IT Strategy and Cost Alignment

Presented by:Chad Doiron, KSAApril, 2005

2

What isn’t IT Strategy and Cost Alignment?

Perception is that IT Strategy and Cost Alignment is either:

1. List of big projects; or a,

2. Recommendation to outsource.

3

What is IT Strategy and Cost Alignment?

Reality is that IT Strategy and Cost Alignment is:

1. Opportunity to Re-allocate IT Budget

2. Mechanism for IT and Business Alignment

3. Foundation for Engineering Effectiveness

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What is the one metric we get asked about most?

IT Expense % of Sales

5

2.60

1.90

- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00

IT Expense % of Sales

AAFA Median is 1.9% of Sales

Overwhelmingly, the most common metric for which KSA receives requests for information is IT Expense % of Sales. The goal of this metric is to assess the degree to which IT is contributing to the success of the business.

However, AAFA numbers vary widely - which is typical for many industries. Due to this variation, it is impossible to use as an industry benchmark. The key reason is that the numbers have no direct relationship to a companies priorities.

…based on respondent data, a full 78% of you should be at or below the CP industry average of 2.6% of sales.

The median value for AAFA respondents is 1.9% of sales… compared with 2.6% for CP overall.

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Initial Focus: $ IT Expense

Taking a deeper look at this metric reveals the disconnects between it’s relevance as a measure of IT effectiveness and it’s usefulness as a means to manage the IT organization.

Reduce Budget

$ IT Expense / $ Sales

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Question: Do you really want to reduce your budget?

No!

Re-allocate Budget

“’What do you want to do?’ Well, retail is a conservative industry and we want to cut spending. ‘Well, what are you going to do?’ Well. I have to replace my POS, I have this RFID thing to worry about, I have all this business process reengineering I have to figure out, we need to do more CRM because we have to drive incremental revenue.”

Mark Millstein, “Big Picture Spend Trend”, WWD, February 2005

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Pressure to Expand IT Budgets

You have indicated that the two greatest obstacles to success of the IT organization is “Budget/Cost Constraints” and “Lack of Human Resources”…

Lack of Appropriate Skills13%

Inability to Manage Enterprise-wide

Projects7%

Budget/Cost Constraints

34%

Lack of Human Resources

33%

Inability to Keep Pace with

Technology Advancement

13%

…both of which suggest that improving the success of your organization would be better served by INCREASING your budget not decreasing it.

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IT’s Perspective on IT Value Business’s Perspective on IT Value

A full 80% of you consider IT to be a key lever of the “top-line”…

…however only 40% of you believe your business considers you a “top-line”

contributor.

StrategicAsset40%

NecessaryBusiness Expense

60%

IT’s Role in the Organization

Furthermore, your survey responses indicate that you typically viewed the IT organization as highly valuable to the success of your respective companies. (Although more so than your business users do.)

NecessaryBusiness Expense

20%

Return-producingInvestment

20%

StrategicAsset60%

Cutting spending when it is producing returns is inconsistent with corporate goals of profitable growth and therefore only makes sense if doing so does not diminish your ability to deliver on business value.

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Objective: Re-allocation

Operations

Operations

Innovation

Innovation

0

20

40

60

80

100

120

2005

200X

IT O

pe

rati

ng

Bu

dg

et

($M

M)

A primary objective is to enable re-allocation of current budget $’s away from “operations spending” toward “innovation spending” – thereby increasing the level of strategic support to the rest of the business.

- For Illustration Purposes Only –

Reduce Cost

50%

Increase Innovation

75%

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Second Focus: $ Sales

Returning to the original “IT expense % of sales” measure, the highly “sales – centric” nature of this metric implies that there is a priority for the IT organization to increase revenue. The real question is whether or not that is a high priority for your organization.

Increase Sales

$ IT Expense / $ Sales

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Question: Should sales be your highest priority?

No!

Align with Business

“In a sign of the growing importance of technology to retail success, a huge percentage of executives said their companies’ IT and business strategies were either highly aligned, 49 percent, or close to highly aligned, 34 percent.”

Mark Millstein, “Big Picture Spend Trend”, WWD, February 2005

“This should be a wakeup call for any retailer who is not aligned or only somewhat aligned because your competition is.”

Jeff Roster, Principal Analyst, Global Industries-Retail, Gartner

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0%

20%

40%

60%

80%

100%

120%

Mer

chan

disi

ng and P

lanni

ng

Desig

n

Produ

ct D

evel

opmen

t

Sales

Mar

ketin

g Art

Sourc

ing

Produ

ctio

n

Logist

ics

and D

istri

bution

Application Categories

Per

cen

t o

f R

esp

on

ses

High Med Low None

Overall IT Priorities

When asked about your priorities, only a small percentage (30%) of your high priorities were in application categories that directly address sales.

4 of your top 5 high-priority categories focus on either reducing COGS or SG&A. The only top-5 high-priority category that directly addresses sales is “merchandising”.

Sales COGS SG&A

25%

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Budget Allocation Consistent with Priorities

And your budget allocation is very consistent with these priorities as you see them. Only 27% of your budgets are focused on increasing your company’s sales.

% Regulatory Compliance

7%

% Revenue Growth

27%

% Reducing Business Expense

34%

% Customer Compliance

12%

% Cost of Doing Business

20%

Correspondingly, 73% of your budgets are driving value that is not being reflected in the primary metric by which the rest of the business measures your success.

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Taxes

Sales

COGS

OperatingExpense

Depreciation /Amortization

The “Highest Common Denominator” … $ EBIT

GP

EBITDA

EBIT

Earnings

…track these metrics over time.

