Sourcing Insights with a Dutch Twist

Beyond Two-Speed IT – Part 3

noreply@blogger.com (François Zielemans) — Fri, 08 Sep 2023 10:52:00 +0000

Summary

This blog is about shifting gears and the ability to offer cars in other colors than T-Ford-black. It is the third and last part of a blog focusing on the importance of translating market and business context into the value proposition offered by IT.

You can find the first part here and the second part here.

FedEx and UPS dominate their markets, again using slightly different value propositions. Compared to UPS, FedEx offers its customer more flexibility at a slightly higher price point. More price sensitive customers opt for UPS and the more standardized value proposition that comes with it. More pronounced is the difference between Walmart and Amazon. The first has its roots in physical retail outlets while the second started as a native digital business model.

Differentiation can also be observed at an operational level. Marketeers want to try new things on a daily basis, while the controllers and bookkeepers of the finance and administration (F&A) department prefer stability and predictability. Marketeers enjoy rally and off-road racing, while controllers tend to take the train for its excellent safety record. When it comes to IT, the marketeers want to be behind the steering wheel with IT as the co-driver, knowing that only as a team they can win. For the controller, a Commercial of the Shelf (COTS) SaaS solution will do just fine.

The higher the technology-density of the market, the more important it becomes for IT to sense and act on the relative importance of co-creation, speed-to-market, flexibility, robustness, efficiency or other sources of contextual value. In hybrid and native digital markets this value can be equal or even surpass the base value represented by the functional requirements

Less uniform, more differentiated represents the ability to deliver context-aware IT solutions.

At company level, think of effectively positioning IT as either a Faithful Servant, Business Partner, John Average or Prima Donna. At operational level, the two key archetypes are Entrepreneurial IT and Foundation IT. The first is also known as ‘Strategic IT’or ‘Enabling IT’, but in hybrid and digital markets it is entrepreneurship that is required from IT. Being an entrepreneur means ‘one who undertakes an endeavor’ or an ‘enterpriser’ (I), a far better term when business and IT are together in pursued of more revenue, profit or less strategic risk.

Foundation IT, also known as ‘Transactional IT’ or ‘Factory IT’, is the traditional sweet spot of the IT department. Even though most consider it less sexy than Entrepreneurial IT, the majority of companies’ revenue and margin is generated by business processes enabled by this part of the IT portfolio. Entrepreneurial IT is in most cases a source of expected future cash flows, funded by current cash flows enabled by Foundation IT. The latter’s portfolio also contains the capabilities required to ‘glue’ IT systems together, like the Enterprise Service Bus, and the platform required by Lean and Business Process Management initiatives. As such, it acts as the solid foundation required by other initiatives to succeed.

To survive, companies need both flavors, differing only in the relative amount.

Notes and references

(I) Technically, the term should be intrapreneur as IT would be acting as in entrepreneur within the company. As this term is not widely used, I use the more common term.

Further reading

Enabling IT and Factory IT are introduced in the McKinsey article Reshaping IT management for turbulent times. It explicitly covers the importance to differentiate between ‘fast’ and ‘slow’ change.

The Harvard Business Review article Mastering the three worlds of information technology from 2006 describes three varieties of work-changing IT. The article relates investments in IT to organizational change, but does not differentiate between ‘fast’ and ‘slow’ change.

One of the first articles emphasizing the importance to differentiate is from Peter Weill: The relationship between investment in information technology and firm performance in the manufacturing sector. Ph. D. dissertation, New York University, New York.

Beyond Two-Speed IT – Part 2

noreply@blogger.com (François Zielemans) — Fri, 08 Sep 2023 10:50:00 +0000

Summary

Markets move at different speeds and in different directions, constantly reshaping the technology-related capabilities required by the business. In the second part, the difference between Customer Intimacy strategy and Operational Excellence strategy is used demonstrate that ‘differentiation’ is more than choosing Agile over Waterfall development.

The first part of this blog dedicated to market and business context is here.

Dell was founded in 1984 and was added to the Fortune 500 in 1992. Its key to success was building direct relationships with the customer via the internet. At the time, most competitors targeting consumers via analogue sales channels, such as brick and mortar shops. Selling directly to the customer also enabled Dell to build-to-order instead of the traditional build-to-stock model.

It kept waste to a minimum and allowed the customer to choose from a wide selection of configuration options. Dell’s pursued a customer intimacy strategy, contrary to the operational excellence strategy of its competitors (I). For the latter, price was the main differentiator while Dell targeted customer looking for choice and flexibility. Even though Dell changed its strategy around 2008, it is still a classic example of a customer intimacy focused business model.

Dell and its competitors all required a customer relationship management (CRM) solution, an enterprise resource planning (ERP) system and solution to manage the supply chain. At first sight, one might think that the choice between a customer intimacy strategy or operational excellence strategy only affects the customer-facing part of the company (e.g. Dell B2C, competitors B2B). Production, logistics and other downstream value chain activities remain shielded from the market.

This is not the case as Dell’s strategy translates into a build-to-order value chain, very different from build-to-stock. A build-to-order business model directly targeting B2C segments has to be far more agile and tightly integrated than a build-to-stock B2B business model. Walmart orders thousands of PC’s with a specific configuration, using an attractive price point as the primary differentiator.

Also most law firms pursue a customer intimacy strategy, competing fiercely among each other to attract and retain customers. The accompanying high cost of customer acquisition results a drive to quickly increase the share-of-the-wallet (SOW). To do so, it is crucial adopt a strong customer-first mentality (Table 1). The specific wants, needs and journey of the customer is leading, the business processes and, therefore also the IT value propositions, follow. Here, the strategic context IT has to operate in is shaped by the drive of the business to offer a seamless extension of the customers’ business process or journey through domain knowledge, customization and flexibility.

Table 1: Translating business strategy into IT positioning (source: book Digital Manifesto).

The starting point for a company pursuing an operational excellence strategy is very different.

Cost leadership requires a standardized product portfolio enabled by a relatively uniform set of business processes and IT solutions. The compelling reason for customers to buy is not customization, but price. The strong focus on cost and economies-of-scale affects every decision the business and IT make.

Where the CIO employed by a law firm of hospital may opt for a best-of-breed sourcing strategy, the CIO of a telecom, budget airline or 3rd party logistics company will consider large scale outsourcing to leverage on the scale of IT service providers. Similarly, both CIO’s will make different choices regarding custom-build software versus commercial off-the-shelf (COTS) software, waterfall versus agile development, hard control versus soft control environment and so on.

In other words: the business context and strategy shape every aspect of the IT Business model.

Notes and references

(I) According to Treacy and Wiersema, a company has to focus on one of the following three generic value disciplines: Customer Intimacy, Operational Excellence or Product Leadership. The value disciplines are covered more in-depth in the book and here.

Beyond Two-Speed IT – Part 1

noreply@blogger.com (François Zielemans) — Fri, 08 Sep 2023 10:45:00 +0000

Summary

Markets move at different speeds and in different directions, constantly reshaping the technology-related capabilities required by the business. This blog is the first in a series covering the third principle of the Digital Manifesto.

When in New York, searching for a restaurant on your mobile yields those nearest to your current location. If your search history indicates you like Chinese food, the results will highlight those.

