L. Mohan 1

Management Imperatives To Make IT Business-Smart

1. Why Companies Don’t Get IT

2. A Model for Managing IT – Cisco Case

3. Lessons for Making IT Business-Smart

4. If Cement Can in Mexico, Anyone Can! – CEMEX Case

5. Summing Up

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An Opportunity to be Seized. . .

- Computers used in Business for Nearly Five Decades

- Dazzling Progress in Technology

- Significant Investments in IT Infrastructure Hardware, Software and Peopleware

Focus on OPERATIONAL SYSTEMS has blurredthe potential of using IT for

MANAGING the Business

YET . . YET . .

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The Bottom Line

WHY NOT ???

The power of today's computing technology is not being used as it should in most enterprises.

- James Martin, The IS Manifesto

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A Hypothesis

Traditional focus on the "4 M's“ (Money, Machines, Markets & Men)

Hands-off approach to IT

HENCE:

IT is treated as a cost center No real understanding of the potential of

IT to help achieve business objectives

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Managerial Implications

CANNOT TREAT IT AS A COST CENTER TO BE RUN BY TECHNICAL PEOPLE

EXECUTIVE LEADERSHIP IS NEEDED TO ENSURE:

• IT is aligned with Corporate Strategy

• IT projects are not bogged down in Operational Systems that are required to run the business - must pay attention to critical Information Support Systems to manage the business

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Companies That just Don’t Get IT!

In the near future, some management guru will write a book about how executives in the 1990s spent too much money on IT because they were afraid to manage it properly. Unsure of what went on in the “black box”, they put their trust in technological experts to deliver business value from IT investment…

CEOs don’t seem to apply the same management scrutiny to their IT department as they do to the rest of the organization.

Source: Wall Street Journal, December 12, 1996

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Why IT is a “Black Box” to Top Management

… Unsure of what goes on within it and not particularly anxious to find out

… Do not know “the right questions to ask and the wrong answers”

… Cannot penetrate the “techno-speak” of the IT group

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Treat IT as a Traditional Business System- Does Not Require “T” Knowledge

Business Strategy & Planning

ProductDevelopment

Operations CustomerService

IT Strategy & Planning

IT Applications Development &Implementation

IT Infrastructure

Operations

UserSupport

Typical Business Functions

Typical IT Functions

IT should be managed like any business system to deliver value.

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IT Strategy & Planning

- Business strategy and priorities must guide IT investment decisions.

- IT Budget should channel funds toward critical areas – e.g., growth of market share, increased revenues and overall competitiveness.

- IT leaders should work from the same agenda as their business counterparts.

- IT leaders must understand the fundamentals of business – to make decisions based on real measures of business value, not politics or pet projects.

- They should have a seat at the table where business priorities are set.

- Business unit heads should be held accountable for the performance benefits promised by IT projects.

- In turn, they must have a seat at the table when IT strategies are developed.

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Cisco in 1993 - $500 M Company

IT ran traditional order-entry, manufacturing and financial systems - basically transaction processing systems

Software package from vendor; CISCO was biggest customer

IT viewed as a cost center Reported through the CFO Too internally oriented

ResultContribution of IT to the business was much less than its potential.

Current legacy systems could not scale to support Cisco’s growth nor were they flexible to meet management requirements

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Changes Made to the IT Function

1. IT reporting changed from Finance to “Customer Advocacy” department to enable IT to facilitate Cisco’s “Customer Focus” strategy.

2. IT budget pertaining to the functions were returned to the functions All IT application projects are client-funded

3. Central IT Steering Committee was disbanded All IT investment decisions on application projects were

pushed out to the line organization but executed by the central IT department

For example, if a sales manager has a goal to grow his sales 50% next year, it is his decision as to what resources he invests in it to accomplish his goal. Do I need more salespeople? Do I create more marketing programs? Or, do I invest in IT? All the money is in his P & L.

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Cisco in 1998: $8.5 B Company

IT department has about 1, 000 people (employees and non-employees)

Operating budget: $300 M (excludes telephone usage, PC acquisition cost and Engineering department’s IT expenses)

Central management of the “T” in IT.

User decides how much to spend on IT, but not which technology is purchased or used.

