Accelerate Value Creation: The Virtuous Cycle of Using Technology to Maximize Business Value


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Explore the relationship between IT investment and performance and productivity gains. This paper describes how companies can best maximize value from their IT investments and can take part in the virtuous cycle of IT.

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Accelerate Value Creation: The Virtuous Cycle of Using Technology to Maximize Business Value

  1. 1. SAP Executive Insight AccelerAte VAlue creAtion The VirTuous CyCle of using TeChnology To MaxiMize Business Value
  2. 2. Corporate iT spending continues to grow. since 1994, the iT spending per worker has more than doubled, from us$3,500 to us$8,000 per worker. annual productivity growth in u.s. companies roughly doubled in the same pe- riod, after experiencing 1.4% growth for 20 years (harvard Business review, July–august 2008). But in today’s econ- omy, competitive advantage is short-lived, and leading companies recognize that continued investments in the vir- tuous cycle of technology are required to stay ahead. understanding how iT can drive value and competitive ad- vantage for your company is important for executives in all industries. This saP executive insight explores the rela- tionship between iT investment and performance and pro- ductivity gains. further, by answering the following ques- tions, it describes how companies can best maximize value from their iT investments and can partake in the vir- tuous cycle of iT: • Is there a virtuous cycle that drives and accounts for the increase in iT spending? • How do companies leverage IT investments to drive competitive advantage? • Do all companies extract equal value from their IT investments? • How are leading companies maximizing the return from iT investments? 2 SAP Executive Insight – accelerate Value Creation
  3. 3. eXecutiVe AGenDA aT a glanCe The Virtuous Cycle of IT Best Practices Maximize Implementing the Full Value Value Creation Life Cycle research has demonstrated the exis- tence of a “virtuous cycle” in iT adop- investing in technology is only half the Companies that successfully invest in tion. firms that implement enterprise game. investing in iT without analogous the virtuous cycle and leverage best systems and reinvest the realized improvements in the management prac- practices to drive value manage their iT benefits into complementary, next- tices around iT will lead only to a slight projects along a value life cycle. Com- generation iT projects derive acceler- increase in productivity. leading com- panies identify key benefit areas and ating benefits in terms of productivity panies that invest in iT while enhancing benchmark themselves against com- and performance. This cycle typical- management practices and governance parable firms in the value discovery ly gets started with an investment in have experienced sustainable results in phase. They understand that an iT proj- core enterprise software that simpli- increased value and improved produc- ect needs to be not only on time and fies a disparate application landscape tivity, in some instances as much as on budget but also on value. similar to into a homogenous integrated platform. a 20% boost (reported in stephen J. any other capital investment, the proj- investments in applications that extend Dorgan and John J. Dowdy, “When IT ect is not done when it goes live. By to processes beyond the enterprise, lifts Productivity,” The McKinsey Quar- tracking the value realization and lever- such as customer relationship man- terly,, aging techniques such as benchmark- agement (CrM) or supply chain man- november 2004). ing and organizational best practices, agement (sCM), come next. once the firms can optimize the value-creation core processes have been implement- agility in management practices com- potential and further drive the virtu- ed, the enterprise has a sound basis to bined with flexible business process- ous cycle. This critical step of develop- introduce analytics and build specific es drive the increased value creation ing the structure and processes to align composites to address very company- for your project. enabling these chang- people, processes, and technology is specific processes that maximize the es with iT can amplify the speed at essential in the value optimization of potential value creation. When you pur- which you can do business too. Coca- an organization’s business-driven iT chase is just as important as what you Cola enterprises and Valero energy investments. purchase. By linking the iT strategy to Corporation are two best-case exam- the business strategy at the outset of ples of how companies can move to the business, your iT infrastructure can more effective and efficient operations better enable growth. through investments in iT and business process innovations. SAP Executive Insight – accelerate Value Creation 3
  4. 4. the Virtuous cycle in it OpTImIzIng prODucTIvITy anD perfOrmance firms that implement enterprise sys- research conducted by faculty at itive advantage and increased agility tems and realize the benefits make new york university, Massachusetts to meet customer demand, and those next-generation iT investments and institute of Technology, and geor- companies with a broader footprint in business process changes to derive gia institute of Technology shows related enterprise software, including even greater benefits in terms of that companies that implement enter- sCM and CrM, can maximize more productivity and performance. Top- prise resource planning (erP) systems value from their investment. aligning iT performing companies invest in a value aligned with the overall business strat- and business strategy around a maturi- life cycle that includes the following. egy enjoy performance gains unknown ty model of investment results in mov- to firms who do not implement these ing up the value chain to applications Enterprise System Investments solutions. that