To create this kind of personalized experience, Google Now, Cortana and Siri combine several data sources, such as location and past usage patterns, to deliver a personalized experience. The capability to show the restaurants in New York instead of Moscow reduces the ‘search stress’ faced by customers and the saved time is a source of customer benefits.

The business has a similar expectation. When requesting a new IT solution, the context, such as stable versus emerging market, or having little or intense competition, is at least as relevant as the functional need. An application with a world-class user experience and feature set is a failure when launched after the competition has seized the market.

At solution-level, the business context has to be reflected by both the design (e.g. non-functional requirements) and realization and support processes (e.g. Waterfall versus Agile development). While these operational are important, they are by themselves point solutions.

To maximize the return on investments in technology, the IT business model as a whole has to be tuned to the context the business operates.

Differentiation (e.g. focus on cost or speed-to-market) is, first and foremost, a strategic topic. An IT and business operating models optimized for Customer Intimacy in an analogue market are very different from one optimized for Product Leadership in a fast moving digital market (I) Similarly, the strategic context embodied in the choice of the business to position itself as an extrovert Prospector or more introvert Defender reaches far beyond the development approach (II).

Notes and references

(II) Prospector and Defender strategies refer to the model by Miles and Snow. The Miles and Snow typology is covered more in-depth in the book and here.

Incremental end-to-end Change

noreply@blogger.com (François Zielemans) — Fri, 08 Sep 2023 10:44:00 +0000

Summary

Digitalization reshapes business models and value chains, requiring a continuous and coherent flow of organizational and technological optimizations to remain ahead of the curve.

Rationally, every executive, manager and employee understands that the company they work for has to remain in touch with market realities and act accordingly. The constant stream of companies struggling with strategic, earnings, liquidity or even a “Chapter 11” crisis is therefore counter intuitive at first sight.

However, even at personal level, something similar can be observed. The more ordinary the skill set of the employee, the more likely the job can be automated. Despite the widespread public attention for this trend, many employees still lack a sense of urgency. It is part of human nature to think bad things only happen to others (I). Market and technology shifts don’t affect them or the company they work for.

Until, eventually, the pink slip arrives. Then the need to change is no longer an abstraction.

When a company or individual hits the proverbial wall, radical change is required. This type of change is infrequent, disruptive, forced and of strategic importance.

When the company or individual remains aligned with its external environment, change can be incremental. Incremental change is continuous, focused on improvements, bottom-up and emergent.

The second key ingredient to surf the digital wave instead of being drowned by it is adopting an end-to-end approach. Numerous companies, including retail giant Walmart, initially underestimated the impact of the internet and mobile on their business model. It is more than adding a web shop module to the existing website.

In other words, incremental change should not be confused with isolated point initiatives. This important point is covered in the McKinsey article ‘Modernizing IT for a digital era’.

“Historically, companies have favored an incremental approach to modernizing IT—that is, addressing the most immediate points of pain and then subsequent issues as they occur. However, the threat of digital disruption is creating an urgent need for companies to modernize IT systems end to end, with the big picture in mind.

End-to-end modernization, or a holistic approach to tackling system upgrades, completely redefines how a company thinks about IT. Under this approach, the technology organization is no longer just a shared service; IT becomes a critical part of the company’s DNA, and IT leaders become trusted partners, not just service providers.”

However, the article still treats the business and IT as two separate domains, whereby IT leaders are responsible for technology. In reality, the business and IT domains increasingly converge or even fuse, reflected by the skill set and leadership style of the executives. No longer ‘we’ and ‘them’.

Companies are quickly learning that digitalization requires the business and IT to adopt a joint end-to-end change program. The McKinsey article touches upon the point by calling IT a critical part of the company’s DNA, but comes short of identifying the true key success factor of strategic change in a digital era: recognizing and acting on the interdependence between business and IT.

Notes and references

(I) This behavior is known as optimism bias, unrealistic optimism or comparative optimism.

(II) Please note that one person may perceive a specific change as incremental while the same change is perceived as radical by another.

Interdependent Principles

noreply@blogger.com (François Zielemans) — Fri, 08 Sep 2023 09:13:00 +0000

Summary

The six principles behind the Digital Manifesto are interdependent. They reinforce each other, creating a positive feedback loop.

Information technology is not a neatly packaged box with a guaranteed return on investment stamped on it. Information Technology is like a kitchen: spending $25.000 on a new kitchen does not automatically result in a great dining experience. You also need a cook. In this case, the cook is the IT professional, embodied by the principle less defensive, more offensive. The IT team no longer delivers a piece of hardware or software to the business, but a solution or even better: a value proposition. A value proposition fulfills a specific want or need of the business, creating value (e.g. additional benefits, less risk).

While advanced automation and robots are substituting humans in several service-related areas of the value chain, employees remain necessary for truly added value activities like strategy setting, innovation, performance improvement and exception-handling.

Employees serve Customers

For the foreseeable future that is. In 2016, Google launched a research project to see if computers can be truly creative. It is only one of the projects part of a global effort to create machines with artificial intelligence and ‘deep learning’ capabilities.

The constantly evolving technology landscape also has a profound impact on the value propositions offered by the business to its customers. Music lovers used to record their favorite music on tape, replacing them over time with DVRs, hard drives, MP3 players, and more recently, streaming from the cloud.

Customer have (increasingly differentiated and technology-rich) needs

The rate of change is not constant, but increases both in volatility and complexity. The tape recorder was invented around 1930 and enjoyed a stable and predictable lifecycle for almost half a century. No such luck for more recent substitutes.

Customer needs change over time (at an accelerating rate)

More generally, every new product is more capable than its predecessor, but also far more difficult and expensive to design and produce. This translates into a network of hundredths, if not thousands, of specialized companies to deliver one coherent value proposition from a customer perspective (I).

Figure 1: Six interdependent principles (source: book Digital Manifesto )

Together, these companies form a virtual entity, bundling a broad set of capabilities, skill sets and other assets to realize one or more shared objectives. The larger and more complex the value proposition and network, the more organization (as in “the act or process of planning and arranging the different parts of an event or activity” (II)) is required to achieve the required effectiveness and efficiency. Do this well and the result is wealth for all the stakeholders involved.

Constantly changing needs require organization (e.g. end-to-end approach, leadership, investment in new skill sets)

Done well, organization results in added value (read: improved revenue and margin, reduced risk)

By investing part of that wealth into the quality of the working environment, employee satisfaction is improved, the first step in the so called service-profit chain (III). The service-profit chain establishes relationships between value creation, customer loyalty, and employee satisfaction. Loyal customers buy more and generate referrals, both key drivers of growth and profitability. To become loyal, they need to be consistently satisfied by the value proposition offered by the company.

The larger the service component of the value proposition, the higher the impact of those responsible for designing and delivering the service. Hence, the emphasis on employee satisfaction as content employees are more productive, go that extra mile, and are less likely to look around for other job opportunities.

People are the most important asset a company can invest in

The end-result is a positive feedback loop, from which all stakeholders benefit.

Notes and references

(I) Sustainable success requires companies to invest the available resources (e.g. available budget, management attention) its distinctive or core competencies. Other competencies should be sources from external partners. Prahalad and Hamel consider a competency core when it is not easy to copy by competitors, can be used for other products and markets and contributes to the end consumer’s experienced benefits and the value.

(II) Source: Merriam Webster dictionary.

