IMPACT SHAREHOLDER VALUE?                                                                     ...
Can IT as an enabler really impact shareholder value?
History is filled with stories of IT ...
Our view is that the Chief Sales
DEFINITIONS OF SHAREHOLDER VALUE                                      Officer (CSO) and C...
 What role is IT playing in enabling your management team to impact sharehol...
a Risk management cannot be ignored as it is a driver of shareholder
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In 2004, IBM released a report based on its worldwide cross-
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 A concept which is still relatively rare in the IT industry, yet one which
 I would perso...
 Is it possible that clients are so busy with day-to-day work activities        and allow ...
Linking information technology to shareholder value
 There are other risks w...
Linking information technology to shareholder value
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Linking information technology to shareholder value
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IBM provides data driven
IBM LINKS TO SHAREHOLDER VALUE                                           services that help you
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IBM LINKS TO SHAREHOLDER VALUE                                         Outsourcing
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IBM LINKS TO SHAREHOLDER VALUE                                           outsourcing provides cost-...
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  We began this paper by asking “Can IT as an enabler really
  impact shareholder value?”
  Yes, IT can impac...


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Can IT Really Impact Shareholder Value? A CIO Perspective


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Can Information Technology (IT) really as an enabler really impact Shareholder Value? What are the drivers of Shareholder Value? Can IT impact them? Read this White Paper to get a Point of View (PoV).

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Can IT Really Impact Shareholder Value? A CIO Perspective

  1. 1. CAN IT AS AN ENABLER REALLY IMPACT SHAREHOLDER VALUE? Evans Munyuki Chief Information Officer (CIO) - Business & Technology Strategist This white paper discusses a key question which has become increasingly important to companies as business seeks to decide whether or not IT has a seat in the boardroom. Ask some of your team-members or friends to describe Can IT as an their latest IT project or IT initiative in business terms, and enabler really you will find that some folks will have to think twice as impact they attempt to define their IT projects in non- shareholder technical business terms which focus on business value in a benefits - terms which could spark the interest of a quantifiable non-technical venture capitalist, a financier, stock investor, and or a corporate shareholder of a non-IT holding. convincing manner? IT - a real enabler of value? This white paper seeks to bridge this gap between IT and Business. It is written for IT rainmakers who want to In order to answer that question, elevate their conversation to C-Suite Executive clients. we must answer two related This white paper will also provide value to CIOs who seek questions which are: to enter the boardroom, it will provide value to CIOs who What are the drivers of seek to demonstrate greater ‘business’ contribution in the shareholder value? boardroom, and will provide value to other C-Suite Executives who seek points-of-view on this topic. What role can IT play to positively The Golden Question influence these drivers? Since the Year 2000 Information Technology (IT) dot com In other words, what levers can bubble burst31, IT has transformed from being the CIOs use to positively prescriber of business investment, to become a business- influence the link between IT censored enabler, even reaching the point where some investment and derived have questioned whether IT matters at all as a shareholder value? differentiator of company competitiveness in the Our conclusion is that IT can marketplace1. impact shareholder value, and Along with this historical backdrop comes the golden CIOs have a key role to play in the question which many are trying to put their fingers on: boardroom as they leverage IT to help drive business results. Table of Contents The golden question The challenges with IT projects Definitions of shareholder value IBM’s approach to Shareholder Value Making the link between IT and Shareholder value Examples of business benefits which IT projects should seek to provide Risk and Reward Examples - IBM A random walk? Conclusion Version 2 Copyright Evans Munyuki Page 1
  2. 2. Can IT as an enabler really impact shareholder value? THE CHALLENGE WITH IT PROJECTS History is filled with stories of IT projects which companies have embarked on, using in-house IT resources, using outside vendors, How long is it taking for us to or both. get our products to market and how do we compare to However, the challenge continues to be, the our competition? quantification of the business value delivered by such initiatives. What key projects are we initiating to help enable Gartner estimates that two-thirds of all major product innovation? technology investments do not achieve their intended result2. Unless CIOs take a very deliberate approach towards How can this be? When projects are initiated, do some the end results they want to companies not have clear IT investment objectives which demonstrate, they can get clearly link back to shareholder value? sucked into ‘survival’ projects Do some companies not have clearly documented business which won’t help them get far cases to guide IT investment decisions and successful beyond keeping-the-lights-on, completion criteria to help assess attainment of intended thus not demonstrating results? maximum contribution towards shareholder value (as In an argument which triggered a variety of responses, judged by fellow business Nicholas Carr3 went as far as questioning whether IT even executives). mattered. A further interesting A further problem which arises with the challenge of observation is the following: quantifying the business value delivered by IT projects is that it becomes much easier to justify and fund IT executives are the least those projects whose business case easily links up satisfied folks in the with metrics. executive suite19. But this may not always be the right thing to do - there are This is according to a survey other IT projects which are key in enabling the by career and recruiting firm corporation’s Business Strategy but whose benefit can be ExecuNet, which covered difficult to measure. 2,100 executives. Projects whose IT contribution can be tough to measure By closely linking IT projects to include those which address such areas as improved shareholder value, IT customer satisfaction, improved margin, improved quality, executives can demonstrate improved customer acquisition, and sometimes, even key business insight which will increased speed to market. give them equal weight and ground with their fellow- Another key challenge with IT projects is that sometimes business-executives. IT organisations are forced to expend a large portion of their energy towards projects and It will help demonstrate that investments which only help to “keep the lights on.” IT’s mindset is more than just Such projects include fire-fighting projects, projects which “cost center.” address key areas of system instability, poor system This business insight will also performance, or technology-refresh projects. help in CIOs’ ability to cross To add fuel to the fire, these “keep-the-lights-on” projects over into business roles. end up consuming up a majority of IT budgets, making it In this paper, we take the view difficult to find funding for those projects which provide that executive directors, CIOs, competitive differentiation - especially those projects which and managers are all leaders are conceived in the current (fully booked) financial year. who get work done through All this is before one starts asking such questions as : How other people. For that reason, do we make it easy for customers to do business with us? we will use these titles interchangeably. What are our key customer dissatisfiers, and what key projects should we initiate to address them?
