN OF THE IT OPERATIONS...................................................................7

6. START YOUR JOURNEY WITH VALUE DRIVEN SOURCING.....................................................8

© Copyright 2016, Capgemini

The information in this document may not in any manner be spread, adapted, modified or

multiplied without prior permission by Capgemini.


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1. Management summary

CIOs have enough challenges and today the biggest one is how to add value to their organization. Over the last years cost reduction was the mantra in the business. But now the focus is mainly on customer obsession and radical and incremental innovation, with information technology seen as the biggest enabler. It is possible to master all at the same time, but how do you solve the embedded paradigm? This whitepaper explains the 3 x 3 approach to create a proven and balanced Digital Transformational journey based upon Value Driven Sourcing to realize the new promise of IT: to multiply the savings by 10 by re-investing them into the business.

ADM Whitepaper 1.0 February 2016 1

2. The three key challenges of the CIO: save costs, improve time to market, enable the business

2.1 Save costsThe dynamics of the CIO function are irreversibly changing. After a decade of technology deployment and rising cost levels, cost control and freeing up budget for innovation were the key

goals of the past five years. Four fifths of the IT budget was fixed for maintenance and there was hardly anything left for new initiatives. All kinds of activities were deployed to lower OPEX;

rationalization, portfolio management, industrialization, automation and simplification of operating model to name a few. However the unintended consequence of too much focus on

cost savings was the growth of unmanaged shadow IT within the business, who see themselves more and more as the drivers of the digital agenda. It is invariably the business that embraces

emerging and disruptive technology solutions, making decisions on adoption based on tangible revenue growth or business cost results. Still too often without involvement of the IT function

resulting in point, rather than integrated solutions, an increasingly diversified application landscape, and the corruption of the CIO’s drive towards IT operational excellence.

2.2 Improve time to marketBut the winds of change are blowing strongly now. In 2015 the hottest topics in IT were DevOps

and Bi-modal IT. Creating flexible and dynamic IT services is currently the means to the end of supporting the business needs. Some CIOs do think everything should become DevOps, but

segmentation of business needs and IT technology doesn’t support this line of thinking. And for some Bi-modal IT is something of an over simplification.

2.3 Enable the businessWhat is more, the strength of the winds of change causes tacking of the boat. Today two out of

three CIOs say that their main objective is to add value to their business. You will recognize the importance of this assignment when you consider how many well known companies of the past

have gone out of business; small ones and big ones, and that in this digital era the key to the future is how you embed IT into you business to make the difference and increase the

performance. This requires another line of thinking; buying instead of making and the change of a full unit-driven IT department into a small retained organization, operating horizontally across

the company and consisting of tactical resources with the right skills to make the difference.


3. Unlocking the value of IT demands a 3 x 3 approach

How do you master the paradigm of combining saving costs, improving time to market and enabling the business into one, well balanced plan? Capgemini’s research shows that the majority

of CIOs are still only starting to address this challenge. Although IT departments work very hard, they predominantly have an internal IT focus. Cost levels are gradually decreasing but because of

the distance from the business a lot of shadow IT spend is occurring; the business buys its own IT to get what is needed. To break this status quo one needs to understand three ingredients. The

first is how to drive IT Excellence (something most CIOs are very familiar with). The second is to understand what will materially add value to the business. And third, the completion of the

necessary preconditions to combine the previous two into a gradual and prosperous evolution. Today only one out of five CIOs has achieved the

mature state of combining these three elements.

Mastering IT Excellence is a common, regular managerial initiative to improve the costs and

quality of the IT department. Today everybody is driving IT portfolio analysis to create a baseline

and define rationalization opportunities. Here a new pragmatic approach is the ‘elephant path’ to

quick wins using a list of items that can create savings at short notice. Gartner is buzzing its Bi-

modal operating models to deliver your IT services, but Capgemini recognizes at least three flavors of operating models, based upon the

dynamics and technical integration of the portfolio. Last but not least, in line with the IT Portfolio and the IT Operating Models, the IT Organization needs to evolve. Outsourcing can be considered

as an option, but actually it is a prerequisite for true IT excellence. Therefore the unit based IT department will need to change into a horizontal operating function. Key strategic elements

within the department will be the management of demand, project portfolio management, creating transparent performance and a direct costing model. Important capabilities of the

retained organization are business knowledge, and change management or transformation capabilities.