(III) Heskett, J. L. , Jones, T.O., Loveman, G. W., Earl Sasser, W. Jr., Schlesinger, L. A., Putting the Service-Profit Chain to Work, Harvard Business Review, 2008.

Leading in a Digital World

noreply@blogger.com (François Zielemans) — Fri, 08 Sep 2023 08:45:00 +0000

Summary

The environment in which we live and work today is more uncertain and complex than ever before in history. To survive, let alone thrive, companies have to boost their capability to sense and act on both foreseen and unforeseen events quickly and decisively.

Introduction

According to McGrath the downfall of Sony, BlackBerry, Blockbuster, Circuit City and even the New York Stock Exchange can be attributed to failing to sense and act on both foreseen and unforeseen events quickly and decisively.

“Their downfall is a predictable outcome of practices that are designed around the concept of sustainable competitive advantage. The fundamental problem is that deeply ingrained structures and systems designed to extract maximum value from a competitive advantage become a liability when the environment requires instead the capacity to surf through waves of short-lived opportunities. To compete in these more volatile and uncertain environments, you need to do things differently.”

Of the 500 largest companies in 1957, less than eighty were still part of the S&P 500 forty years later. Some were taken over but most shrunk or simply went bankrupt.

Even today, Facebook, Twitter, LinkedIn and other young multibillion companies are not exempted from these economic forces. Yahoo was one of the pioneers that turned the internet into a billion-dollar business. Today it is struggling to find its mojo back.

Facebook had attracted a huge teen following, an important demographic group for marketeers, at its inception. However, privacy concerns in combination with Mom, Dad, Aunt Edna, Uncle Jim and the rest of the uncool lot joining Facebook is affecting engagement with this age group. Consequently, they move on to apps like WhatsApp, Snapchat or others to communicate with their peers. For now, between today and a couple of years from now, a startup introduces a new value proposition, starting a new cycle.

Technology is therefore both a key enabler of new business models and at the same time a major source of strategic risk.

Data follows a similar path. The continued miniaturization of sensors, CPU’s and other components turns ‘dumb’ products into ‘smart’ ones. This too is a potential source of billions in revenue for both IT service providers and the companies using their solutions. Downsides include bankruptcy for companies ignoring the Internet of Things and Big Data all together, and waste for companies unable to effectively realize the potential value represented by these buzzwords.

Combine data with advanced algorithms and you have a tool to automate knowledge-intensive work, create robots maintaining other robots and autonomous driving trucks, cars and airplanes. However, until Artificial Intelligence (AI) becomes mature enough to dynamically solve myriad situations, both foreseen and unforeseen, weaknesses in either data set or algorithm could result in dramatic distortions in the value chain or a car ending up in the ditch.

Budget is only part of the solution

It is important to note that the changing role of technology does not equal asking the CFO to double the IT budget or adopt every new technology entering the market.

The success of Apple’s iPad doesn’t come from any introduction of a new disruptive technology. It is a winner because Apple combined easy-access to a wide variety of books, music, games and movies with a good looking, high quality device. Additionally, the iPad actually provided so much more functionality than the average e-reader that it created a new market. Consumers did not know they had the need until Apple launched the product.

As a result, the iPad sold more than 3 million units in its first 80 days, making it fastest selling electronic device at the time. Number two, at a considerable distance, was the DVD player with 350,000 units in its first year.

The creation of new (uncontested) market spaces as a means to break away from traditional competition models is described by Kim and Mauborgne in their book Blue Ocean Strategy. They argue that the traditional fighting for competitive advantage, battling over market share, and struggling for differentiation, has resulted in a bloody “Red Ocean” of rivals fighting over a shrinking profit pool. The authors argue that tomorrow’s leading companies will succeed not by competing head-to-head with competitors, but by fulfilling a new demand in an uncontested market space, creating a “blue ocean.” Oceans that will in most cases be full of technology and data.

The need for technology and business departments to act fast and decisive is amplified by the infusion of information technology into our day-to-day lives. Today, some 450 million people have internet on their mobile phone and with 4 billion people using mobile phones, and that number is expected to grow fast. We can consume information 24 hours a day, purchase a book at 3 am and read a memo from a colleague at the breakfast table. Information technology is not only changing business models, but also the way we spend our free time (e.g. checking our Facebook account, playing mobile games).

Technology overcomes many boundaries, enabling companies to tap into new markets and enriching the private lives of billions of people. We are part of a global eco-system, with all its opportunities and challenges. To thrive as a company in this world, companies need to invest in the capabilities reflected by the six principles introduced as part of the Digital Manifesto.

Additional Reading

Biological ecosystems consist of multiple interdependent species that need each other in order to survive. Species use natural selection mechanisms to adapt themselves to their environment and the most successful ones produce more offspring. Kelly’s book “Out of control” uses beehives, the economy, intelligence and evolution as examples of systems where the sum of parts create more than all the individual parts (e.g. one bee, company or brain cell) can. Especially his nine ‘incubation’ principles are worth a look when faced by uncertain and complex needs and wants from internal and external customers. Another interesting article with the same topic is The Biology of Corporate Survival from Reeves, Levin and Ueda. They point out that:

“Business environments are more diverse, dynamic, and interconnected than ever—and far less predictable. Yet many firms still pursue classic approaches to strategy that were designed for more-stable times, emphasizing analysis and planning focused on maximizing short-term performance rather than long-term robustness.”

The article provides business and IT leaders with several strategic pointers to improve the alignment between external environment and the company.

Kelly, K., Out of Control the New Biology of Machines, Social Systems and the Economic World, 2008.

Reeves, M., Levin, S., Ueda, D., The Biology of Corporate Survival, Harvard Business Review, January-February 2016.

What the M&A practice can add to the sourcing practice

noreply@blogger.com (François Zielemans) — Tue, 31 Jul 2012 15:11:00 +0000

This blog shares part of its content with this older blog. I included this blog in my upcoming book but added more content. I hope you will find it useful.

Cost cutting is still one of the key reasons to outsource parts of the IT portfolio. There are many other sources of financial benefits hidden within these deals however. Deals which often involve large sums of money, a multiyear commitment and a considerable risk of failure. Properties which are not unlike a M&A deal.

At first sight may outsourcing and M&A not share many similarities, but at the core are both about one company buying assets from another company, with the aim to make a profit. M&A deals tend to be much larger in value however, which has resulted in developing best practices to both maximize and protect deal value.

One of the key differences between an outsourcing and M&A engagement is the stronger focus of the latter on the exit. If a private equity house buys (part of) a company, most value is created when the shares are sold again or the company is floated on a stock market. Consequently will considerable effort be directed to predict the expected future return. As Real Options can be used to value uncertainty (e.g. effect of economic slowdown) and flexibility (e.g. postpone part of an investment), are they a popular tool among M&A experts.