  3. 3. Our view is that the Chief Sales DEFINITIONS OF SHAREHOLDER VALUE Officer (CSO) and Chief Information Officer (CIO) must Let us agree on the definitions of shareholder value and be tied to the hip on the value business value. IT can bring to sales execution, service delivery, Shareholder value is defined5 as the value of the and product delivery. company minus the future claims (debts). A= Annual earnings should be Some calculate this value as the Net Present Value of all future cashflows plus the value of the non-operating assets of the company. The IBM Institute of Business Value references business value as the resolution of those issues which have the greatest impact to the business. As such, The IBM Institute for Business Value provides strategic insights and recommendations that address critical business challenges and help clients capitalize on new opportunities6. For publicly traded companies, some of the measures of shareholder value include share price, dividend payout, and up 25% or more in each of the economic profit. last three years. Annual return on equity should be 17% or more. DRIVERS OF SHAREHOLDER VALUE? What are the drivers of shareholder value, and what role N= A company should have can IT play to positively influence these drivers? a new product or service that's fueling earnings growth. We will begin by assessing shareholder value from the perspective of a potential investor in a company’s stock. S= Supply and demand. Shares outstanding can be large or Investor’s Business Daily7 (IBD) is a national American small, but trading volume business and financial daily newspaper that serves over should be big as the stock price 800,000 investors worldwide through a variety of increases. proprietary products and services, relevant news from the investor’s perspective, as well as innovative research, L= Leader or laggard? Buy the investment education, stock ratings and online graphs. leading stock in a leading IBD has a checklist for investors which outlines the seven industry. A stock's Relative Price common characteristics all great performing stocks have Strength Rating should be 80 or before they make their biggest gains. IBD calls this checklist: higher. CAN SLIM®. I= Institutional sponsorship Using CAN- SLIM®, IBD promises investors to significantly should be increasing. Invest in reduce their risk and increase returns through their stocks showing increasing Investment Research Tool which is a fact-based ownership by mutual funds in performance checklist to easily evaluate a stock before they recent quarters - in other words buy. strong interest from fund managers. IBD's Accumulation Lets look at what each letter stands for in CAN SLIM®: / Distribution Rating gauges C= Current earnings per share mutual fund activity in a stock. should be up 25% or more and in many cases accelerating in recent M= The market indexes, the quarters. Dow, S&P 500 and Nasdaq, should be in a confirmed up Quarterly sales should also be up trend since three out of four 25% or more or accelerating over stocks follow the market's prior quarters. overall trend. Version 2 Copyright Evans Munyuki Page 3
  4. 4. DRIVERS OF SHAREHOLDER VALUE IN YOUR COMPANY? What role is IT playing in enabling your management team to impact shareholder value as defined in the CAN SLIM® checklist? Even more importantly, what role can IT play, but is currently not playing, to drive shareholder value in your company? Professor Laurence Booth8 of the Rotman School of Management at the University of Toronto asserts the following key points on the drivers of Shareholder value. Quarterly earnings are a key driver of shareholder value – a.k.a. stock market values. Economic Value Add - the market values companies that increase the productive use of their assets by increasing turnover ratios, increasing profit margins, and as a result increasing profitability. IBM’S APPROACH TO SHAREHOLDER VALUE a the value of intangible Economic Value Add (EVA) is the key creator of shareholder value. This assets is getting much is according to IBM. greater as a proportion of the total value of a firm, To create Economic Value Add, you must do four things: 1) Grow and Sales, 2) Control Costs, 3) Enhance Your Risks Management and 4) Manage Your Assets. b reputational risk is a key element of strategic risk 1. Grow Sales that cannot be hedged Consistent with IBD and Professor Laurence Booth, IBM emphasizes away24. sales growth as a key contributor to Economic Value. You must grow sales9 by investing in opportunities which will give you superior Case studies show examples of returns. companies which have been exposed to reputational risk Embark on new contracts and new projects which will result in sales events, some of which growth. Clearly, IT has a key enablement role to play here. recovered, and others which 2. Control Costs experienced significant To control your costs, you must increase your employee’s negative shareholder impact25. productivity10, outsource low value and non-core areas of your In reviewing those companies business which other companies can do better and which recovered well, key cheaper than you (IT, Business Process, Application differentiators were the Development, etc.). following virtues in the Reduce your operating expenses, and optimize your management team: selling, general, and administrative costs. Honesty, Transparency, Some managers may look at a partial view of costs. Personal involvement of the Learn to look at the full total-cost-of-ownership CEO in the major risk event, which evaluates the overall life-span of your assets in and Communication with order to arrive at a holistic view of your true cost stakeholders. base. These traits clearly 3. Enhance your risk management demonstrated that they have a Now more so than ever before, managers need to enhance the financial value. management of the risk profiles of their organizations because there is a link between risk and shareholder value. In assessing the impact of catastrophe on shareholder value24, it is clear that reputational losses What does this mean in the can be affected by management, and they have an impact on context of shareholder value? shareholder value which can be positive or negative. The link is tight because, Version 2 Copyright Evans Munyuki Page 4
  5. 5. DRIVERS OF SHAREHOLDER VALUE Conclusions: a Risk management cannot be ignored as it is a driver of shareholder value. b It is important for managers to manage operational risk. However, that is not enough - reputational risk is a key area that managers must also address as these risk areas are drivers of shareholder value. Tied with that conclusion is the topic of compliance. Managers must be compliant. With international case studies of companies like Enron (USA), Worldcom (USA), Parmalat (Europe), and LeisureNet (Africa), it is clear that good ethics, good governance, and compliance with resultant regulation is very important to boards of directors, and the CIO as a board member must demonstrate the contribution his organization can bring to the table. An interesting topic which directors are now discussing is the cost of non-compliance. Ironically, even the topic on the cost of compliance has also come up. Without digressing on this topic, we will make one key point: “Compliance is a marathon run over changing terrain. Those who win know how to conserve effort, reduce cost and position their companies over the long haul”18. Companies must establish a rock solid controls posture. Make business controls a non-negotiable matter as demonstrated by your supporting processes, IT systems, and your management systems. Further in this article, we will explore this topic a little more. Clearly, IT has a role to play in the enforcement of systems and processes which ensure separation of duties, and compliance with regulation. 4. Manage Your Assets To manage your assets, you must i sell underperforming assets, ii utilize idle or underutilized assets, iii manage your accounts receivables, iv optimize your resources, and v manage your inventory. You must watch how long it is taking you to pay your debts, versus how long it is taking you to collect cash - including any interest debt you may be exposed to in the process. IBM uses tools and methodologies which help customers address these key drivers of Economic Value Add. And the good news is that, Economic Value Add is the ultimate contributor to shareholder value. Version 2 Copyright Evans Munyuki Page 5