extend your enterprise. accord- ing to the faculty research mentioned What are your company’s iT needs Extended Enterprise Software above, firms that implement extended to drive profitable growth in the busi- enterprise software after having adopt- ness? By focusing on the alignment of Ceos clearly see iT as an ultraneces- ed erP systems experience addition- business needs and how iT can sup- sity that will sharpen their competitive al benefits. port these outcomes, your company edge by accelerating innovation and will be better positioned to take advan- enabling agile strategy execution, two Performance Optimization and tage of the value drivers that iT, and of the most important success factors Measurement specifically enterprise and related soft- to succeed in a changing business envi- ware, delivers. a company that decides ronment. Those companies focused on according to a report by the harvard to implement enterprise software to minimizing latency between business Business review (July–august 2008), standardize operations and increase strategy and execution and increasing companies only achieve about 60% efficiencies in the business is on the the speed of value from innovation will of the potential value of their strate- path for success. a company that pur- come out ahead. gy because of gaps between planning sues an enterprise software strate- and execution. as the pace of business gy focused on line-of-business needs iT has become increasingly central to continues to increase, the modularity of based on a common platform and with every business strategy, and with the business processes will enable you to governance practices in place is in sol- rise of business networks, the case for remain agile to best execute your strat- id position to achieve profitable growth. aligned iT is stronger than ever. net- egy. for companies to maintain market works are a driver of greater compet- status or emerge as the new market lead, this open iT infrastructure must enable the exchange of information, results • 16% productivity increase processes, and innovation to capture • 10%–30% increase in the collective intelligence of the entire process efficiency results business network. Productivity • 37% greater labor productivity • 13% higher inventory efficiency Platform* results • 6% higher asset utilization employees must be empowered to • 10% greater labor productivity make informed decisions by convert- • 13% higher inventory efficiency extended enterprise ing raw data into tangible information, • 15% higher asset utilization software * Platform is defined as a business ensuring better decision making and process platform comprised of enterprise a technology foundation and execution aligned with strategy. The enterprise applications software enablement of closed-loop business performance optimization allows a firm Investment to get real-time insight into its busi- Figure 1: Investing in IT to Drive Competitive Advantage ness processes to adapt its strategy to sources: research by Massachusetts institute of Technology, new york university, and georgia changing business conditions. Institute of Technology, 2007. Sap cooperated with the university of St. gallen, Institute of Information Management (iWi-hsg). 4 SAP Executive Insight – accelerate Value Creation
  5. 5. Best PrActices MAXiMize VAlue creAtion cOmmOn, alIgneD BuSIneSS prOceSSeS are essenTial Through the alignment of iT and the panies across almost every industry dollar by increasing the productivity of business units, companies build out are adapting new business models for each worker the software touches. common processes aligning on one delivering and monetizing their prod- platform for maximum value return on ucts and services to develop broader their investments. These companies competitive advantages. as the model Maximizing Value: In Practice are well versed at the following. of the enterprise changes, the iT infra- structure must change with it. By changing business processes to Planning for Growth align with new advances and invest- Timing is critical at this stage. Those ments in iT, a firm can dramatically are there trends in your industry that companies that purchase too late in change the value derived from the new you need to capitalize on? are you their growth cycle are at a disadvan- technology and efficiently scale opera- making significant changes to your tage as the business ramps up; so tions profitably. business model? To maintain your com- as the strategy is being developed, it petitive edge, understanding why you is critical to align the business and iT Coca-Cola enterprises (CCe) signif- need to make an investment at a spe- needs to build out common processes icantly improved the efficiency of its cific time is critical to your success. aligned on one platform where your iT order fulfillment by innovating pro- With increased competition and dynam- infrastructure contributes to the over- cesses in conjunction with new invest- ic, market-driven requirements, com- all profitable growth and drives faster ments in technology. after its brand achievement of competitive gains. portfolio rapidly increased from 150 to Management’s Big role more than 450 beverages, the compa- % increase in total factor productivity Investments in Complementary ny’s order fulfillment process became improving management Process and Management more complex and warranted redesign. practices increases productivity Changes Coca-Cola enterprises implement- more than investing in iT... ed an interactive order-picking system ... while doing both Technology investments are one with voice recognition technology tied yields highest increase source of productivity growth, but to to saP® software. The new automat- Management-practices score + make the desired impact on the per- ed process, which gives CCe real-time, 75th formance of the company, it should be fully integrated access to orders, drove percentile +8% +20%1 and above combined with complementary invest- order accuracy to 99.8%. ments