As dealing with uncertainty and flexibility are also important in outsourcing, can they also be a source of value here. When applying options and other M&A terminology to outsourcing, the value of an outsourcing contract can be described as follows:

Option value for vendor: By taking over the assets and people of the client the vendor might be able to get into new markets and/or clients (e.g. get more clients in the media vertical after signing a contract with a newspaper publisher). Other sources of option value are better economies-of-scale by adding the volume of the new client and contract harvesting (e.g. additional projects).
Option value for client: The money the client receives from the vendor for the asset transfer can be used to enter new markets, innovation or to other means. Value can also be created if the vendor enables the creation of new products/services or improve forward/backward integration of the value chain. Furthermore is a vendor a source of volume, service and resource flexibility.
Embedded value for vendor: the monthly revenue stream for the term of the contract (the value of an extension can be included as an option). Additional benefits are realized by assigning part of the transferred staff and assets to other contracts.
Embedded value for client: the lower monthly cost achieved by better economies-of-scale for the same service. Other sources of potential benefits are better time-to-market and availability figures. Intangible benefits may include access to a larger and more diverse pool of workers and the effects of a more mature delivery organization.
Exit costs for vendor: the exit cost is related to the risk (option of the client) to switch to another supply source at the end of the contract term. Another source of negative value is spending more money on the exit-transition than the vendor can recover from the client.
Exit costs for client: the client has to cover the cost of retransition the activities back inhouse or transfer the activities to another vendor.

In addition to the exit cost is there also the potential value destruction related to specific sourcing risks. These might be strategic of nature (e.g. costs due to opportunistic behavior of vendor), operational (e.g. vendor failing to deliver according to contractual requirements) or compliance (e.g. legal penalties due to vendor not protecting personal data). Depending on the upfront risk assessment and the value of the contract, more or less attention should be paid to one or more of these risks. Consequently can the important ones be included into the business case using options.

To show how a business case looks with and without using options a simplified example is used. The first business case follows a traditional structure outlining the investments and costs for both client and vendor for a period of five years. The second business case expands the base model by including several options to capture other sources of value. Both business cases are based on a fictional client company outsourcing some 70 IT staff, office automation for 3500 users, some 25 business applications and 400 servers to a local vendor. Both business cases are written from the perspective of the client company.

The cumulative net present value of the first business case becomes positive in the fourth year. In most cases this outsourcing would be a no-go.

For the second business case the break-even occurs a years earlier, as more sources of value have been quantified. However, these additional sources of value are surrounded by uncertainty, hence the use of Real Options. Only with the progression of time the client company will know for sure whether the benefit and risk assumptions are correct. By for example tying the realized benefits from co-creation and improved quality in year 3 to the decision to increase the scope of the outsourcing contract, a more objective decision can be made regarding this ‘call option’.

This flexibility to change the course of action during the term of the contract, is a major source of value. In a traditional NPV-based business case is no room to adjust the number of countries or processes that will be outsourced. The decision has to be made upfront, regardless of the level of uncertainty and quality of information. As options introduce the ability to postpone decisions, will their use become more valuable with increasing levels of uncertainty. Consider the example.

A large multinational company considers to outsourcng several business processes within three countries. The implementation can either be executed ‘big bang’ or sequential, starting in the United States with Brazil and Mexico following over a three year period. From the ROV perspective is outsourcing out an ‘call option’: the right, but not the obligation to outsource within a specific country. The value of this option changes during the duration of the contract, due to for example the project running into difficulties, changing economic circumstances, the company engaging in M&A activities or deciding to (des)invest in certain markets and products. At the moment the decision has to be made whether or not to outsource the processes in the next country, the value of the option is recalculated, incorporating the changes in the economic situation and so on. Only if the value of the option to outsource in a specific country is still equal or higher than the initial NPV, the project gets a go.

Imagine the company has to invest $50 for the transition per country, but the NPV will only yield a positive return if there is a substantial growth in revenue. The company knows however only in two years time whether the revenue has shrunk or increased by 50%. The illustration depicts part of the decision three required to model the outsourcing project. The two basic scenarios are parallel outsourcing in all three countries (invest $150) or start with one country (invest $50).Assuming that there is a 50% percent chance of either 50% growth or decline in revenue the expected NPV for both scenario’s can be calculated.

0,5 times NPV (migrate one country at $50 with business decline of 50%) + 0,5 times NPV (migrate one country at $50 with business growth of 50%) = 0,5 x $34 + 0,5 x $19 = $26,5
0,5 times NPV (migrate all countries at $150 with business decline of 50%) + 0,5 times NPV (migrate all countries at $150 with business growth of 50%) = 0,5 x 42 + 0,5 x 5 = $ 23,5

To keep it simple, relevant information is left out, including the WACC used to discount the cash flows. For further reading I can recommend the following two articles: T. Copeland, P. Keeman, Making Real Options Real, McKinsey Quarterly 1998 no 3 and T. Luehrman, Strategy as a portfolio of real options, Harvard Business Review, September-October 1993.

Sources and recommended articles for further reading:

D. Craig en P. Willmott ,Outsourcing grows up, McKinsey Quarterly, februari 2005.
T. Blommaert, S. van den Broek, E. Curfs, Methodiek voor betere besluitvorming van (strategische) IT investeringen, Informatie, 2009 (Dutch).
T. Copeland, P. Keeman, Making Real Options Real, McKinsey Quarterly 1998 no 3.
T. Luehrman, Strategy as a portfolio of real options, Harvard Business Review, September-October 1993.

App development for enterprises, more than just good looks

noreply@blogger.com (François Zielemans) — Mon, 04 Jun 2012 06:14:00 +0000

It sometimes looks like everybody can develop an App or website these days as the entry barrier is relatively low. Everybody with some rudimentary knowledge on software development can produce a simple App. This combined with a huge demand in the market for Apps, has resulted in an explosion of vendors which try to get a piece of the cake. And subsequently pressure on price.

Besides labor cost is the number of functionalities one of the key drivers of the development price. And with App development being a relatively new area, are many client companies finding their way in defining the right scope. Building a App which is supposed to unlock business rules and data from internal (back office) systems is not something you do on a rainy Sunday afternoon.

App vendors and client companies should be aware of the impact (and risk) of building a proper B2C or B2B App. I have seen client companies picking the cheapest vendor and finding out after three months that a large part of the functionalities required to create a fully functionally App were missing. The App itself is often only a very small part of the puzzle, as the main challenge is to access the right internal or external system and combine the pieces to a logical and consistent user experience.

Take an airline for example. To book or change a ticket via an App it is necessary to have access to systems related to seat availability, food preferences, credit card information, luggage preferences, general flight information (e.g. IATA systems) and several others. Several systems (e.g. IATA’s) are read only as it provides a global service for every airline while others have specific interface requirements (e.g. credit card systems). In other words, App development is for many companies a serious profession as it unlocks core business rules and data to customers.

Developing an App which provides access to the right business rules and data securely for a mobile or tablet is only part of the challenge however. There are many more devices around which (soon) have to be taken into account to ensure a company has a consistent presence in the market. Surface tables and touch screen foils are two other digital channels which can be added to the mix, and within a decade expect even your dining table will provide access to you email while you are having breakfast.

To make matters worse, all these devices more capable and versatile, allowing for the integration of more complex business rules (and datasets) on the devices. This trend is depicted in the illustration below and shows that the back office systems have to be opened up to many more devices. The different size of the triangles depict both the increase in channels and the ‘upstream’ shift of business rules and data. A third element of added complexity is the shift from data only to data, voice and video integration. Soon, you will be able to use your banking application on your tablet not only to access your bank account, but use the same App to open a video session with the service desk of the same bank if you have a question about your statement or want to buy an insurance.

To do all this securely and at the same time very fast (consumers get irritated very quickly when having to wait; resulting in a bad customer experience; resulting in customers leaving) is not easy. It requires vendors to develop a capability which is traditionally not their strongest point: combining designing a good looking and intuitive App and unlocking business rules, data, voice and video.