  6. 6. DRIVERS OF SHAREHOLDER VALUE Sustainability Sustainability means “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”29 This concept of “sustainability” is derived from the term “sustainable development” which was covered in the Report of the World Commission on Environment and Development, 1987 (The “Brundtland Report.”29 Quoting the King II Report, “In a corporate context, ‘sustainability’ means that each enterprise must balance the need for long-term viability and prosperity - of the enterprise itself and the societies and environment upon which it relies for its ability to generate economic value - with the requirement for short-term competitiveness and financial gain. Compromising longer-term prospects purely for short- term benefit is counter-productive. A balance must be struck and failure to do so will prove potentially irreparable, and have far- reaching consequences, both for the enterprise and the societies and environment within which it operates. Social, ethical and environment management practices provide a strong indicator of any company’s intent in this respect.” Many companies are taking sustainability very seriously. For example, Wesbank (South Africa) publishes a sustainability report which highlights what the bank is doing around their focus areas in Sustainability. In addition to previous activity, in 2006, Standard Bank (South Africa) published a Sustainability and Black Economic Empowerment Report (sustainability report) which contains non-financial information as at board approval date (6 March 2007) and financial information for the year ended 31 December 2006. A wide variety of companies have embraced sustainability and indeed publish sustainability reports together with their annual financial reports, or as separate documents - they include but are not limited to the following: Santam (South Africa), Sanlam (South Africa), Eskom (South Africa), ABSA (South Africa), MTN (South Africa), IBM (USA), Microsoft (USA), Anglo American, Gold Fields (South Afrca), the list goes on... Sustainability is a key item on the Shareholder agenda, and IT has a role to play here. In addition to several other sustainability initiatives, IBM has taken a leadership role in introducing tools that can help CIO’s contribution to their organization’s sustainability. Examples: IBM’s server management tools allow CIOs to reduce the power consumption of non-critical servers at nights and on weekends. Another example is IBM’s green data center initiative which will see high density computing systems utilizing virtualization technology, along with IBM’s Cool Blue portfolio of energy efficient power and cooling technologies. These technologies, in conjunction with the energy efficient design and construction, will allow IBM to reduce its overall carbon footprint compared to standard data centers, and lessen the impact to the environment30. Version 2 Copyright Evans Munyuki Page 6
  7. 7. MAKING THE LINK BETWEEN SHAREHOLDER VALUE AND IT Now that we have identified the drivers of shareholder value, we need to understand the IT’s impact on these drivers. 1. Does IT have a link to the drivers of shareholder value? 2. Can “well-run” IT projects empower CIOs with the ability to impact growth of sales? 3. Can “well-run” IT projects provide CIOs the opportunity Can “well-run” IT projects to control costs? provide CIOs the 4. Can “well-run” IT projects empower CIOs with the ability opportunity to control to better manage their assets? costs? Does IT have a link to the drivers of shareholder Yes - IT can indeed help you value? drive down your cost basis. Emphasis must be placed on Yes it does - IT has both a direct and an indirect impact on Total Cost of Ownership, and the drivers of shareholder value . the role IT plays in helping the business scale while keeping We would like to even take this costs in check. point of view further by stating that IT can either have a disruptive or a Many companies have taken on constructive impact on the drivers projects which have helped of shareholder value. them automate processes and activities resulting in reduced Left in the hands of inexperienced cost. These also include paper- IT leaders, IT can indeed have a eliminating projects, disruptive impact on the drivers of shareholder value. All productivity-enhancing projects, you have to do is look at the number of projects whose and process-optimizing projects. deployment did not go as planned, resulting in negative product sales impact. As we all know, inhibition of sales is In addition, if you do not one of the paths to profit erosion. optimize your IT environment, IT itself can become a holder of Can “well-run” IT projects empower CIOs with the cost reduction potential. An ability to impact growth of sales? example is a situation where IT The level of contribution which IT can make to your holds a farm of non-green, company's top line will depend on which industry you are energy guzzling, inefficient in, the level of dependence your company has on IT in servers. Optimization becomes order to execute sales, supply, & demand processes and necessary because some perform its core functions. It also depends on where your companies have acquired company and industry are relative to the IT contribution businesses with disparate IT maturity curve. systems. Others may have defined optimized IT strategies We mostly use the word ‘IT’ tightly - in its real application, it is only later in the purchase cycle. broader: IT Resource domains, according to IBM, are Other companies may not have Infrastructure, Applications, Data, Process, Organization taken the best approach to (people & structure), Network, and Finance & Environment. A optimize the environment and strategic alignment and optimization of these domains is drive out cost , which includes critical because they make up the full equation of IT looking at other parts of your Resources, and they can impact sales growth. business where cost-reduction benefit may be had. In March 2006, IBM released a report based on its worldwide cross-industry survey of more than 750 of the world's top CEOs and business leaders. Among the key findings of this survey, CEOs had moved their agenda from cost-cutting to driving profitable growth28. Version 2 Copyright Evans Munyuki Page 7