Mastering what adds value to the business is the real challenge. We – IT adepts – feel it and we

need to believe it. Happily for us, studies show more and more evidence of it. Major initiatives are centered on re-envisioning customer experience, operational processes and business models.

Companies are changing how functions work, redefining how functions interact, and even


evolving the boundaries of the firm based upon technology. But generic insight is getting more

and more specific. For example just implementing ERP is not enough, it needs to be combined with a lean approach. Or, reporting has been out there for a long while but now we are evolving

into a state of operational intelligence of (nearly) real-time insights and root cause analysis on the fly. And, with ‘big data’ we can learn to understand our clients better, although simply

analyzing a pile of data is not the right way forward. Last but not least companies can do much more to gain value from investments they have already made, even as they envision radically

new ways of working.

Having addressed the two areas of driving IT Excellence and identifying true Business Value, now it becomes more difficult; managing the two together. It is the opposite of trial and error;

requiring a semi planned change that involves all stakeholders. It takes reorganization and resilience. Research has identified three elements (as mentioned in the figure above), all aspects

of a transformational program to align business and IT efforts. Without vision and someone to lead, and without the ability to articulate direction and offer a convincing glimpse of ’the road

ahead’, generally a course of ‘business as usual’ will be followed. A change of course requires the collaboration between the different departments to ensure a consistent customer experience

rather than managing their respective touch points differently and creating an inconsistent, fractioning experience that frustrates customers. It will require board room involvement as well

as involvement of demand management, supply management and service providers (as partners).

Some self-explanatory examples:

In search of the lowest costs possible a global manufacturer decided to reorganise their IT department as a Global Business Service line such as is often done for Finance and HR.

As a result the IT Excellence drive was hierarchically separated from the Business Value drive. This led to fragmentation of new initiatives and the failure to support the topline

growth. This has since been fixed simply by combining the both functions into the responsibility of a single director.

A local Dutch retailer was on an aggressive drive to increase market share. The IT department sensed this very well and put all its energy in supporting new business

initiatives. As a result the quality and costs of maintenance were neglected and incident management was more or less seen as a project. As a result the quality and cost of IT

were poorly managed. And a global food company learned that what can be done to add value is not about

deploying available tools and platforms. It rather is an ‘outside in’ view of the customer behaviour, that continuously will change, translated into appropriate technology

solutions.


4. The financial value: IT savings can be reinvested so they multiply by 10

Slowly more and more research is becoming available that really proves that it is possible to increase business performance via IT. So mastering the 3x3 challenge becomes ever more

attractive. For example companies that have a data officer, developing how the business can profit from the available insights, have shown to perform better. And another example is that this

performance increase happens also at companies where the reporting line of the CIO is in synch with the corporate strategy. So, if the strategy is Cost Excellence a reporting line to the CFO does

make sense. If Product Excellence is the key strategy, a reporting line to the CEO is more beneficial.

There is even more specific data available. First the journey towards IT Excellence can be really

beneficial. We have identified five stages of outsourcing and every stage roughly represents incremental 10% costs savings. Stage one is DIY; i.e. a fully insourced model, stage two is ‘co-

sourcing to obtain the right skills’, third is ‘first generation outsourcing for more efficiency’, fourth is ‘outsourcing to cut cost for innovation’ and fifth is the current best practice of

outsourcing including automation, service integration and driving value from an IT perspective.

Proving the value of IT is a bit more difficult. To start adding value, we first need to specify what value comes from where. What are we looking for? Every business process has necessary

activities and differentiating activities ( as illustrated in the figure on this page). The

necessary part, typically the back office and representing up to 68% of the total process costs,

principally are the focus for cost reduction initiatives. In 2014 a study was conducted with

1,000 business executives. They conveyed a 27% cost saving potential for business processes by

radical application of technology. The differentiating activities principally are the focus of investments to increase the competitiveness

of the organization and especially in those areas that are aligned to the corporate strategy. Other studies show that increasing the customer experience will enforce brand loyalty leading to 20%

more sales. And the MIT & Capgemini study in 2011 proclaims a performance increase of 26% compared to peers if you manage it all well at the same time.