In the illustration below, I provide two sourcing models (in case client companies do not consider App development part of their core IT capabilities). The solution at the left is for client companies which consider the App part of their primary sales/delivery channel towards their consumers. Think of the previously mentioned airliner, banks and other A-brand companies. For them it is crucial that the style of the corporate brand is reflected in the App and that it is very easy to use. This is the area of specialized niche vendors which employ very creative minds with an excellence sense for usability.

Opening up business rules, data and other technical stuff is not their cup of tea however and another vendor typically steps in (or the internal IT department if they have App developers). This second vendor creates everything that is needed to turn a nice looking presentation layer into a fully functional solution. On the right side of the illustration is a sourcing model where interface design is important, but not crucial. Here developers with some creativity, and after following the right courses, can develop the whole stack. The eye-candy part is not that important, it is first and foremost about the right functionalities. The target audience for these Apps are for example internal workers, business partners or for consumers if e-commerce is only of secondary importance of the company.

In short, the following topics are important when thinking about developing an App as a client company:

Is App/HTML5 development a key capability or is it something I want to buy. Develop capabilities internally if ‘online’ is or will be a core part of the companies’ business model. Always ask help from niche players for concept development of critical B2C Apps.
Ensure to include all functionalities required to create a fully functional App. It is easy to assume that an Enterprise Service Bus or a data repository will provide all that is needed, but in real life have back office environments the tendency to develop into complex eco-systems with all kinds of interfaces which are often not visible on the standard architecture drawing.
Think of a mobile or tablet as one of the channels you can reach a consumer with. It can be a standalone solution, but by integrating them into an (online) consumer strategy it is likely to yield much higher returns.

And the following when developing Apps as a vendor:

Carefully pick your clients and types of Apps you want to develop. In my experience is it easier to more upstream than the other way around. What I mean is that developers which have created complex business applications are easier to train in mobile App development, than train an App developer in unraveling (legacy) back office systems. This would mean that traditional software developers are well positioned to take a considerable piece of the enterprise App cake.
Decide whether you want to be brilliant in concept creation and interfacing or in the technology behind it. The skills, culture, leadership style etc required to do one of them are very different and cannot be part of the same team. You can focus on one and do a bit of the other, but it is always better to have a clear profile in the market. Client companies know the two things require a different type of person and do not expect to see both combined in one vendor.
Push back towards the client if you find their requirements cover only half of the scope needed to build a working App. I recently spoke somebody from vendor A which had lost an App deal to vendor B on price, only to find the client going back to the vendor A after six months when they found out that vendor A had priced all functionalities needed for working an App. Here the client had made two mistakes a) not including the necessary scope in de RfP and b) not listening to arguments of vendor A why their price was higher. I am not saying that there will be a happy end every time, but it still happens.

System development with added value in mind

noreply@blogger.com (François Zielemans) — Mon, 07 May 2012 07:16:00 +0000

This blog is a small excerpt from the second chapter of the book I’m writing on Business IT convergence. One of the topics this chapter discusses, is the need to identify and unlock the value which is embedded within the context of the demand of the business for a new IT solution.

When designing and building new IT solutions, all questions from IT (and its external suppliers) for the business were traditionally focused on the functionalities. The business rules, the business process, the interface and data that have to be translated into a working IT system. The context of the demand (e.g. relative importance of time-to-market versus efficiency) is typically considered to be of little importance. This was and is indeed the case for situations where IT is used to automate business processes; the traditional sweet spot for IT. With IT increasingly used by the business to compete in market space and technology changing complete business models, the context of the business demand becomes suddenly very relevant. These days, the importance of and mutual tradeoffs between topics like speed-to-market, agility, efficiency, risk profile et cetera have to be included in the business case for a new initiative in order to make an informed decision. Examples:

Incorporating the newest social media technology quickly is crucial when the product targets young customers. For older customer groups, short time-to-market of the newest technologies and trends is far less important.
The ability to increase production volume quickly is of secondary importance for a business product which is at the end of its life cycle. For a product at the start of its lifecycle, volume flexibility is however crucial.
An American banker will have a very low risk appetite regarding regulatory compliance while Asian bankers will have a slightly higher appetite due to another regulatory culture and more principle-based laws.

Identifying these contextual or secondary sources of IT value are often overlooked as demand management typically focuses on collecting the business and user requirements, ignoring a substantial source of IT value. The illustration depicts the four sources of IT value which I believe can be identified. The primary source is the business and user requirements which are translated into code and a proper user interface. It also includes the value embedded in the technology used, like adaptability, adherence to open standards and IT efficiency. The second layer of the onion reflects the tangible and intangible sources of value which reflect the context of the demand. If the business has identified an potential market opportunity of 100 million for the first company to offer a product, speed-to-market and not efficiency is key. Proposing to start with a three month design study followed by sixteen months of building and testing may be the best approach from an IT perspective as it allows for very efficient resource use. Potentially missing 100 million in revenue for a 10% IT efficiency gain is the contextual value of a business demand which relationship management has to identify and address when shaping with value proposition. To realize this source of value, is one of the reasons Foundation IT and Entrepreneurial IT are introduced. Differentiation allows for capturing the value of the second and third layers of the onion.

The third source is the value created by combining Business and IT value propositions and accompanying competencies into a offering which offers a strategic advantage. It is the 1+1=3 synergy and subsequent strategic advantage IT by itself cannot provide due to its lack of scarcity. Strategic advantage can in terms of lower cost than the competition or product differentiation.

With technology itself being available to everybody at ever lower cost levels, become the two outer layers of the onion more important if IT is considered by the company to be more than a facility service. Everybody has access to programmers, servers and development tools, but companies demonstrating effective convergence of Business, agility and an entrepreneurial mindset within IT, are still scarce.

The last layer is represents the trend that an increasing number of companies use ‘social technologies’ to enhance growth and profitability. The customer is no longer a passive receiver of a product or service, but is slowly integrated within the business processes and IT ecosystem of the company. According to a survey by McKinsey (2011) are companies increasingly using social technologies to increase their agility and to manage organizational complexity. Many of the 4200 global executives interviewed believe that with the diminish of organizational barriers new business processes rise, potentially radically improving performance. Like with the third layer will also this type of IT contribution only be applicable to part of the IT portfolio as bookkeeping can hardly contribute from social technologies (unless bookkeeping is sourced to external freelancers).

All four layers of the onion have to be reflected in the value proposition with the third and fourth layer be more relevant for Enabling IT than Factory IT (see blogs 1 and 2). The value propositions have a special role as they are the linking pin between the customer facing part of the IT Business model and the ‘back end’. It is a (bundle of) products and/or services that create value to a specific customer segment and consolidates both the tangible and intangible value delivered to the internal and/or external customers and the cost incurred to create and deliver the value proposition.

Source: (2011) How social technologies are extending the organization, Jacques Bughin, Angela Hung Byers, and Michael Chui, november 2011, McKinsey Global Institute.

The importance to innovate as a supplier

noreply@blogger.com (François Zielemans) — Mon, 23 Apr 2012 07:22:00 +0000

I spoke recently with a senior executive of a small external service provider. A service provider with a staff of 350+ in the year 2000 and some 75 today. So one of the main topics we discussed was how this happened.