  8. 8. In 2004, IBM released a report based on its worldwide cross- industry survey of 456 CEOs. Among the findings of this Tools & Methods survey, 80 percent of CEOs surveyed believe revenue growth is now their top priority (though continued cost-containment IBM has developed discipline remains important)27. Shareholder value tools which are used to conduct enterprise In the same report, CEOs rated competition and market level financial competitive dynamics as very high and important external forces, while at assessments and to translate the same time placing immature and obsolete IT low on the management actions to impact list of top 10 barriers to change. It is clear that in shareholder value. In responsiveness is a key issue for CEOs. For leading addition, IBM has purchased companies, exploiting IT advances to detect critical business licences for a number of events earlier is a key initiative27. shareholder value tools such as Thomson ONE Banker, CBV, When looking at costs, a key indicator to keep in mind is your Bureau van Dijk and Reuters company’s IT-spend-as-a-percentage-of-revenue, compared Knowledge11 which are used to your industry average. However caution must be exercised by IBM Business Consultants in as this comparison must be balanced with your company’s helping clients based on positioning in your industry (leader? Laggard?), your strategy factual information. (are you busy entering new markets, acquiring businesses, growing?) It is also important to understand whether the majority of Gartner has developed its 10 your IT spend funds expenditure which allows you “keep the Step guide to achieving the lights on,” or whether it funds investment which drives new Business Value of IT12. capability and competitive differentiation of your company for the marketplace. Gartner’s ten step guide13 includes acknowledging that Can well-run IT projects empower CIOs with the you have a problem, getting ability to better manage their assets? the basics of IT measurement right (at the strategic Yes - well-run IT projects can empower CIOs and their fellow alignment level, business directors with the ability to better manage their assets. process impact level, CIOs can do so with a variety of projects which enable the architecture level, direct business to better manage, better track, better utilize, and payback, and the business & better optimize resources. technology risk level). Realizing that there are no CIO’s management of assets also involves business continuity more IT projects - there are and resilience planning. Instead of accumulating disaster business projects and as such, recovery assets which lie idle with no productivity or utilization IT professionals must learn value, CIOs can liquidate such assets and leverage shared business basics, and they must resource bases from suppliers in order to get a much better use language which is return on assets. understood by C-level executives. Building consistent However, the point made in the paragraph above should be frameworks of execution is very closely tested with the type of business a CIO is in. What key, along with getting the recovery time objectives does such a business require? Does right external helpers, asking it truly require shared or dedicated resources? Does it require the right questions, having the a hot managed service which would be ready to run in case of right governance processes in an emergency? If a dedicated infrastructure is required, is it place, having clear decision really necessary for it to be a company owned asset or does it checkpoints (knowing when to make sense for this to be an asset which is provided by a stop), and sticking with the company that specializes in Business Continuity - a company process of continuous which can procure the needed hardware at discounted cost? improvement. Do you require 100% dedicated infrastructure or are there elements of the solution which can be shared? There is no one size solution which fits all companies - CIOs must evaluate the needs of their business taking their risk profile into account. CIOs have the opportunity to better manage their assets resulting in increased shareholder value. Version 2 Copyright Evans Munyuki Page 8
  9. 9. IT RISK AND REWARD PARTNERSHIPS A concept which is still relatively rare in the IT industry, yet one which I would personally like to see more of, is the concept of IT Risk and Reward. The legal industry has used this concept for years. In order to drive a direct relationship and link between IT projects and business results, one of the key concepts we expect see in the marketplace is concept of Risk/Reward partnerships. “A Risk-&-Reward partnership is a strategic partnership between a This concept may very well vendor and a customer - where clients reduce or eliminate their capital breed a new approach to IT expenditure for “qualifying” IT projects, and instead link their vendor provider selection focusing on payment structures and the quantity of that payment reward to the creation of greater value for clients. actual business and technology benefits delivered by the successful completion of such IT projects. This could be value gained at the ADVANTAGES OF RISK & completion of the project, or it could be ‘earned-value’ gained as the REWARD PARTNERSHIPS project moves forward.” Client Perspective: Much has been said about the necessary migration from IT projects 1. Risk & Reward (R&R) to “Business” projects. We believe risk & reward partnerships are Partnerships strengthen the probably the missing link in making this migration complete. level of relationship between IT consumer and IT provider. Some customers are starting to zone in to this area of opportunity in I.e. It becomes a true the evolving courtship & marriage between business and IT. partnership - not just box While we don’t believe this approach will be appropriate for all IT dropping. projects, we certainly believe that it will be applicable to high value, 2. R & R Partnerships can high risk projects. Encourage an environment Out of the capital expenditure which is approved by the board in the of trust - a ‘we’re in this AGM (Annual General Meeting), many boards do not require their together’ attitude. executive directors to bring specific projects for approval at 3. R & R Partnerships can execution time, however, IT is the exception. significantly help clients to Many boards require that sizeable IT investment projects enjoy the benefits coming come for final approval before the contract is signed. out of the recommendations from consultants. Why is this so? Because the board generally considers certain IT investments as risky, and they want to be convinced that Look at the number of expenditure is tied to business returns - returns which will impact businesses which pay top-dollar shareholder value. to consultants so the consultants can give them business This is one of the reasons why we strongly recommendations which they believe the CIO must sit on the board - so don’t implement. that she is directly linked with all business imperatives, and is accountable to the board Why do some companies not for the investments she signs off on. use the advice they so dearly pay for? With the above backdrop in mind, IT Risk & Reward projects are one of the key methods Is it really because some that CIOs are starting to use to link IT companies are lacking in activity with business results. execution? In the world of IT Service Providers, this Or is it because customers concept will separate the wheat from the actually need help implementing chaff. Under-capitalized, understaffed, and the recommendations which inexperienced IT Service Providers without a proven track record will consultants provide them with? find it difficult to compete in this space. Version 2 Copyright Evans Munyuki Page 9