in human capital and organi- zational change management. There Valero energy transforms new acqui- 25th is inherent value in these additional sitions with investments in iT and percentile 0 +2% investments in new business process business process improvements, con- and below and other organizational practices, and verting those resources into healthy without them the investment in iT would profits through rapid modernization – Intensity of IT deployment + be a moot point. and more efficient operation of under- 25th percentile 75th percentile valued assets. Valero can absorb an and below and above firms that adapt organizational pro- acquisition and integrate its process- 1 for 9 out of 10 companies whose management-practices cesses to increase information flow es into the corporate structure within scores and levels of iT deployment are both in top quartile. across business lines will achieve 90 days – a task that takes many firms Figure 2: How IT Affects Productivity greater success with the iT invest- 12 to 24 months. Valero has the lowest sources: exhibit from “When iT lifts Productiv- ments than if they only launched the iT cost structure in the entire refining ity,” november 2004, The McKinsey Quarterly, software alone. additional investments industry – 0.14% of sales, well below © 2008 McKinsey & Company. all rights reserved. reprinted by in change management enables firms the refining industry average of 2.0% – permission. to generate more business value per iT an achievement it attributes to unparal- leled business process efficiencies. SAP Executive Insight – accelerate Value Creation 5
  6. 6. iMPleMentinG the Full VAlue liFe cycle Measuring suCCess for iT inVesTMenT in the 1990s, projects were measured you can achieve as well as produc- structure and processes to align peo- on time and on budget. in today’s busi- tivity gains that are possible with the ple, processes, and technology toward ness environment, executives and implementation. maximizing the value of an organiza- shareholders care about the value of tion’s business-driven iT investments. investments. on time, on budget, and Value Realization firms also need to assess how the on value are the measures of success implementation and processes com- for an iT investment and project. realizing value from iT investments pare to best practices. it is impera- is paramount, but how does a com- tive to look for opportunities where The implementation of iT is an oppor- pany best attain this? studies have the business can derive more val- tunity to follow best practices for your shown that there is a critical disconnect ue from current investments through industry and to reengineer and optimize between projected benefits in business shared services and centers of excel- business processes. The road map to cases for iT investments and actual val- lence and reduce costs while increas- value focuses on the following. ue achieved, because so many firms ing customer service and organizational focus on going live with a project rath- effectiveness. Value Discovery er than its value delivery. an saP/ asug best-practice survey on the abil- Budgets sometimes stop after a proj- it is most important to understand what ity to capture the projected benefits of ect goes live, but you need to be able issue you are trying to solve in your an IT project found that 73% of compa- to make changes to the infrastructure business and how an investment in iT nies do not quantitatively measure val- to run your investments at full capacity. can help. What are the solutions that ue postimplementation. This optimal level of strategic operation will best support your business strat- needs additional investment to fine- egy, and what value can be achieved? it is critical to develop transformational tune the system and to maximize value. Quantifying iT decisions and the antic- strategies to mobilize, deliver, and mea- ipated returns can be the hardest hur- sure business results based on insights dle to overcome. setting the stage into leading practices and benchmarks. for management investment approv- Best-practice value identification, trans- als includes a thorough review of risk formation, and measurement approach- mitigation and deployment challeng- es include: on Time, on Budget, on Value es and an understanding of best prac- • incorporation of business case objec- tices and the desired “to be” state, as tives throughout the project life cycle Discove well as benchmarking business pro- • Communication and documentation lue ry cesses, both inside and outside your of process objectives and project Va industry. all of these items contribute success criteria to a solid business case and return on • use of both existing and new mization Value Re investment, and they are necessary to program-specific financial and oper- Value Life-Cycle Management achieve the consensus and resource ational key performance indicators, allocation for the project. based on the business case objec- pti tives, to measure project success ali O za once you comprehend where you Val ue tio n need to get to at a minimum, you can Value Optimization engage in the next level of review, which includes deriving the value of optimizing the applications after going Best-run Businesses the solution. This is the stage where live is a critical stage in any project the best-practice data can give you a from a value-capture perspective. This Figure 3: Achieving Business Value: On-Value, strong idea of what cost efficiencies phase includes the development of On-Time Performance 6 SAP Executive Insight – accelerate Value Creation