The founders of the company identified some twenty years ago a software niche in supply chain management. In this period manufacturers and their up-and downstream partners in the supply chain were looking for solutions to exchange information to optimize their logistics processes and stock levels. The founders came up with some very clever concepts and for many years the sky was the limit.

What the founders and subsequent managers overlooked however is that every (software) product goes through a lifecycle. And at the end of the lifecycle the software product has become obsolete. It may become obsolete because of not anticipating on evolving functionalities, technologies (e.g. Cobol) or because business models.

Functionalities. In the past many software vendors provided a ‘point solution’; a product which provides functionalities to cover a highly specific need (e.g. EDI mapping). These days, client companies expect an integrated service which covers a broad set of functionalities and includes end-to-end support. The broadening of functionalities can be ‘horizontally’ within the business process by supporting more activities, or ‘vertically’ by unlocking information to multiple channels (e.g. desktop, smart phone, tablets, surface tables).
Technology. Many client companies still use Windows XP or Internet Explorer 6 because they use applications which do not support more modern environments. But there will be a day when these applications will be replaced, and the client company will at that moment expect a state-of-the-art offering from its vendor or will shop elsewhere. At the same time are many client companies standardizing on certain eco-systems (e.g. Microsoft, IBM, SAP), replacing solutions provided by external service providers build using other technologies.
Business models. Shopping is increasingly becoming an online activity and the shops in the street are suffering. A similar trend is taking place with books: from paper to tablet. These are only two examples technology as an initiator of dramatic change. While it is an opportunity for many newcomers, is it a treat by many traditional software vendors. Vendors which for too long relied on their past success.

The executive I was talking to inherited a company which had for a long time failed to look beyond its current success and did subsequently not invest in the future. As a result was the company currently struggling to revitalize the solutions portfolio and to manage the lifecycle of the individual solutions. The first step they undertook was determining the ‘age’ of their current solutions and technologies (figure 1). This provides an idea of the distribution and health of the portfolio. If there are hardly any solutions on the left half of the curve, the company is likely to get into trouble in the years to come.

The ‘left’ and ‘right’ side of the curve are also important for another reason: the reaction of the market on a new solution is difficult to predict. As several are likely to fail, is it important to have an adequate volume of new innovative ideas and concepts to ensure enough business volume in the future.

The number of solutions and technologies will thus typically be larger at the left side of the curve. At the same side of the curve will the margin of successful solutions also be higher compared to the right side as client companies are willing to pay more for new and innovative solutions. When the solution matures, the competition will increase and thus the focus on price (see table).

Besides investing in enough new solutions and technologies to ensure the company has a healthy product portfolio, is it also possible to extend the life of existing solutions. The next figure provides some simple examples of initiatives to push the End-of-Life of a technology.

The senior executive at the company had made some tough decisions in last couple of years, but by scraping together resources he was able to invest in some initiatives which slowly started to show results. This was not only a good sign for the financial bottom line, but provided also some hard needed positive news and energy for the people doing the actual work.

Case study: awakening of an IT department

noreply@blogger.com (François Zielemans) — Mon, 24 Oct 2011 09:06:00 +0000

Most organizations are facing a multitude of challenges these days, including pressure on pricing and shorter lifecycles of new products. This requires organizations to become more flexible, focused on their core activities and enhance the capability to use new technologies to create or sustain a competitive advantage.

When the IT department is too sheltered

One of the companies busy transforming itself from a traditional, low IT density business model, to a highly digitalized business model is the company ‘Merchant’. It is a specialist in auctioning consumer products in high volumes (millions of items per day). To do so it has invested in an impressive amount of buildings which handle the inbound logistics, auction, outbound logistics and financial transaction.

In the last decade both producers and buyers of the products are increasingly looking for ways to improve efficiency, including the role of Merchant to align demand and supply. As a result are producers and buyers looking at Merchant for an improved service offering.

Traditionally, reliability and thus very thorough development, testing and operating procedures were the cornerstone of the IT department. A typical IT project would take at least a year from start to finish. And as the traditional business model required the physical buildings to perform the auction, it was Merchant (and subsequently their IT) which was calling the shots. Merchant had grown over the years into the largest company of its kind and the required investments in new physical infrastructure ensured a high entry barrier.

The introduction of the internet changed all that, even though Merchant was able to ignore it until quite recently. One of the ‘problems’ of the internet for Merchant is that it considerably lowers the barrier of entry. It allows the information flow required to auction a product to be disconnected from the physical flow. In the traditional business model, both flows were combined with documents travelling with the physical product. The internet also makes it easier for producer and buyer to find each other without the Merchant as a broker.

While the business very clearly saw these threats and scrambled to action, the IT department initially failed to appreciate the sense of urgency. During summer it was not uncommon that a project was on hold for three weeks because the developers were on a three week holiday. The difference in culture and economic model are depicted in the table.

	Traditional auction	Internet auction
Economic model	High fixed cost require high volumes to recover them. Economies of scale are crucial.	Increasing the number of users of the online system is crucial. The more producers and buyers the system use, the more attractive it becomes (‘positive feedback loop’).
Culture	Risk averse, efficiency focused.	Fight for talent to ensure own system is improved faster than competition’s offering.
Competition	Focus on costs and high level of standardization among business partners	Focus on attracting and retaining most talented employees.

Due to the lack of action from the internal IT department the business manager of Merchant responsible for the e-commerce domain engaged a third party supplier to build a pilot system. A pilot which was rolled out within three months. Since the introduction the transaction volume has grown exponentially and the system has become of strategic importance to Merchant. Subsequently the business has requested IT to insource the solution and incorporate it into the internal IT ecosystem. However, the ecosystem of Merchant was standardized on Microsoft and the external vendor used a non-compatible system from IBM. As a result will the system now be rebuild in dot-net.

Structural solution

The sense of urgency has in the meantime taken hold at management level within the IT department and several steps are undertaken to create a more agile and responsive department. Central in this approach is the need to differentiate based on the demand profile of the business (speed-to-market & innovation versus efficiency & reliability). More on this topic can be found in previous blogs, including here. The essence of the required change is however a cultural one. From a mindset of thinking in roadblocks to a mindset of thinking in possibilities.

Political unrest and economic trouble versus offshore outsourcing

noreply@blogger.com (François Zielemans) — Thu, 14 Jul 2011 16:20:00 +0000

The recent bomb attack on Mumbai, killing at least ten people and wounding more than fifty, is one in a series. According to Wikipedia are “as of 2006, at least 232 of the country’s 608 districts afflicted, at differing intensities, by various insurgent and terrorist movements. In August 2008, National Security Advisor M K Narayanan has said that there are as many as 800 terrorist cells operating in the country”. While India is not the only outsourcing destination which suffers from ‘political’ unrest, are this bomb attack and the 10 coordinated shooting and bombing attacks of 2008 of a completely different order than what is going on in most other countries (except for maybe Pakistan).

Also Egypt had its period of unrest when toppling over president Mubarak, and Malaysia recently caught the headlines with people demanding democratic reforms. And the Ministry of foreign affairs of Australia “advise you to exercise a high degree of caution in the Philippines because of the high threat of terrorist attack and the high level of serious crime”. While these last examples are magnitudes different from the situation in India, is it an indication that several popular offshore destinations end up in news papers in a less than favorable way.