  10. 10. IT RISK AND REWARD PARTNERSHIPS Is it possible that clients are so busy with day-to-day work activities and allow the provider to that they find it difficult to carve out resources, people, and time, recover her scoping costs. which they can devote to the implementation of the consultant- CONCLUSION ON IT RISK & recommended-ideas? REWARD PARTNERSHIPS Risk reward partnerships can help bridge that gap. They can If IT Risk & Reward facilitate an environment where companies can see the value Partnerships are structured promised by their IT visionaries. properly with a strategic view 4. R & R Partnerships facilitate the platform for the necessary in mind, we firmly believe that commitment to make the initiative a success. they can provide both client and provider with an 5. R & R Partnerships directly align the interests of the opportunity to win together. shareholders (client), with those of the board, and with those of the IT Service Provider. To reach the finishing line smiling together. ADVANTAGES OF RISK & REWARD PARTNERSHIPS Thus enabling the CIO to go Provider Perspective: back into the boardroom with 1. With R & R Partnerships, top performance can mean top IT-influenced business results revenue streams and repeat business. which are welcomed by the 2. R & R Partnerships directly align the interests of the board of directors - results shareholders (client), with those of the board (client), and with those which are welcomed by the of the IT Service Provider, thus helping the IT Service provider to shareholders - results which vest his interests in a deeper understanding of what the client’s will enable the CIO to return to business is all about, how the client makes money, and how he can the higher price delegations play a key role in bringing value as measured by Shareholder Value. and the point of authorizing 3. R & R Partnerships can help turn engagements with clients from notable IT capital expenditure being transactional to strategic enabling providers to gain value without always needing board from investment into a client’s business. approval. DISADVANTAGES OF RISK & REWARD PARTNERSHIPS: Obviously, by leveraging IT Risk & Reward Partnerships, Provider Perspective: and by leveraging IT Financing 1. Places heavier emphasis of sound business financials on service such as that provided by IBM providers (project capital expenditure), which could rule out feasibility Global Financing, CIOs can of engagement for emerging IT providers. avoid capital expenditure 2. Can expose the provider to excessive financial risk with very altogether and turn IT little “skin in the game” from the client side. The client can prioritize initiatives into an “business-as-usual,” or prioritize “other projects” by devoting resources to operational expense. those, thus further increasing the risk of project failure and the financial impact which would primarily be bourne by the provider, and not the client. 3. Up-front agreement on the problem statement, boundaries, payment structures, and reward systems are critical. As such, poorly scoped projects can pose threats of failure. Comprehensive upfront scoping becomes a key activity which may very well have to be a “paid engagement” with contractual terms that include exit clauses which allow the client to choose to pursue the project at zero-scoping-cost, Version 2 Copyright Evans Munyuki Page 10
  11. 11. OTHER RISKS WHICH THE CORPORATION MUST MANAGE Linking information technology to shareholder value There are other risks which managers must manage. These include financial risk, legal risk, and overall project risk. In today’s world of tight corporate governance, managers must assess their business as a whole and leverage IT, process, and organization to ensure they have the right business controls posture in place to demonstrate an adequate level of responsibility to shareholders. To this end, we will take a moment to explain a few of the key compliance requirements which shareholders expect directors to govern, and for managers to manage. The key point is that, depending on which industry a company is in, these are key regulatory requirements. As such, the IT organisation has a key role to play in enabling these regulatory requirements which are key on the Shareholder’s Agenda. Compliance is barely something to ignore. CIOs report that 8 to 10 percent of their budgets are spent on compliance efforts18. King II & King III King II is the abbreviated name for the King Report on Corporate Governance for South Africa published in 2002 in South Africa. It IT Relevance: followed a 1994 report commonly known as King I15. (At the time of the writing of this white paper, a draft version of King III was about to be CIOs have a key role to play in submitted for Public Comment). helping companies become compliant with various elements of Companies listed on South Africa's JSE Securities Exchange have to King II. Of key note are the areas of comply with King II which itself requires compliance with Global business continuity and disaster Reporting Initiative guidelines. King II uses a comply-or-explain recovery, technical risk, and approach whereas SOX uses a comply-or-else approach. compliance risk. King II outlines requirements on corporate Governance covering the CIOs can help demonstrate an broad spectrum of : Directors and their responsibilities, Risk integrated approach to good Management, Internal Audit, Integrated Sustainability Reporting, governance in the interests of the Accounting and Auditing, and Compliance & Enforcement16. wide range of company In the area of Risk Management, King II states that Risk assessment stakeholders. should address the company’s exposure to the following: physical and operational risks; human resource risks; technical King III is clear in its recognition of risks; business continuity and disaster recovery; credit and IT as an integral part of business market risks; compliance risks. today. Risk management and UPDATE: King III was since released. King III uses an ‘apply-or-explain company strategy are areas now approach. King III has taken a very strong stance on the Board’s affected more than just financials. responsibility for the Governance of Information Technology, the That means the profile composition integration of IT Strategy with Business Strategy, appointment of an IT of company Boards of Directors (in Steering Committee, appointment of a CIO by the CEO, Qualifications of their mandate to drive company a CIO, monitoring and approvals of significant IT Investments, strategy) can no longer just be protection of intellectual capital contained in IT systems, compliance, Accountants. It now extends to the fact that IT should form an integral part of the company’s Risk roles which affect shareholder value Management Committee, and the role of the Risk and Audit committees such as IT, Marketing, Sales, and in assisting IT carry out its responsibilities. Risk. Version 2 Copyright Evans Munyuki Page 11
  12. 12. OTHER RISKS WHICH THE CORPORATION MUST MANAGE Linking information technology to shareholder value Basel II Basel II17 is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version (Basel II) aims at: Ensuring that capital allocation is more risk sensitive; Separating operational risk from credit risk, and quantifying both; Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. IT Relevance CIOs have a role to play in helping companies become compliant with Basel II. This is both from an systems compliance perspective, and also in establishing contingencies which help demonstrate significant (and real) reduction in risk, which in turn reduces capital reserves requirements, thus freeing up the capital for engagement in business activities which produce higher returns. Version 2 Copyright Evans Munyuki Page 12