Implemented a $15 M Enterprise Resource Planning System to replace all legacy systems worldwide in an aggressive 9-month big bang effort (June ‘94 - February ‘95)

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Cisco’s Approach to IT

Philosophy Focus on reducing cycle time and improving customer

satisfaction in a cost-effective manner IT is integral to the business

IT’s Relationship with Clients

Our clients manage IT as one of the resources available to achieve business goals.

We jointly define with our clients the scope of IT projects. Clients are held accountable for attaining the business results with their IT investments. We are held accountable for implementing effective solutions as defined

Companies that achieve a high degree of business responsiveness and business integration usually have decentralized IT; they optimize for the business unit but sub-optimize for the overall enterprise. We have been able to walk that difficult line between centralization and decentralization and yet achieve a very high degree business ownership of IT decisions and investment.

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A Key Lesson - How to View IT Investment

In the information age, spending less is no longer the goal; getting benefits and maximizing cost effectiveness is the goal…

…We manage IT as an integral part of every function in the company. Manufacturing decides how much to invest in IT, and IT becomes part of the COGs (Cost of Goods). The same thing happens in R&D, sales, finance, marketing and distribution, human resources, etc. While all this seems pretty obvious, it’s amazing the number of companies that lump most of their IT into G&A (General & Administrative) expense, and then manage IT to minimize the cost as if it were a necessary evil.

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The Customer is THE Business- Pervades IT Department Too

I have 150,000 registered Customers hooked up - those are customers with a big “C” - compared to 15,000 Cisco employees. In contrast to most internally focused IT organization in many other companies, my mission does not primarily focus on providing services and systems to meet the needs of the employees of the business. In fact, I refer to my employee users as clients, and not as customers.

Customers that are using our systems directly express higher satisfaction with us, and enjoy a lower cost of doing business with us than those who do not use our systems. And, of course, we also lower our cost of doing business.

CIO spends 25% of his time meeting with customers to brief them on his IT mission, strategies, organization structure and applications.

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IT Application Development & Implementation

Top management have a significant role to play in the oversight of “big” IT projects – cannot abdicate this responsibility to the CIO

Example: Cisco’s ERP System

– Installed an ERP System to replace all legacy systems worldwide in an aggressive 9-month big-bang effort

– Cisco had NO CHOICE…The legacy systems could not scale to the explosive growth of Cisco in the early Nineties – the crash of the system in January 1994 shut the company for two days

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Management Imperatives- To Make IT Business-Smart

Example: FedEx vs. UPS

– Same Annual IT Expenditure: $1 B

– But FedEx Annual Revenue: 33% less than UPS

– Difference due to different IT strategies

– FedEx: Decentralized approach to IT management-- Focus on flexibility to meet needs of various customer segments

– UPS: Centralized, standardized IT environment-- Dependable customer service at relatively low cost

1. IT spending should be based on the strategic role of IT to achieve business goals- Industry benchmarks not appropriate

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Management Imperatives- To Make IT Business-Smart

– Information is a critical resource that can provide competitive advantage to the business.

– Examples: Frito-Lay, Elf Atochem.

– Senior management should recognize the potential of the “I” in IT and play a leadership role in bringing about organizational change to make use of better information in the firm’s management process.

– Upgrading the “I” will be all costs and no benefits unless it is used to upgrade the management process, with the help of the “I”, which is more difficult and requires push from top management

2. IT is not “little i, Big T”

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Management Imperatives- To Make IT Business-Smart

Example: Which comes first – ERP or SCM or CRM?– Frito Lay: CRM first– Asian Paints: SCM first– Nike & Hershey: All three together– Owens Corning: ERP first,

but had to seek bankruptcy protection

3. Priorities for IT projects should be set by top management in line with business imperatives.

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Owens Corning put ERP Before CRM

– “You have to have your internal transactions, your base transactions in place before you automate anything to the end-customer” – CIO

– ERP package from SAP costing $ 280 M took 7 years to implement – replaced 200 disparate systems with a single platform to support operations of multiple SBUs in multiple countries

– Got the CRM system from SAP as part of the package – but “everything was being sunk into CORE business systems. CRM didn’t sink in as a priority at the time.”

– Today the CIO concedes that the firm should have focused more on what customers wanted instead of working only on getting its internal processes right. “We should have spent more time working with the customer and gone backward from there.”