While the impact on the short run is likely to be very limited, may long term unrest in combination with continuing economic struggles in the United States and Europe have an negative impact on offshore volumes. In the United states some 8 million jobs were lost with financial services accounting for 800.000 of them. In Europe unemployment is not much better with especially Southern European countries suffering from rates up to 21,3% in Spain.

With the supply of skilled people surpassing demand in both the U.S. and Europe, wages tend to stabilize or even decline. Of the people who lost their job in the U.S. between 2007 and 2009, had 36 percent to accept a job which pay was at least 20 percent less than their previous job. At the same time are wages in India, Sri Lanka and Bangladesh expected to show a double digit increase in 2011.

In manufacturing this has already resulted in many American companies insourcing their production again. But “homeshoring” is also picking up in the service industry. Arise employs more than 7000 call center American agents who work from their living rooms and connect via telephone systems to national service lines. At the same time provides the U.S. government tax incentives to keep jobs at home and some states (e.g. Ohio) even ban offshoring. In Europe, the social security system prevents large wage fluctuation, but also over here are people accepting jobs with at lower pay grades.

Subsequently do I wonder whether we will see lower (growth) figures in new offshore contracts for the coming two or three years. Because a) the labor surplus in the U.S. and Europe will not be absorbed anytime soon even with economic growth slowly picking up, b) the battle for talent in India and other destinations will continue to push wages further, and c) the unrest in India, Pakistan, Philippines and other countries does not show any signs of subduing.

Simply stated: the financial benefit of offshore is getting smaller, while the risk profile is growing. Two trends which might result in corporate decision makers steering for (a larger share of) local outsourcing.

The need for a differentiated sourcing strategy

noreply@blogger.com (François Zielemans) — Mon, 27 Jun 2011 12:21:00 +0000

Technology is everywhere and is becoming of increasing importance to attract and retain consumers and engage with upstream and downstream business partners. It is changing industries, impact the roles of CEO, COO and CIO. Insurance companies are transforming their business model from selling though big, impressive marble decorated buildings and well paid sales men in Porsche cars, to a lean no fuss companies using internet as the primary sales channel. Physical newspapers are increasingly replaced by digital versions and we shop on the internet when it rains or just for our convenience. The part of the IT portfolio where time-to-market, intense business-IT interaction and innovation are the key success factors (Enabling IT).

While IT plays a key role in transforming business models, consists a large part of IT portfolio still of value propositions which core attributes include reliability, availability and efficiency (Factory IT). As this category still represents the majority of the budget within most companies, has it subsequently shaped the structure, culture, and capabilities of the average IT department. And subsequently its sourcing strategy.

With IT required to deliver both IT enabling the business to capture more market share or open new ones and provide more traditional IT services, the standard approach of centralization and outsourcing may have to be reviewed. Before providing some of my thoughts, first the basic organizational structures an organization can pick from:

Centralized/shared. People and assets are concentrated within one department or unit, reporting hierarchically to the board. This ‘silo’ provides economies of scale regarding deployment of both labor and assets. The subsequent standardization and rationalization makes it also more prone of being more internally orientated with the business being dealt with through formal procedures, forms and reports. Its main benefits are efficiency and reliability.
Decentralized. People and assets are allocated to the business units needing their capabilities. The distance between business and IT is here much narrower as IT and business staff daily bump into each other. Drawbacks are the inability to use economies of scale when providing services like a standard workstation environment and telecom facilities. Its main benefits are business specific differentiation and flexibility.
Hybrid. By choosing this form it is possible to use the advantages of a centralized IT department (leverage on standard services) and decentralization (business specific differentiation). The drawbacks are additional cost due to coordination between the units, as all pieces of the puzzle will have to act as a whole. An increasing number of organizations are embracing this model to cope with the differentiated demand from the business.

When looking from a sourcing perspective at these three structures is it obvious that the traditional stronghold of outsourcing has been boosting the efficiency by increasing the economies of scale further than a company can by itself (supplemented by labor arbitrage). This kind of services are known as Transactional IT or Factory IT, and are depicted at the right side of the table.

The table shows some typical aspects of the highly centralized (and outsourced) Factory IT part of the portfolio. As mentioned before is the Business IT cooperation here highly formalized with many documents and procedures flowing back and forth. Subsequently is the relationship with the external service provider also highly formalized with thick documents, aimed at mutual risk mitigation. Actually, one of the key aspects of the whole right sight of the table is its risk-averseness. Risk in the form of budget overruns, disruptions, and security breaches.

	Enabling IT	Factory IT
Business-IT cooperation	Intense daily interaction, joint team	Client-supplier relationship
Importance speed-to-market	High	Medium to low
Importance reliability	Low to medium	High
Innovation orientation	Joint product innovation	Business and IT process optimalizations
IT management orientation	Strong leader, creative stars	Manager plus administrators
Sourcing orientation	Enhance innovation and speed-to-market, volume flexibility, minimize investment risk.	Sourcing decisions based on drive for efficiency and reliability.

The left side of the table is very different. Here the business wants to deploy IT as a means to increase its market share and IT needs therefore to be much closed to the business. Here IT is decentralized (if hardly any shared services, rare) and/or part of hybrid model (most common model). For this part, risk taking is part of the game, with the business expecting IT to come up with innovative ideas and high speed-to-market. External service providers are deployed here to enhance the innovative profile of the internal IT function, resource flexibility and reduced investment risk (e.g. through PaaS or IaaS). It requires a different contract and engagement model between client organization and external service provider to work. Here resources from the external service provider are part of the joint Business IT team translating the business vision into an actual product or service. Here not the procurement department has the last say (like with Factory IT contracts), but the content specialists and creative stars. In these cases are attitude, drive and energy the attributes the client is looking for.

One of the issues is however that in many cases the fundamental difference between Factory IT and Enabling IT is not made when looking for external service providers. It is still the procurement department which ensures the lowest bidder gets selected. Only when the business and IT join forces, a too narrow minded (and elaborate) contract can be avoided. When product cycles are measured in months instead of years, bickering two months about the cost is a recipe for loosing losing the continuous battle for market share. For enabling IT, it is about value, not about cost.

CobiT, ITIL v3, ISO 27002: Benefits and risks

noreply@blogger.com (François Zielemans) — Wed, 18 May 2011 10:38:00 +0000

By the beginning of the 1990’s an increasing number of IT departments started using process oriented models like ITIL, ISO/IEC 9000 and CMM(i). Later on substituted by CobiT, ISO/IEC 27002, ASL, BiSL, ISO/IEC 20000 and many more. That these models helped professionalize IT and transform themselves from a technology playground to a more business and service oriented procession is without a doubt. A survey among 503 companies on the benefits of ITIL shows that with the increased maturity of the IT function, also the realized benefits increased, while the perception of implementation challenges decreases (2010 [FZ1]). From a strategic standpoint is the added value however limited as ITIL implementations can be easily imitated by competitors, leveling the playing field again. Furthermore is there a considerable risk implementations will end up in a swamp due to over-engineered procedures, templates, PPI and KPI reports and lack of fundamental understanding of the concept behind ITIL. A risk especially prone to materialize with the introduction of version 3 which is even more complex and extensive than the previous version. As a result companies got disappointed with the outcomes of implementations.