Taking these as examples to a consumer product company, how does this translate into financial

benefits? We will apply three levers at the same time to the business and IT processes. Lever one


is lowering the ADM spend by one third (can be up to 50%) and reinvest this in a Digital

Transformation program. Lever two is realizing one third of the potential 27% savings on the non-differentiating processes. And lever three is adding a quarter of the potential 20% revenue

increase to the topline as a result of improvement of differentiating processes, as we have accomplished at a retailer. As a result the operating margin will not be increased by the ADM

savings only, but by a tenfold. (Not taken into account that the Digital Transformation program can require additional CAPEX investments.)

Some self-explanatory examples:

The marketshare of a financial company was slipping. The CEO decides to use IT as an accelerator and transform the business. They started with the basics and created an

shared service center. They drove duplicative applications out of the processing network and streamlined work flows. Then the CEO and the provider’s leadership kicked off

technology-enabled change programs designed to cut down the dysfunctional organizational silos and change the company’s focus from protecting turf to

performance. They also implemented a report card that measured contribution to strategic goals. In three years the operating margins doubled, market share grew by 50%

and share price doubled. A search engine company completed an transformational outsourcing. Conventional

outsourcing would have brought them 20-50% cost savings, access to best practices, better service quality, improved career opportunities for IT and more management focus.

The transformational outsourcing, including a performance program to improve the business by IT, provided also flexibility, speed, shared strategic risk and a growth of 50%

market share and doubling of the revenue.


5. Future state design of the IT operations

Managing the IT function is becoming increasingly more difficult as a result of this analysis. Breaking out of set patterns and solving complex paradigms are necessary to be able to take a

good step forward. This presumes leadership and the ability to make clear choices. For example for the operating model (or working model), in order to improve efficiency, sourcing on the basis

of real partnership, a clear strategy with an identifiable point on the horizon and the structuring of a powerful leadership

organization within the IT department and in the business. We

briefly outline the seven changes we see coming. The sum total of

these changes will define the new form of the IT department (as

pictured in the figure): Change one: IT investment

focuses on information, interaction, transaction and straight-through processing to underpin performance;

Change two: usage of IT technology determines the added value, so business managers will determine more and more the IT choices and will become the owner of the IT budget

unless the maturity of the IT department keeps pace; Change three: to increase the performance of the IT department level five outsourcing is

relevant and services models delivered will resonate with the business strategy and operational dynamics. Therefore organized per end-to-end process domain;

Change four: this implies an increasing responsibility for service providers, especially for commoditized business processes and - technology.;

Change five: strengthening of demand & supply is needed to manage the journey to increased performance and can be simplified once it is accomplished. Then the business

can work directly with external providers – partners – to define the requirements; Change six: The IT department will become a retained organization and co-producer and

tactical centre to align the IT activities. Most likely managed by a CIO with business knowledge and who has become member of the board;

Change seven: where dynamics meet complexity, opportunities arise, but also present a great degree of uncertainty. Three direct managerial countermeasures are possible for

this. The first is to improve the transfer of information between parties. The second is to carve departments and activities up into smaller pieces. The third is to make decision

making less formal and more localized. So while the IT department mostly is centralized the setup of governance is more agile, decentralized and transparent.


6. Start your journey with value driven sourcing

There is no doubt digital transformation is an unstoppable, irresistible catalyst for change. Study after study presents clear and convincing evidence of the digital data tsunami and its impact on

businesses and organizations of every shape and size. Even more important is that every part of the business will recognize that we are entering the next phase of the digital innovation curve—

moving from early adoption to broader growth through the early maturity. True digital transformation, however, demands more than the exploitation of existing innovative digital

services and tools. It also requires establishing new operating models, implementing new governance structures and crucially, creating new, value-driven sourcing models. The traditional

approaches to outsourcing will impede, not facilitate successful migration to the Digital Business era.

Simply stated, a value driven sourcing model changes the business value focus from primarily one

dimension—cost reduction and efficiencies—to the three dimensions of the 3x3 approach. Although cost savings and higher IT efficiencies will remain an important element in any managed

services offering, sourcing in this new digital era will equally be driven by the realization of additional benefits streams: increased revenues, improvements in working capital or increase of

your social contribution if you’re a public, or simply a ‘public spirited’ company.


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Whitepaper 'How Value Driven Sourcing enables you to increase IT Value to the business tenfold' v 1.0