  13. 13. OTHER RISKS WHICH THE CORPORATION MUST MANAGE Linking information technology to shareholder value Sarbanes Oxley The Sarbanes-Oxley Act of 2002 (SOX) was designed principally to bolster pubic confidence in corporate governance and financial reporting of public companies by rebuilding public trust in corporations and capital markets.34 Sarbanes Oxley largely affects American headquartered companies, companies which do business in the USA, or subsidiaries of such. Impact of SOX on the corporate IT department32 The SEC identifies the COSO framework by name as a methodology for achieving compliance. The COSO framework defines five areas, which when implemented, can help support the requirements as set forth in the Sarbanes-Oxley legislation. These five areas and their impacts for the IT Department are as follows: Risk Assessment. Before the necessary controls are implemented, IT management must assess and understand the areas of risk affecting the completeness and validity of the financial reports. They must examine how the company's systems are being used and the current level and accuracy of existing documentation. The areas of risk drive the definition of the other four components of the COSO framework. Control Environment. An environment in which the employees take ownership for the success of their projects will encourage them to escalate issues and concerns, and feel that their time and efforts contribute to the success of the organization. This is the foundation on which the IT organization will thrive. Employees should cross train with design, implementation, quality assurance and deployment teams to better understand the entire technology lifecycle. Control Activities. Design, implementation and quality assurance testing teams should be independent. ERP and CRM systems that collect data, but feed into manual spreadsheets are prone to human error. The organization will need to document usage rules and create an audit trail for each system that contributes financial information. Further, written policies should define the specifications, business requirements and other documentation expected for each project. Monitoring. Auditing processes and schedules should be developed to address the high-risk areas within the IT organization. IT personnel should perform frequent internal audits. In addition, personnel from outside the IT organization should perform audits on a schedule that is appropriate to the level of risk. Management should clearly understand and be held responsible for the outcome of these audits. Information and Communication. Without timely, accurate information, it will be difficult for IT management to proactively identify and address areas of risk. They will be unable to react to issues as they occur. IT management must demonstrate to company management an understanding of what needs to be done to comply with Sarbanes-Oxley and how to get there. Version 2 Copyright Evans Munyuki Page 13
  14. 14. IBM provides data driven IBM LINKS TO SHAREHOLDER VALUE services that help you Enclosed below are the value proposition in some of prioritize your critical data IBM’s offerings which help CIOs demonstrate greater and ensure the ongoing contribution to shareholder value in the boardroom. availability of your infrastructure. These include Through its key businesses, IBM provides a continuum of value proposition enablers spanning the full range of IT: i.e. Software, Hardware, Services, and Financing. This continuum of value becomes clear as we explore some of IBM’s offerings, and their links to shareholder value: Risk Management - Business Continuity & Resilience Services (BCRS)23 In today's interconnected world, virtually every aspect of a company's operations is vulnerable to disruption. So continuity has become a concern that extends far beyond IT. And with the number of threats to business increasing, the worst-case scenario "insurance policy" approach to business continuity has become woefully inadequate23. IBM high availability services, and IBM data But how do you determine the continuity and recovery continuity services. requirements of your business? How do you identify and integrate critical business and IT priorities into a High availability services help comprehensive continuity program? How do you identify the you avoid downtime and gaps between what you have and what you need? Where do recovery costs by planning, you start? creating and running an infrastructure that supports IBM business continuity and resiliency services can help, from continuous access to planning and design through implementation and business processes, IT management. environments and networks. IBM provides business driven services that help you Data continuity services help develop a business continuity plan aligned to your risk you prioritize critical data in tolerance and geared toward your business needs. These light of regulatory include IBM business continuity services and IBM regulatory requirements and business compliance services. needs and implement a Business continuity services help you identify and fill gaps in retention and retrieval plan your current continuity strategy with a robust continuity for virtually anywhere, program aligned to business needs, budgets and best anytime information access practices Regulatory compliance services enable you to obtain objective, industry-specific guidance about your compliance risks while anticipating and responding to the changing regulatory landscape. We have made significant investment into Disaster Recovery & Business continuity facilities which include data center space, work area recovery space, call center recovery space, dealer room space, and a host of redundant infrastructure. We understand regulatory compliance and the ways our clients can leverage process, IT, people, data, applications, and business models in order to maximize compliance at cost levels which the business can tolerate. Version 2 Copyright Evans Munyuki Page 14
  15. 15. IBM LINKS TO SHAREHOLDER VALUE To complete the Risk Management picture from an infrastructure perspective, IBM provides Event Driven Services that help you address common gaps in your disaster plans so you can ensure that employees, processes and systems recover quickly. These services are: IBM disaster recovery services, and IBM crisis management services. Disaster recovery services help clients address common gaps in disaster planning, with the goal of responding more effectively to a disruptive event and minimizing the costs and time associated with recovery. Crisis management services help clients minimize the impact of unforeseen events, from the minor to the catastrophic, with crisis management services to support your employees, communications and infrastructure. Business Continuity and Resilience Services have an indirect link with the drivers of shareholder value. They help CIOs enhance their risk management and helps them plan for business interruptions, which if unmanaged could result in lost sales, lost revenue, and could even strip a company of its key competitive assets. Version 2 Copyright Evans Munyuki Page 15
  16. 16. Business Transformation IBM LINKS TO SHAREHOLDER VALUE Outsourcing Whereas Infrastructure Some of IBM’s offerings, and how they link to shareholder outsourcing focuses on IT value systems, Business Infrastructure Outsourcing & Hosting Services20 Transformation Outsourcing Infrastructure outsourcing & hosting is the management of focuses on business processes. your applications and IT systems. IBM's outsourcing offerings scope includes desktop outsourcing, applications outsourcing, data center outsourcing, managed hosting, managed storage, network outsourcing, output management, and workforce mobility services. You strategically partner with IBM to manage and operate your applications and IT systems, under an agreement which benefits both the client and IBM. The outsourcing agreement may include the transfer of IT employees and IT assets to IBM. IBM provides service level assurances to make sure the client sees quality of service and can measure it20. IBM can imbed innovation and business transformation into outsourcing deals, enabling customers to derive great According to IBM’s integrated benefit and value from engagements. offering suite, these processes Infrastructure outsourcing include: Services have a direct link with the drivers of shareholder 1 Finance and Administration value. They help CIOs reduce IT costs, and helps them (F&A), better manage their assets. Through access to greater pools 2 Customer Relationship of skilled resources, CIOs can improve IT’s responsiveness Management (CRM) to business request, and