Management Imperatives To Make IT Business-Smart

A Success Story - Why it Worked? – Asian Paints Vs. Nike

Why Companies Don’t Get IT

A Model for Managing IT - Cisco Case

The Cisco Inventory Wreck: How Did It Happen?

Lessons for Making IT Business-Smart

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

Summing Up

A Big Splash In Wall Street in March 2001... Nike Says Profit Woes Due To IT Philip Knight, Nike’s Chairman and CEO, blamed the “complications arising from the impact of implementing our new demand-and-supply planning systems and processes” for the shortages of some products and excess amounts of others as well as late deliveries. Result: Profits Fell Short of Estimate by 33% I guess my immediate reaction is: This is what we get for $400 million? Source: Computerworld, March 5, 2001

Some Causes for the Nike Problem

BIG Global Supply-Chain Project

Suppliers in Indonesia, Malaysia, China…. A Real Challenge

High degree of Customization

i2’s Supply Chain application had to be linked with SAP’s ERP and Siebel’s CRM systems

Wide range of footwear products in a multitude of styles and sizes

Complexity in mapping the supply-chain software to the company’s internal business processes

A Success Story: Asian Paints IT Funded Global Acquisitions

$20M investment in IT

Benefit:

$80M operating cash flow generated over the past 3 years

Implemented SCM from i2 before ERP from SAP

Inventory Turns: 11.6 in 2002 vs. 6.5 in 1998

 ---------- SUCCESS ---------  FAILURE @ ASIAN PAINTS FACTOR @ NIKE Restricted to India Number of locations Suppliers across the globe Decided to install SCM software before ERP software Top management insight Did not recognize the complexity of a global Supply Chain Project Phased – First SCM, then ERP, last CRM Implementation strategy Three packages simultaneously – Nike IT staff spread thin Restructured in 1998, before SCM Project – only modest customization needed in the software Organization issues Heavy customization of i2 software to fit Nike’s business processes – no pilot test due to aggressive time-table i2 played a proactive role - suggested implementing smaller modules one at a time. i2’s role i2 did not adhere to what it did usually – it adopted a big-bang rollout approach

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 blurred the potential of using IT for MANAGING the Business YET . .

The Bottom Line

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

- James Martin, The IS Manifesto

WHY NOT ???

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

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

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

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

Treat IT as a Traditional Business System - Does Not Require “T” Knowledge Business Strategy & Planning Product Development Operations Customer Service IT Strategy & Planning IT Applications Development & Implementation IT Infrastructure Operations User Support Typical Business Functions Typical IT Functions IT should be managed like any business system to deliver value.

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.

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

Result Contribution 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

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.

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)

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.

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.

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.

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

Key Steps taken by Cisco Management

CEO made the project one of the company’s top 7 goals for the year and tracked its progress in executive staff meetings, company-wide meetings and board meetings

Oversight by Top Management

Project was Not An IT-only Initiative

Hand-picked the best business people to work with IT personnel on the project

Team of 100 members placed onto one of 5 tracks (process areas)

Key Steps taken by Cisco Management

Implementation Responsibility at Two Levels

Executive Steering Committee composed of VPs of Manufacturing and Customer Advocacy, CIO, Corporate Controller and Senior VPs of Vendors

Project Management Office headed by business manager overseeing the 5 tracks, each of which had a business leader and an IT leader jointly overseeing the work of the team

The “Cisco After” - $2.2 B Inventory Write-Off in Apr 2001

How could a posterchild of E-Business, with all the publicity about the brilliant integration of its systems

-“ the company could close its books in 24 hours, any day of the year”-

… Not stop building inventory worth billions of dollars that could not be sold?

The Great Inventory Wreck of Cisco:

Blamed the economy –

compared it to an “unforeseeable natural disaster”

- Sales plunged 30%

- 8,500 people laid off

- Stock sunk to $13.63 on April 6, 2004,

from $82 in March 2000

The Demand Chain CISCO Ford Boeing Merrill Lynch Auto Dealers Auto Buyers Airlines Air Travelers Stock Traders

Demand Chain Management

Shifts in end-stage demand should drive production planning and inventory decisions

Problem: Available information is of varying levels of accuracy and time discrepancies

B2B firms must understand that the business drivers of their “B” customers are different – must track these drivers for the “20%” key customers accounting for 80% revenue

Cisco Miscalculated Demand

Cisco’s customers placed multiple orders on Cisco and its competitors during the Year 2000 boom, when network gear was hard to come by, even though they would ultimately make just one purchase – from whomever could deliver the goods first .

