Measuring Business Value of IT

Cisco Case Study EMBA: Measuring Business Value of IT University of Notre Dame March 19, 2004 Ayelet Baron—aybaron@cisco.com WW Sales Strategy & Planning Cisco Systems, Inc.

History of Cisco Systems Started at Stanford IPO; 192 Employees End-to-End Solutions Provider Cisco Routers Power the Internet; LAN/WAN Switching, Remote Access #1 Communications Equipment Supplier Shipped First Router $18.9 Billion Revenue; 34,000 Employees; IP Telephony, Security, Wireless, Networked Home 1998 1984 1986 1990 1994 2002 2003

Cisco Worldwide

33,000+ employees in 68 countries

Average years of service 4.5

1/3 Engineering/IT, 1/3 Sales, 1/3 all others

All connected to common Internet tools

All are Cisco shareholders

Updated 01/04

Cisco Products

Industry’s broadest product line

Leadership products in each category

R&D = 16.9% of revenue

Enables end-to-end network services

Networking and the Internet WORK LIVE PLAY LEARN

Cisco’s Financial Benefit from IT Financial Impact FY ’95 FY ’03 FY ’96 FY ’97 FY ’98 FY ’99 FY ’00 FY ’01 FY ’02

Communications

Internal Directory

External Web Site

Support Self-Service

$1B Departmental $3B

Virtual Supply Chain

Online Collaborative Support

E-Treasury

$1.9B $2.1B $1.7B Inter-Enterprise $2B

E-Commerce

E-Procurement

E-Learning

E-HR

Virtual Close

$900M Enterprise

Core and Context Core Context © 2004 Cisco Systems, Inc. All rights reserved. Mission Critical Non-Mission Critical Contributes Directly to Competitive Advantage Required to run the business and fulfill commitments Shortfall risks company's operations

Out-Tasking Versus Out-Sourcing

A whole function (IT)

Manage contract and SLAs

Separate IT Systems with reporting

Process redesign requires contract renegotiation

Elements of a function

Real time visibility and active management

Shared systems/web services; common data, network standards

Allows process redesign and continuous innovation

Investment and Partnering Strategy Core Context © 2004 Cisco Systems, Inc. All rights reserved. Mission Critical Non-Mission Critical Invest Retain In-house Drive Productivity Strategic Partners (Few, Tightly Coupled) Focused Investment Specialist Partners Control Costs Vendor Management (SLAs Driven)

Inside sales

Advertising

Lead qualification

Payroll processing

Travel

Investment Management

Temp contracting

Benefits admin

Global mobility

Desktop mgmt

Remote office WAN

E-commerce apps

Board manufacturing

Final assembly & test

Logistics & delivery

Level 1 help desk

Order admin

Field logistics & repair

Cisco IT Employees—1999

1900+ employees

2500+ vendors

~2.5% of total employee base

~4.5% of expense

65% in US, 25% in EMEA, 10% in AsiaPac / Japan

~$1B in spend

Cisco’s IT Evolution

IT works independently of business

Seeing as non value adding

IT seen as “high” cost

Focus on technical performance

IT as Cost Center CFP& ERP Internet Enabler Outcome Defined Trusted Business Partner Value Creation Proactive Reactive 2000 1997 1993-95 1991 IT Supports Business Strategy IT Enables New Capabilities and Roles Business Value

Supports business strategy

IT seen as a support process

Focus on Return on Investment

Supports and enhances business strategy

IT seen as a critical process

Focus on cycle time, cost reduction, service quality

Enables business strategy and integral part of the business

Effective use and leverage of technology and “virtual” resources

Focus on Shareholder value

Cisco IT’s Historical “Shifts” Time

Key IT Success Factors

Organization Model

Exceptional Staff

Receptive Company

IT as cost center CFP model Use of Internet, CCO Repl of all key apps (ERP) 1991 1993 1995 1997 1999 Consultative Proactive Leadership LEVEL 0 LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 2003 Cross-functional Productivity Experts Strategic Impact Low High

IT Mission IT drives the Business in Internet Leadership Capabilities, integrated across Cisco Globally, resulting in:

Meeting Productivity Goals

Increasing shareholder value

Increased Customer Success

Cost Avoidance

Improved Decision Making

Guiding Principles

Create close IT/business alignment

The business determines value tradeoffs for investments providing the “best-value” return

Deliver near-term business results

Drive constant improvements with serious and accountable metrics

Utilize an enterprise wide common and scalable infrastructure

Productivity!!!