support faster speed to market for 3 Supply Chain Management new products and services. Often, for the same or lower (SCM) and Procurement costs, customers can enjoy better services levels. Many firms are also outsourcing services to focus on their core 4 Human Resources (HR) business and be more competitive which helps drive Within each process area, IBM shareholder value. offers the following 3 Business Process services: Selective Managed Services Unlike traditional full-scope outsourcing deals, selective Business Process managed services target specific IT services for Outsourcing (BPO) is primarily an offshore or management by an external provider, usually elements of nearshore model with a high non-core business functions. They are perfect for labor arbitrage component. It companies looking to outsource on a smaller scale21. These is effectively a lift-and-shift smaller scope deals are perceived as less risky than the approach with minimal process traditional full-scope, mega deals. Companies don't have to transformation with gains to hand over all their IT services to a single provider, and they be had from a shared service can retain control of those services they want to. model, or leveraging IBM’s mature methods - even if the Managed Services have a direct services are provided onsite22. link with the drivers of shareholder value. They help CIOs The business benefits of this reduce IT costs, and helps them better manage their assets. model are: reducing a client's Through access to greater pools of skilled resources, CIOs costs and investment in can improve IT’s responsiveness to business request, business processes while and support faster speed to market for new products and improving efficiency and services. For the same or lower costs, clients can enjoy customer satisfaction. better services levels. Version 2 Copyright Evans Munyuki Page 16
  17. 17. 4. IBM Human Resources IBM LINKS TO SHAREHOLDER VALUE outsourcing provides cost- effective, outsourced end- Business Process Services (BPS) is the outsourcing and to-end human resource optimization of specific solutions such as accounts receivable administrative services and or mortgage processing. Highly automated process delivery employee service delivery. leads to standardized scale driven plays22. Where a client can get maximum value is in the area of Business Transformation Outsourcing (BTO). BTO delivers improved business results through continuous strategic change and the operation and transformation of the client's business processes, applications and infrastructure – measured against business outcomes22. Let us take a closer look at each of the four process areas: 1 - IBM Finance and Administration Outsourcing provides enhanced decision support and processes, along with IBM can facilitate the transactional processing that uses our local and/or global transformation for your delivery capability. Finance and Administration are employee-to-company transformed using the collective innovation, world-class skills, experience through and cost savings necessary to provide a flexible and scalable technology, such as the role- network of people, applications and infrastructure to support based portal and enhanced the varying needs of organizations22. call center, and processes 2 - IBM Customer Relationship Management (CRM) including learning, payroll Response rates. Cycle times. Order tracking. Integrated and benefits. Improved customer experiences. Customer care is increasingly a point of employee satisfaction and differentiation for many organizations. While fundamental reduced turnover while industry change is pressuring organizations to reduce costs, customers continue to expect responsive service and unique reducing service delivery experiences22. cost in an integrated, intuitive delivery process is Taking a holistic customer view, IBM Customer Relationship the objective Management outsourcing focuses on more efficient business operations from providing design for the multi-channel customer contact process to improving agent productivity, from systems and data improvement to enabling the sales and marketing organization. The resulting differentiated customer care can reduce costs through increased self-service while increasing revenue opportunities with improved cross-sell, up-sell, and customer retention. Our industry specific solutions address specific customer care needs22. 3 - IBM Procurement outsourcing offers organizations a variety of outsourcing solutions, from customized "start from scratch" solutions to multiple levels of Leveraged Procurement Services - solutions that leverage intellectual capital and result-driven experiences. This solution helps eliminate the paperwork shuffle and enables streamlined processes to deliver efficient operations, savings and end-user satisfaction. For some organizations procurement spend can be as much as 50% of annual revenue, having a significant impact on the bottom line. IBM can analyze procurement spend and leverage our global supplier relationships to improve strategic sourcing, reduce off-contract or maverick purchasing to leverage reduced prices at lower cost per order22. Version 2 Copyright Evans Munyuki Page 17
  18. 18. IBM LINKS TO SHAREHOLDER VALUE IT is more than just a cost reduction target - it can be a revenue growth enabler, a risk mitigation enabler, a productivity enabler, and a speed-to-market enabler. IBM understands IT, and with its IBM Global Financing offering offers fresh ideas for financial solutions. The IBM Global Financing offering helps customers make smarter financial decisions: We can help you conserve cash, lower your total cost of ownership, and support your overall financial objectives33. While at this, we can provide solutions customized to your needs, while taking advantage of the fact that we have created a simpler financing experience from acquisition through disposition. Financing is more than just a great way to acquire IT without a big upfront investment. As part of your overall IT management strategy, financing can also help keep your technologies current, reduce costs, minimize risk, and preserve your ability to make flexible equipment decisions throughout the entire technology life cycle. IBM offers a comprehensive solution - i.e design, build, run and finance the entire solution. Version 2 Copyright Evans Munyuki Page 18
  19. 19. A RANDOM WALK DOWN WALL STREET? Is the walk down Wall Street a random walk? How should managers behave given the various market dynamics impacting the behaviour and results we see on the stock market? In his modern classic on stock market investing, ‘A Random Walk down Wall Street,’ Burton Malkiel14 contends that, though history has shown various examples where ‘the madness of crowds’ led to company over-valuation on the stock market, the markets are efficient, and when we see inefficiencies occur in company valuation, the market does make its due corrections in due time resulting in proper recognition of manager’s performance as custodians for shareholders. We make this point to highlight one key point: Managers should stay true to their effort of leveraging IT as an enabler capable of impacting shareholder value. Company share price will be exposed to various market dynamics, some of which will be out of manager’s control and influence, however IT leaders must remain diligent at their effort to demonstrate IT’s value in the boardroom, and their contribution to shareholder value. Version 2 Copyright Evans Munyuki Page 19