Because of long lead times, customers ordered more than they needed to, as a sort of insurance policy.

Cisco’s order books did not hence reflect the real demand. When the economy slowed down abruptly, these orders evaporated.

Over-reliance on IT Systems

Other networking companies with far less sophisticated tools saw the downturn coming, and downgraded their forecasts months earlier – Cisco Did Not!

Cisco’s highly touted IT systems contributed to the fog that prevented it from seeing what was clear to everyone else

… Blinded by their own good press

Big Problem with Cisco’s State-of-the-Art Networked Supply Chain Management Systems

… Outsources over 70% of its production to Contract Mfrs

… “ 55% of orders flow from Suppliers to Customers without even touching us”

But: No Visibility into the Demand Chain

Cisco Compounded The Problem!

To lock in suppliers of scarce components during the boom, Cisco placed large orders on multiple contract manufacturers based on demand projections from the company’s sales force – which were artificially inflated .

Factories of Cisco’s Tier 2 Suppliers are mostly located in Southeast Asia, necessitating long delivery times.

- JIT is really “ Nearly ” JIT: Shipping Times are NOT Real-Time!

Just because the faucet was turned off at Cisco, the company could not renege on orders with its contract suppliers which were placed months earlier because of the long lead times.

Cisco’s Vaunted Management Process Did Not Measure Up!

Inflated sales forecasts from Cisco’s customers due to the shortage environment in 2000

Must have corrective mechanism to adjust for the artificial inflation in salespeople’s forecasts during shortage

Dell has a “contingency planning” model for training sales people to get demand estimates from “B” customers

Valuable to institute a reward system for salespeople to provide “good” sales forecasts

Must track business drivers of key customers

2. Forecasting models based on growth:

40 strength quarters of stout growth;

last 3 quarters of extreme growth (66%)

No “What If” analysis if growth assumptions did NOT materialize

Cisco’s Vaunted Management Process Did Not Measure Up!

3. Models ignored macroeconomic factors such as debt levels, interest rates, the bond market, etc, that overshadows the entire communications industry

“ We never built models to anticipate something of this magnitude” - CEO admitting to The Economist , April 2001

4. Did not encourage key suppliers to share market knowledge

Cisco’s supplier, Solectron, saw a growing disparity between what they and their other customers thought was happening and what Cisco said was happening

“ Can you really sit there and confront a customer and tell him he doesn’t know what he is doing with his business” - CIO Magazine , August 1, 2001

Cisco’s “Sense & Response” Mechanism – Missing during Sept. – Nov., 2000

By Sept. 2000, Cisco’s Tier 1 and Tier 2 Suppliers were strategizing for a downturn in the economy: either a “V” (deep, short but right back up) or a longer, more serious “U”-shaped recession

But Cisco remained upbeat

“ We haven’t seen any sign of a slowdown”…

Chief Strategy Officer, Nov. 2000

“ I’ve never been most optimistic”… CEO to analysts, Dec. 4, 2000

Why did Cisco executives not sense the looming problem in the “virtual close” system?

The system forecast a slowdown in Japan’s economy in 9 months before competitors did

It enables decision-makers to have real-time access to detailed operating data.

Cisco saw the problem a little too late on Dec. 15, 2001.

Actual sales had crossed under its projections in the system… Decided to seriously curtail expenses

3 weeks later, a hiring freeze was on!

What was Cisco doing during Sept. – Nov., 2000?

Did they not see that the actual sales line and the forecast line were converging?

Cisco’s “Sense & Response” Mechanism – Missing during Sept. – Nov., 2000

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

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

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

IT is not “little i, Big T”

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.

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.”

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

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

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.

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

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

Cemex -

O ne 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

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

The Beginning - A New CEO in 1985 Business Issues 1. An overly diversified company - Also owned hotels, petrochemical plants, mining companies, etc 2. High volatility of the Mexican economic and financial systems 3. Price pressure from more efficient multinational companies 4. 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!

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

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

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

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 .

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

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

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.

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%

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)

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

Effective Management Strategies Used 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

Operational Strategy

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

Effective Management Strategies Used 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