  7. 7. how Do you Get the Most VAlue FroM it? MaKing The VirTuous CyCle WorK for your CoMPany getting the most of iT is not a one-time • Benchmark yourself and com- shot but a continuous and evolving pro- pare your performance. identify- Further Reading cess that includes not just the invest- ing areas with the greatest business To learn more, please visit ment in iT but how you address and opportunity by benchmarking your or contact your review the opportunities for improve- organization’s processes against a saP representative about the ment – to your management practices, comparative group of companies is a following: your business processes, and your val- critical step. • Tasty Baking – Business Transfor- ue assessment. Companies that imple- • Develop your business case with mation study ment enterprise business software well-known business metrics. Build- • Wolverine World Wide inc. – in pursuit of a value-driven strategy ing an ironclad business case for your Business Transformation study can create a stream of business ben- iT investments is a powerful means • Valero energy – Business efits. What factors will propel a com- to create alignment in your organiza- Transformation study pany to the next level of competitive tion around common goals, quantify- • saP Value realization: achieving advantage? ing both the tangible and intangible Business Value from your iT value proposition of the project. investments – asug/saP Build on your current platform. Benchmarking and Best Practice • Use ERP to expand your business Organize your project around value survey processes and integrate your busi- delivery. ness. it is essential for iT to express • Institute a value management office. its relevancy in business terms. Key components for success include About the Authors • Leverage your core processes to input from the business, manage- Chakib Bouhdary is chief value drive innovation. a portfolio ment buy-in, and prioritization of proj- officer of saP ag. he is the approach, driving standardiza- ects to maximize the value of the founder of saP’s value engineering tion of processes, frees up time opportunity. framework. his mission is to make and resources for more strategic • Integrate dashboarding into man- every saP customer a best-run innovation. agement practices. over time, business. over the past six years, • Continue to invest in talent and benchmarking allows you to track he has built a world-class organiza- change management. additional your performance gains and measure tion of professionals that is focused investments in your workforce and your improvements, documenting the on creating value along the entire iT change-management practices result value that you achieved from your investment cycle for prospects and in more business value per iT dollar investment. customers. by increasing the productivity of the • Ensure every project is not just stacy Comes is a director in saP’s firm. on time and on budget but, most global communications team important, on value. Closing the focused on thought leadership Design your strategy to maximize your loop on your original business case strategy. she concentrates on business value. is a critical task. Value identifica- creating value-oriented thought • Build and communicate a three- tion, transformation, and measure- leadership and working with year road map that aligns business ment approaches are key to tracking strategic customers to validate and IT. it is essential to treat your iT success. topics and best practices. investment as a “portfolio,” complete • Develop the right rewards to drive with infrastructure and transactional, the right behavior. showcase your informational, and strategic assets, project success internally and exter- and to look at it for the long run, not nally; it is critical for the executive just for the immediate situation. sponsors to know the eventual out- come of the project in business terms. SAP Executive Insight – accelerate Value Creation 7
  8. 8. /contactsap About This Research research for this paper was conducted saP also embarked on a research pro- by faculty at new york university, gram with the university of st. gallen to Massachusetts institute of Technology, hear directly from organizations about and georgia institute of Technology. how they approach service-oriented addressing the question “Does IT cause architecture (soa) to adapt to rapidly productivity, or are productive firms changing market needs and how they spending more on iT?” the researchers calculate business cases to justify examined the effects on productivity and investment in soa. This study shows performance of enterprise system that many soa projects start without an investments in 698 companies in all explicit business case, but the need for market segments. The noted benefits proving value increases rapidly down the inspire future adoption of extended road. further areas of potential benefit enterprise systems and investments in explored in the research include user organizational capital, resulting in productivity and business process inno- increasing performance improvements. vation as well as time to market, support for mergers and acquisitions and out- sourcing, and iT productivity. 50 091 755 (08/10) © 2008 by saP ag. all rights reserved. saP, r/3, xapps, xapp, saP netWeaver, Duet, partneredge, ByDesign, Sap Business ByDesign, and other saP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of saP ag in germany and in several other countries all over the world. Business objects and the Business objects logo, Businessobjects, crystal reports, crystal Decisions, Web Intelligence, Xcelsius, and other Business objects products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Business objects s.a. in the united states and in several other coun- tries all over the world. Business objects is an saP company. all other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. national product specifications may vary. These materials are subject to change without notice. These materials are provided by saP ag and its affiliated companies (“saP group”) for informational purposes only, without representation or warranty of any kind, and saP group shall not be liable for errors or omissions with re- spect to the materials. The only warranties for saP group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. nothing herein should be construed as constituting an additional warranty.