Cisco’s “Hybrid” IT Organization

Advantages

Business executives involved with IT project success more than CIO

Good alignment of business and IT objectives

Promotes the right business decisions

Higher degree of client satisfaction

Still strict centralized control over standards, architectures to ensure low-cost, high-quality, and rapid cycle times

Centralized Infrastructure Data Center, Hosting, Transport, Client Services, Theatre Service Delivery, Infrastructure Applications, VMO, Technical Architecture, Administration Manufacturing Sales Finance Marketing CIO IT Organization IT Organization IT Organization IT Organization

IT Business Model to Get It All Done Effective Use of IT Resources Effective IT Processes Measurement and Accountability

Core vs Context

Strategic Use of Outside Services and Outsourcing

Vendor Management

Objective Efforts Status

End to End Portfolio Mgmt (emPOWER)

World Ready Apps

Collaboration

Management Metrics

Expectations of Leadership team

Early Results

CA TS and GCT Context 75% outsourced

emPOWER Proof of Concept completed

World Ready Road Show complete in India and EMEA

Cisco’s philosophy and financial approach to IT spend has allowed IT investment to grow as fast or faster than revenue (as “return” is accounted for on “business side) Investment Approach And Impact On Cisco’s IT Investment

Project Guidance and Planning “ In 1998, there were no guidelines, no rules of the road as far as how to do CFP planning and execution. ”

Project Tracking using a central repository

Project Reporting on a quarterly basis

Tracking of Budget vs. Actuals during the project

Compliance to Architecture & Standards

Execute Commitment for funding of project execution and delivery

Readiness Reviews before Go Live

Client Satisfaction measurements after delivery

Today…

Enterprise IT Portfolio Management Goals

Make the correct tradeoff, prioritization decision

Ensure business capabilities are created in the right sequence

Identify and resolve key barriers

Hold key projects accountable for delivery of business value within budget

Maximize the Value of Cisco’s IT Investments

IT Governance Model Funding Mechanisms IT Performance Mgt Process Oversight Standards Approach Client Centric Organization Principles Business Mindset Metrics Strategic Partner IT Business Alignment CULTURE Insuring the maximum value for Cisco’s IT investment

Approach: Cisco IT Governance “How We Ensure Value” Strategic “Instinct” Co-location CFP Model Operations Metrics Root Cause Analysis Global Vs Local Decisions Operations Reviews Performance Metrics Mbo’s and Plans Adherence Selection Process Emerging Vs Sun-setting Standards Budget Management Productivity Analysis Business Justification Mindset SDLC Model Balance “Risk Vs Innovation” Project Mgr Education ASP System Integrators Web Portals Management Accountability Business Alignment Standards Management Fiscal Controls Development Methods Continuous Improvement End User Technology Procurement

Change Management Framework DESIRED STATE SPONSOR COMMITMENT SKILLS CULTURAL ALIGNMENT RESISTANCE P A I N COMMITMENT TIME SYNERGISTIC RELATIONSHIP R EM E D Y PLAN TRANSITION RISK AREAS Frame of Reference PRESENT STATE

Strategic Direction Framework Future State Strategic Transition State ∆ Current State Tactical C A Understand the Current State Implement Transitional State Define Future State B

Communications Framework Behavior Change Leadership—60% Systems—30% Vehicles—10%

Executive Sponsorship—Global and Regional

Behaviors—Say & Do

Messages

Briefings

Meetings

Structure

Compensation

Policies

Resource allocation

Communication with customer administrators

Announcements/ Broadcasts

Websites/portals

Meetings

VODs

Email

Voice mail

Behavior Change Framework Awareness Understanding Translation Commitment Internalization

Proposed Approach

Situation analysis/Change Readiness Assessment

Gap analysis

Global team

Identify quick wins

Leadership buy-in

Define sponsor roles

Strategic direction

Benefit analysis

Best practice sharing—integrate

Change management &communication plan

Establish metrics

Get buy-in

Set up teams

Deliver plan

Identify new needs

Monitor results

Assess business results

Integrate and leverage

Sponsorship & Communication Where are we now? Where do we want to be? How will we get there? Who must do what? How are we doing?

Sponsorship Guiding Principles

Executives are held accountable for the success or failure of the process and results

Sponsorship cannot be delegated

Keep communicating throughout the whole process

Be honest and address people’s real concerns directly

Don’t engage in more change than you can adequately support

Weak sponsors must be educated or replaced; if not, failure is inevitable—the ultimate success or failure falls on the sponsor

Encourage in-depth dialogue , even when leaders are initially uncomfortable

Success depends on a systemic approach , not the “patchwork quilt” of initiatives, programs, etc

Sponsorship Role Power: the sanctioning power to legitimize the change Pain: a level of discomfort with the status quo that makes change attractive Resources: a thorough understanding of resources necessary for successful implementation and the ability/willingness/ influence to get the right people The Long View: an in-depth understanding of the impact the change will have on the organization Sensitivity: the capacity to fully appreciate and empathize with the personal issues major change raises Scope: the capacity to understand thoroughly the size of the group to be affected by the change Vision: a clear definition of what change must occur Public Role: demonstrates public support & commitment to change A Private Role: meets privately with individuals or groups to convey strong personal support for the change Consequence Management Techniques: prepared to reward supporters of change & express displeasure with those who inhibit it A Willingness to Sacrifice : the commitment to pursue the transition, knowing that there is a price Persistence: the capability to demonstrate consistent support for the change and reject any short-term action that is inconsistent with long-term change goals