For these projects categories…

$ IT Depreciation (Revenue Projects)

Per

$ Revenue

$ IT Depreciation (COGS

Projects)

Per

$ COGS

$ IT Depreciation (COGS

Projects)

Per

$ COGS

$ IT Depreciation (SG&A)

Per

$ SG&A

$ IT Depreciation (IT Cost

Reduction)

Per

$ IT Op. Exp.

Mer

chan

disi

ng

Sal

es

Pro

duct

D

evel

opm

ent,

P

rodu

ctio

n

Logi

stic

s an

d D

istr

ibut

ion

ITR

atio

naliz

atio

n &

R

ight

sizi

ng

16

$10

$12

$14

$16

$18

$20

$22

$24

$26

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Time

$ E

BIT

/ $

IT S

pe

nd

Since the “value” of IT is in the business innovation that it supports…

…doing a better job will result in dramatically improved return on investment.

Therefore the only universal metric that allows for comparison of IT alignment with the business must be one that takes into consideration all business objectives. Company’s are asking IT to deliver “value” for dollars invested. Over time, this means an increase in $ EBIT / $ IT Spend.

- For Illustration Purposes Only –

Improve

Return

Objective: Align IT with Business ($ EBIT/$ IT Spend)

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Question: Is there anything else?

Yes!

Engineer Effectiveness

“The majority of failures of technology implementations are due to poorly executed business process reengineering. It is typically a people problem more than a technology problem – a lack of staffing, which is historic, and a lack of funding.”

Mark Millstein, “Big Picture Spend Trend”, WWD, February 2005

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Remaining Obstacles Relate to IT Best Practices

Returning to the obstacles to success chart on from page 7, the remaining 33% of your responses are best addressed by improving the reliance on “best practices”.

Inability to Keep Pace with

Technology Advancement

13%

Lack of Human Resources

33%

Budget/Cost Constraints34%

Inability to Manage Enterprise-wide

Projects7%

Lack of Appropriate Skills

13%

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Most Contributors to Success Tie to Best Practices

Best practices also contribute to 73% of the success factors you sited for your organizations.

Alignment of IT and Business Strategies

20%

Supportive Corporate

Management / Users26%

Technical Skills of IT Staff Members

13%

Customer Service Attitude of the IT

Organization13%

Agile IT Organization

7%

Currently Installed Technology Base

7%

Partnering with External Service

Providers7%

Adequate Funding7%

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Project Planningand Execution

ResourceAllocation/

Staffing

Budget/Funding

Architecture

Standards

Methodology

Service Levels/Performance

Measures

Governance/Controls

Contracts/Procurement

IT Planning

Objective: Engineer Effectiveness

IT OperationsIT Policies

Therefore not only is it critical to drive innovation spending and align with the business priorities, but it is equally important to create a way of maintaining the end state.

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Objectives Summary

Objectives Goals

1Enable

Budget

Re-allocation

1 Identify opportunities to reduce operating costs associated with running IT

2Architect application and infrastructure solutions to support the future needs of the business

2Align with

Business

Priorities

3Drive innovation in revenue and cost effectiveness based on business priorities

3

Engineer for

Future

Effectiveness

4Implement best-practices to efficiently maintain alignment between the business and IT

5Structure the organization to enable effective execution of business requirements

The objectives of IT Strategy and Cost Alignment are three-fold…

…however, there are five corresponding and “actionable” goals to consider.

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What should you do tomorrow?

1. Internal Review

2. Consider Approach

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Internal Review: Objectives Detail

1 Identify opportunities to reduce operating costs associated with running IT Are systems replacement prioritized based on cost/benefit and user requirements? Do the systems leverage common development environments and tools, and reusable components where possible so as to allow for more cost effective application solutions? How can you reduce costs associated with incompatible systems?

2 Architect application and infrastructure solutions to support the future needs of the business What infrastructure capabilities will be required to accommodate organic growth and new acquisitions? Will the current systems architecture be adequate to absorb and integrate future acquisitions? Are there gaps in the current applications portfolio that inhibit the achievement of strategic objectives? How flexible is the current applications portfolio to support new and yet unknown objectives of the business? How can IT be more cost effective?

3 Drive innovation in revenue and cost effectiveness based on business priorities Do you possess a strategic implementation plan that ensures information systems will be aligned with the business strategy and the processes needed to support the strategy

while remaining flexible enough to accommodate future changes? Is the implementation timing of technology linked to major business milestones so it is in place to support business initiatives?

4 Implement best-practices to efficiently maintain alignment between the business and IT What processes need to be in place to ensure that IT priorities are established that yield the highest value and maintain alignment with strategic business needs? How can the current process for determining cost/benefit of new IT opportunities be improved? What policy changes will be required to sustain the best practices?

5 Structure the organization to enable effective execution of business requirements Does the current IT organization posses the skills needed to support the business into the future? How can the IT organization be structured to align more closely with the business and improve the effectiveness of its operations? What aspects of the broader organization beyond IT are inhibiting rapid IT solution identification and execution? How can the business become a better “customer” of IT?

Leave here today asking yourself these questions of each of the five goals…

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Scope of Full IT Strategy

Business Strategy

ITAlignment

IT

Infrastru

cture

Applications

Capabilities

ITPractices& Funding

ITOrganization

Consider Approach: 5 Key IT Elements of ITS & CA

Developing the right people and partnerships to deliver results

Engineering processes and controls for IT and the business that drive value and alignment

Understanding and supporting business strategy with IT initiatives

Determining key business needs and how to gain enterprise-wide leverage

Establishing the right base technologies and architectures to enable business growth and flexibility

Consider achieving these objectives by addressing capabilities and needs across the five key elements of any IT operation.

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2

3

4

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