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Management Imperatives- To Make IT Business-Smart

4. Head of IT should be business savvy and be an “equal among peers” in the boardroom – CIO is not just a change of title

Characteristic MIS Manager CIO

Reports to CFO CEO

Management Level Middle Senior

Manages Computer Systems Info.Resources

Skills Needed Technical Business

Planning Technical Strategic

Management Style Control Influence

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Management Imperatives- To Make IT Business-Smart

– Leverages “T” expertise across the company

– Enables large and cost-effective contracts with “T” suppliers

– Facilitates global business processes

5. The “T” should be centrally managed by the CIO to realize significant cost savings and strategic benefits that come from centralizing IT capabilities and standardizing IT infrastructure across an organization

Caveat: Limits the company’s responsiveness to differentiated customer segments and is resisted by business unit heads

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Management Imperatives- To Make IT Business-Smart

– A new IT system alone has little value unless it is coupled with a new or redesigned business process, which entails change in the organization

– CIO is responsible for delivering systems on time and on budget, with the potential to be both useful and used, but NOT the organizational changes needed to generate business value from a new system

6. Business leaders should play a significant role in oversight of IT projects, especially the “big” projects; AND be accountable for realizing the anticipated business benefits.

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Why Not Just Outsource IT?

Rationale for Outsourcing

– IT is not a core competency of the business

– Outsource to IT service providers who excel in that

– Possible cost savings, especially for offshore outsourcing

AND

– No headaches of managing IT!

BUT… There are Risks

– Service providers may not be flexible to meet changing business needs

– Vulnerable if the provider fails to meet contractual obligations

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Mutual Life Insurance of New York (MONY)- A Case of “IT Out and Back”

1995– Outsourced the IT function staffed by 240 people to Computer

Sciences Corp– Objective: to update MONY’s IT architecture while controlling costs 1997– CEO brought IT back in-house– MONY faced intense pressure from banks and other aggressive

competitors which necessitated radical changes in MONY’s business strategy that required a variety of new systems

– CEO was diffident about the suppliers ability to keep up with MONY’s needs

– IT staff expanded by 37%– IT budget up $60 M in 1998 vs. $42 M in 1997

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Cemex - One of the World’s Digital Innovators

An extraordinary anomaly- Cement: A highly unpromising industry -- Commodity-based; Asset-intensive; -- Low growth; Low profit margins; -- Unpredictable demand -- Uncontrollable environmental factors - weather, traffic jams, government policies,…

- An “Old Economy” Company: Founded in 1906

- Location: Hidalgo, Mexico - “ Middle of Nowhere” -- Not near Silicon Valley, Seattle, Boston,….. -- No special advantages in terms of talent base or high-tech infrastructure. Cemex plant outside Mexico City was in a town with only 20 telephone lines

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Cemex Today…..

- World’s third largest cement manufacturer -- Has plants in 30 countries -- Sales in 60 more countries -- More profitable than either France’s Lafarge or Switzerland’s Holcim

- A blue-print of a “smart” business model -- Added a brilliantly integrated layer of IT to an asset-intensive low-efficiency business -- In today’s digital age, anyone can play!

- Essentially built a “bits” factory to complement and support the “atoms” factory

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The Beginning - A New CEO in 1985

Business Issues

1. An overly diversified company - Also owned hotels, petrochemical plants, mining companies, etc2. High volatility of the Mexican economic and financial systems3. Price pressure from more efficient multinational companies4. Growing competition from new low-cost Asian companies

A number of factors could be listed in the “excuses” section of the CEO letter in the annual report. But the new CEO, grandson of the founder and a Stanford MBA, preferred to change the rules of the game!

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The Transformation….

- Started by divesting almost all the non-cement businesses

- Hired a Wharton MBA to serve as Chief Information Officer

Powerful partnership was THE key-- A CEO attuned to the strategic value of

IT-- A CIO with a genuine understanding of business

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Delivering Ready-mixed Concrete-A Tough Business Anywhere!

- A logistical nightmare to get mixer trucks from the plants to the building sites at the right time -- cement has to be poured within 90 minutes of mixing. - Especially so in Mexico-- wild weather, traffic gridlock, work stoppages and arbitrary government inspections may hit at any time-- And, customers (contractors at the site) who are always changing their orders - 50% of orders are cancelled or rescheduled or changed (vs 5% change rate at a US Cemex affiliate)- Cemex tried to force customers into predictability -- Required orders 24 hours in advance-- Imposed price penalties for change- Still, could promise delivery only within 3 hours

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Starting Point: Who Else has Solved Our Problem?