Sponsor Evaluation To Be Used by CPR Leader to Assess Sponsorship 5 4 3 2 1 The sponsor views this as a cross-functional issue 5 4 3 2 1 The sponsor has a good understanding of how this relates to Cisco’s strategy 5 4 3 2 1 The sponsor demonstrates consistent, sustained support for the initiative 5 4 3 2 1 The sponsor leads by example Strongly Agree Somewhat Agree Neutral Somewhat Disagree Strongly Disagree 5 4 3 2 1 The sponsor sees this as a critical business issue that he/she is committed to address 5 4 3 2 1 The sponsor has a good understanding of the impact of dealing with this issue will have on the organization 5 4 3 2 1 The sponsor understands what resources—in terms of time, budget, dedicated people, training, access to people—are needed for this initiative to be successful 5 4 3 2 1 The sponsor is willing to commit the resources in terms of time, budget, dedicated people, training, access to people— needed for the initiative to succeed 5 4 3 2 1 The sponsor is willing to meet privately with individuals or groups to convey strong personal support for the initiative 5 4 3 2 1 The sponsor is committed to dealing with roadblocks when they arise 5 4 3 2 1 This is one of the sponsor’s top 5 initiatives

Business Challenge

From : A service delivery organization…

To : A Consultative Business Partner offering:

Strategic Solutions

A Catalyst for Change

Technology Leadership

Breakthrough Productivity

Strategic Plan

Taking Partnerships to New Heights

The Way We Work

Leading Internet Capabilities

Ongoing Assessments

Cascading Workshops

Ongoing Engagement

Internal Communication Capability

Cross-functional Team: IT & Business

Online solutions: IT & Cisco

Ongoing Communication

IT Senior Staff

Internal Clients

IT: 75 Interviews Worldwide

Strategic Off-site

Stages Transform Implement Plan & Engage Assess 1999 2002 2000 Focus & Investment

Client Feedback IT Performance vs. Business Need Example 0.8 0.9 0.7 1.1 0.8 1.0

Change Readiness Assessment Key Risk Areas

Strong belief that IT senior staff supports the changes we need to make

Some concern about IT senior staff sharing common goal around Business Partnership

Caution around leadership by example - walking the talk

Management has a history of losing focus on important projects when other problems or issues compete for its attention

Failure to involve middle managers in planning change has resulted in their indifference and opposition to initiatives

Managers in past changes said they supported a change but their behavior often suggested the opposite

Employees understanding of how Cisco’s business goals translate into specific things they can do in their jobs

In deciding to support a change, people do what they think will please their boss rather than what is best for Cisco

There will be some difficulty in explaining BP to employees

Communication in IT is open and candid

IT’s usage of rewards, measurement and other processes to communicate its seriousness and signal a change

A compelling reason to change has not been clearly communicated

Employees will not easily understand the costs associated with not implementing BP

Employees expect change to happen at Cisco

Employees will not be motivated to achieve Business Partnership

Employees will need to be invested in the new way of operating

Employees will not feel a sense of control in implementing Business Partnership

BP will be regarded as requiring employees to make substantial changes to their own day-to-day activities

Employees do not have the assimilation capacity for Business Partnership

IT Senior Staff has the skills and abilities to execute and deliver Business Partnership

Managers already possess Business Partnership skills

Employees already possess Business Partnership skills

Employees have the skills and abilities they need to accomplish this change

S P O N S O R S H I P RESISI TANCE COMMUNICAT ION SKI LLS Example

Internal Assessment Risk Area: Sponsorship IT Senior Staff ... Example IT Senior Staff Supports This Change...

Leadership Say/Do Gap Analysis Example 43% GAP 31% GAP 36% GAP

Change Communication Plan

IT Connection

IT e-Communities

IT Client Portal

Best Practice Website

Meetings & Off-sites

Chats with CIO

Manager Weekly e-alert

Meeting-in-a-Box

Client Feedback

MBO Alignment

Quarterly IT Business Partnership Award  IT Champion Award

Performance Reviews

CAP Awards

Training Program

IT Communication Function  Centralized company-wide

Training for Sr. Staff

Delivery of BP Workshops

Quarterly IT All-Hands/IPTV

Sr. Staff Meetings

Management Staff Meetings

Chats with CIO

CIO Corner

IT Connection

Sr. Staff Forums

BP Team

SYSTEMS/PROCESSES MEDIA LEADERSHIP

Windows 2000 Customer Feedback It is very important to me that my individual settings are transferred to my Windows 2000 environment Business events may interfere with my conversion to Windows 2000 Mean 4.0 Mean 2.8

To convert my computer to Windows 2000, I would prefer to …

To learn What's New in Windows 2000, I would prefer to …

Implementing Process to Deliver Value Clear Understanding of Value to Be Delivered Standard, Consistent, End-to-End Definitive, Global, Mandate Value and Process Metrics Adoption, No-Opt Out Scalable, Integrated, Flexible * Systems implementation not always required Customer / Shareholder Value Process Policy Measurement Enforcement Systems Implementation *

Client Satisfaction Mean 4.2 Mean 3.8

Evolve to an Integrated IT Business Model IT Business Model Process Metrics Portfolio Management and End-to-End Delivery Architecture & Standards Governance Business Partnership Value Low Total Cost of Ownership Customer and Client Satisfaction Speed and Agility Exploiting New Technology