  20. 20. KNOW YOUR BUSINESS - KNOW YOUR INDUSTRY! In order to gain and keep their status as business executives (not just IT-focused-leaders), CIOs must become business advisors who understand how to leverage IT to bring business 21 Do my executive value. peers perceive me as “IT-only” In order to gain a convincing executive presence and trust from or do they view me as a their business leading executive peers, CIOs must demonstrate business peer who has the a strong understanding of their business’ industry, the advantage of understanding competitive forces pressuring the business, customer demands, IT’s value proposition to our and the areas of inefficiencies in the business. business? A good place to begin is the IBM CEO Study of 2008, and the 22 What business drivers IBM study which outlines the CIO implications from the CEO do I need to be aware of and study. what proposals am I making to leverage IT in enabling the We have compiled a list of questions which the CIO (and IT business to respond to these Leadership) should ask and know. business drivers? 1 What sector is my business in? 23 What compliance 2 What industry is my business in? pressures is my organisation 3 What business are we in? exposed to? 4 Who is our end customer? 24 What is the implication 5 What are customers saying about our business? of these compliance pressures 6 How do those comments compare with what our to my business? competitors provide? 25 What (if anything) do 7 If in the banking industry, do we have a single view of the following mean to me?: the customer? Sarbanes Oxley, King II, 8 If in a financial services group, is it easy for our banking Bassel II, PFMS, IFRS, customers to buy insurance from us? National Credit Act, etc. 9 If in the Fast Moving Consumer Goods industry, do we 26 What risks have we have an optimized, efficient, cost controlled supply chain? given thought to, and what 10 Who are my internal-customers as CIO? are our plans to mitigate and 11 Who are my external-customers? respond to those risks events? 12 Who are my stakeholders - people who I normally don’t 27 What is our Business interact with but stand to gain or lose from the services Continuity Management I provide? posture? 13 What are all these people saying about the service which 28 In the event of a my organisation provides? business interruption, do we 14 What matters to my customers? have clear plans to recover our 15 What is keeping my customer awake at night and what Data Centers, clear plans to can I do to make this pain go away? recover our Work Area and 16 What is our positioning in the industry? Are we a leader Call Centers at alternate, or a laggard? available, accessible sites? 17 What is our business strategy? 18 What is my CEO saying about our market positioning? 19 What is my CEO saying about entrance into new markets? 20 What are the industry trends and how will we respond Version 2 Copyright Evans Munyuki Page 20
  21. 21. KNOW YOUR BUSINESS - KNOW YOUR INDUSTRY! 29 Does every employee in the organisation know what to do in the event of a business interruption? 30 What kind of investments are we making into the provision of Business Continuity Management ? 31 What kinds of returns are we getting for those 46 Has my company investments? been clear on what it does 32 Is that the best use of our shareholder’s monies or are best and am I clear to my there smarter and less expensive ways to achieve the organisation on our mandate same end result? to go and make this happen? 33 Who are my IT strategic partners - companies and 47 Do customers perceive individuals who are committed to help me solve my my company as being easy to problems? do business with, and what 34 Do they have skin in the game? role is my IT organisation 35 Have I taken the time to solicit the value proposition playing to better enable this? from my IT vendors in order to form objective points-of- 48 Has my company view on who my Strategic Partners are? simplified its offerings, and am 36 Are my IT vendor choices congruent and in alignment I playing a key role in reducing with my strategic partnership proclamations? the speed to market for 37 Have I taken the time to sit my strategic partners in one bringing new offerings to room to explain my company’s strategy? market? 38 Have I taken the time to make sure my strategic 49 Am I close enough to partners understand what my mandates are? the voice of the customer? 39 Who (as demonstrated by their behavior, input, and 50 What is my IT maturity results) is losing sleep with me? Who has made it their and contribution to the personal mission to make sure I am successful? To make business relative to other sure my company gains competitive edge which will set companies in my industry? us apart in our industry? 51 What contribution am 40 What is my contribution to my company’s Shareholder I making in helping simplify Value? the business? Simplifying our 41 What am I doing to help grow sales? processes, our applications, 42 What am I doing to help better manage my our architecture, our organisation’s assets? infrastructure, our 43 What am I doing to reduce total cost of ownership for organisational constructs, our my corporations IT assets? ordering processes, our supply 44 When my managers prioritize projects, do they have chain, our customer Shareholder Value in mind? interfaces? 45 When my managers prioritize projects, do they have a 52 What objective clear view of what our customers are saying? What my analysis do we do at what CEO is saying? What my business executive peers are intervals in order to gain an saying? objective insight on the question above? Version 2 Copyright Evans Munyuki Page 21
  22. 22. CONCLUSION We began this paper by asking “Can IT as an enabler really impact shareholder value?” Yes, IT can impact shareholder value. It is very important for business and technology leaders to understand and leverage IT as a lever to influence the drivers of shareholder value. It is also important for IT leaders to know the types of risks that business is trying to manage, and for them to understand their role in the same. A focus on affecting business results is how CIOs will be able to demonstrate that they deserve a seat in the boardroom, and for CIOs who already have it, this is how they will be able to demonstrate that they are true business executives, not just glorified techno geeks. :-) About the author: At the time of the initial writing of this white paper (2007), Evans Munyuki was the Go-to-market Executive for IBM’s Integrated Technology Services Business in South Africa. He was with IBM in South Africa and the USA for over 15 years. (2010 Update) Evans Munyuki is the Group Chief Information Officer (CIO) at the Kelly Group, a Services Group of companies with 11 Companies and 23,000+ employees. Evans is a Non-Exec Director on the IoD Board of Directors in South Africa. He is a member of the Institute of Directors (IoD), and has held several business & management certifications including certification as an IoD Certified Director, an IBM Certified Executive Project Manager, and an IBM Certified ACT Consultant. Evans holds 3 degrees in Electronics Engineering, Project Management, Business Administration, and a minor in Computer Information Systems. You can contact Evans at or +27 (0) 83 288 4391. Version 2 Copyright Evans Munyuki Page 22
  23. 23. 1 2 3 4 5 6 7 8 9 Kees Klokman, Michael Zwiefler, IBM Global Technology Services EMEA 10 Kees Klokman, Michael Zwiefler, IBM Global Technology Services EMEA 11 12 13 14 Reference a Random Walk Down Wallstreet 15 16 www. c l i f f e d e k k e r. c o m 17 18 “10 Things you need to know about compliance.” An IBM Whitepaper; July 2007; Julie Gable 19 20 21 22 23 24 "The Impact of Catastrophes on Shareholder Value." Fory F. Knight & Deborah J. Pretty. The Oxford Executive Research Briefings. 25 Reputation & Value, Dr Deborah J Pretty, Oxford Metrica, June 2001 26 Dr Deborah J Pretty, Oxford Metrica 27 28 29 King Report on Corporate Governance for South Africa - 2002, Institute of Directors Publication 30 31 32 33 34 Version 2 Copyright Evans Munyuki Page 23