- Benchmark the Best World-Class Practices

Fed-Ex- Customers never provide forecasts- Achieved unparalleled speed and reliability of delivery of packages to millions of destinations around the world, using Memphis as a hub.

Exxon - Tracking, scheduling and rerouting oil shipments- Global fleet of tankers, at the mercy of ocean weather, military and political unrest, was efficiently managed

Houston 911 Center - Coordinates hundreds of ambulances, fire and police vehicles in response to unpredictable, often life-threatening, emergency calls- Deal with city traffic, inaccurate addresses and incomplete information

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Common Thread in the Three Companies…..

They had developed systems for quickly and accurately capturing, responding to, and sharing information about their customer’s needs. As a result, they were able to substitute management of information for deployment of costly assets such as trucks, ships and employees - BITS in place of ATOMS.

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The IT-Enabled Solution

CEMEXNET, a satellite system for communications (1987 - 89) - Connected 11 Cemex cement factories in Mexico and 175

mixing plants with central “operations center” - Central coordination of supply and demand instead of each plant operating independently - Central dispatching system for routing of 1500 trucks; previously each plant had its own fleet of trucks Computer terminals installed in every delivery truck with Global Positioning Satellite (GPS) systems - Could dispatch the right truck to pick up and deliver a particular grade of cement (8000 products) - Reroute the truck when the chaotic traffic conditions delayed delivery - Redirect deliveries from one customer to another if last- minute changes were made

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Expert System- For Smarter Decisions

- To project order rates by day, hour and location -- improved predictions as the data grew

- Customer site of the incoming order is triangulated against the mixing plants and delivery trucks scattered throughout the city

- ”Best” combination selected based on traffic, pouring conditions and the pattern of predicted orders

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The Payoff...

- Reduced the 3-hour delivery window for ready-mix concrete to 20 minutes with reliability of over 98%. Goal: 10 minutes.

- Fewer lost orders because the phone systems aren’t tied up

- Uses 35 % fewer trucks -- Less inventory in transit -- Large savings in fuel, equipment maintenance and payroll costs.

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Cemex’s Unique Value Proposition To Its Customers

- Rapid Responses -- Order changes and same-day delivery are standard service

- Reliability -- Worry less about late deliveries -- Avoid huge costs of idle workers in case of late deliveries

- Guarantee -- If the truck is late by over 20 minutes, buyer gets rebate of 5%

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New Technology is Nothing Without New Attitudes ...

- Dispatchers were told: “ You are no longer scheduling; you are committing.”

- Compulsory computer and customer-service training for drivers (with an average schooling of 6 years) -- Six hours at half-pay -- every Sunday for 2 years

- Changing of “old” work rules -- Unions consented on the promise that more efficient trucks meant higher pay.It is better for the Company as well as for us. As a matter of fact, we

are the Company. (Salvador Lamas, a truck driver and union leader)

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Today: IT is a Separate Business

- Spun off the internal IT department, Cemtec, and joined it with 4 other Spanish and Latin American firms in 2000. -- Created Neoris, an IT consultancy

- Neoris is now part of CxNetworks -- a Miami-based subsidiary that Cemex wants to use to turn itself into an e-business

- Launched under CxNetworks: -- Construmix: a construction industry online marketplace -- Latinexus: an e-procurement site

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Effective Management StrategiesUsed by CEOs Who Get IT!

– Should have a clear view as to how the company must operate differently once the investment in IT is in place

1. Operational Strategy

2. Emphasis on Key Processes

– Concentrate IT investments to support re-engineering of key processes such as using the Net to connect with customers and suppliers or helping people at all levels do their jobs more effectively through information support systems

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Effective Management StrategiesUsed by CEOs Who Get IT!

– Make the CIO a member of the top management team so that the CEO and CIO are in touch on a weekly, if not daily, basis.

– Or, set up an effective IT steering committee with the CEO or COO, CIO and the heads of business units that meets periodically to set IT direction within the context of the business strategy and balance company-wide and business unit IT needs

3. Effective Governance

4. Line Managers Should “Get IT”– Make IT education a part of the management training

program to ensure line management at all levels view IT as a competitive weapon, not as a cost

– Encourage efforts to use IT effectively, monitor and reward them