Investigating two American and two Australian companies which implemented ITIL (version 2) provide some pointers however to the increase the chance of a positive return (2009 [FZ2] ): executive management support, interdepartmental communication and collaboration, use of consultants, training and careful software selection. Besides these more generic critical success factors, they also found three specific ones: creating an ITIL-friendly culture, process as a priority, and customer-focused metrics. In my experience is especially the ITIL-friendly culture an important one as the implementation of a service and process-orientation in an organization that is used to think in functional silo’s has a considerable impact on both staff and managers. And changing a culture is a time consuming process and may thus collide with ambitious targets like ‘we are going to implement ITIL within the next six months’. Hence, the disappointment in some cases.

Some of the same risks and challenges may arise when implementing (parts of) CobiT and ISO/IEC 27002, as these are also extensive frameworks. CobiT covers both strategic governance (e.g. IT value management) and more operational IT management (e.g. managing service calls). ITIL’s original focus was more on the operational aspects of IT (the ‘service support’ and ‘service delivery’ processes), but with version 3 the framework also added more strategic topics, resulting in even more overlap with CobiT. While both CobiT and ITIL cover security management, provides ISO/IEC 27002 much more detail and is therefore widely adopted by any IT function where security is considered to be a risk factor which has to be mitigated. More information on the overlap and alignment of CobiT, ITIL v3 and ISO/IEC 27002 can be found here. It is a management briefing of 130 pages which gives an indication of the extensive scope and complexity of these models.

Embedded in the broad scope and complexity is one major strategic risk: compliance to the model itself tends in time to overshadow the original purpose of the implementation. So much effort and time is invested in the implementation that IT becomes inward looking while the core of most frameworks is making IT more externally focused. The risk of internal focus is given momentum by two other factors: the CFO tightening the resource tap and the increased dynamics and complexity of the business demand. Less resources means paying a lot of attention to initiatives to enhance internal efficiency, while the natural defense against contracting forces is building a (paper) shield. In the words of Minzberg (1991 [FZ3] ): ‘Organisations that have to reconcile contradictory forces, especially in dealing with change, often turn to the co-operative force of ideology or the competitive force of politics’. And this is not without pitfalls as Mintzberg continues that an ideology encourages the members of an organisation ‘to look inward – to take their lead from the organizations own vision’.

What does not help is the focus on most frameworks on activities and accompanying forms, reports and other pieces of paper. While the business is mostly interested in results. Result from a business perspective (99,9% of transaction processed flawlessly), not IT perspective (e.g. we closed 20 incidents today). Also Schaffer and Thomson (1992 [FZ4] ), and Mastenbroek (1997 [FZ5] ) are convinced that improvement programs that focus solely on structures and systems (= frameworks and tools) don’t necessarily lead to increasing performance. In the words of Mastenbroek: ‘the more the organisational change is linked to improvements in the output, the better’. Schaffer and Thomson distinguish within this context between ‘activity centered’ and ‘result driven’ transformation. Some of the typical characteristics of both approaches are summarized in the table.

‘Activity centred transformation’	‘Result driven transformation’
Often too ambitious, large-scaled and diffused. Not oriented towards archiving specific outputs, resulting in misleading performance measurements.	Forces management to prioritise its targets and the necessary means to archive them.
Preference for orthodox approach instead of empirical.	Empirical tests show what works and what doesn’t .
Focus on long term, not on results.	Frequent reinforcement by the management provides the transformation with new energy
Controlled by staff departments and consultants.	Management creates an ongoing learning process by leveraging on lessons learned in previous phases and use new insight when designing and implementing the next phase.

As a result have many IT departments entrenched themselves with formal procedures and templates to structure the communication with the business. A business which is the ‘client’ and IT being referred to as the ‘supplier’. Good and well in a static environment, but a recipe for an out-of-business-signboard in a highly competitive one as the Entrepreneurial IT requires a fundamentally different approach.

[Note: this is another small piece of the book I’m writing]

Literature:

[FZ1]ITIL and the creation of benefits: an empirical study on benefits, challenges and processes, 18th European Conference on Information Systems, Marrone, Mauricio, Kolbe, Lutz M.

[FZ2]Justifications, Strategies, and Critical Success Factors in Successful ITIL Implementations in U.S. and Australian Companies: An Exploratory Study, Carol Pollarda; Aileen Cater-Steelb, Information Systems Management, Volume 26, Issue 2, 2009, Pages 164 – 175.

[FZ3]The effective Organization: Forces and Forms, Henry Mintzberg, Sloan Management Review, Winter 1991, Volume 32, number 2

[FZ4]Successful Change Programs Begin with Results,
Schaffer R. H., Thomson H. A, Harvard Business Review, January-February 1992.

[FZ5]Mastenbroek, W. Verandermanagement. Holland Business Publications, 1997.

Benchmarking becoming obsolete?

noreply@blogger.com (François Zielemans) — Mon, 28 Mar 2011 20:19:00 +0000

Today I was asked to give my opinion on the proposition “when outsourcing is benchmarking required to prevent a failure” by an editor of an IT magazine. My first thought was: of course it is, as including a benchmark clause in a contract was standard practice when I drafted a contract. But then I thought again and come to a less back-and-white conclusion.

Benchmarking before or during the contract period is common good and big business for companies like Gartner, Alsbridge and Compass, but given the increased complexity and tailoring of the solutions provided I wonder whether their usage is not restricted to a limited set of services. Services which soon get so common that many just buy them out of the cloud. Let me explain.

Many organizations outsourcing for the first time did not know what to expect from a supplier and often also have no clue about the cost of a workspace or server. They just knew the total IT budget and had a target to reduce it by 5% before next year. The benchmark company helped these companies in two way: allocate the aggregated budget to individual services and provide the average cost in the market for that same service. That way the organization knew whether there would be a positive business case.

Since than many things have changed. For starters have most organizations learned that selecting the cheapest suppliers is not always the best decision. The damage caused by crappy services and the invoices send for additional work ensure many business cases end up in the archive, together with the responsible IT manager. Both not to be seen again. As a result know companies that outsource for a second or third time what to expect and go for a more balanced contract. And as they have the price sheet of their existing supplier, it is easy to calculate any benefit by choosing a competing supplier.

At the same time are many standard IT services commoditizing to an extent that it is as easy as going to a grocery store. Server capacity, storage and a continuously increasing list of applications can be bought out of the cloud on a pay per use basis. How much price transparency do you want?

That leaves the company specific solutions and technology. Solutions which key business value are for example improving flexibility or speed-to-market of the business. How are you going to benchmark those qualities? How do you ensure you use the same definitions per company? Everybody can easily agree on a definition of ‘availability’ or ‘response time’, but defining ‘flexibility’ is already more complex (e.g. volume, service mix, time). The same applies to the cost. How do you create a peer group if there are maybe one or two companies which have similar services? In other words, the validity of the outcome of a benchmark deteriorates fast when complexity and tailoring increase.

As a result I believe that the relevance of benchmarking will decrease over time with a) companies leveraging experience from past deals, b) standard services becoming so commoditized that benchmarking does not add any value, c) IT services retained by companies become to specialized to benchmark as the peer group is too thin.

No shares in benchmark companies for me I guess ;-)

Run your datacenter on paprika’s

noreply@blogger.com (François Zielemans) — Sun, 20 Mar 2011 17:47:00 +0000

The Netherlands has traditionally a leading position in agricultural (Tulip anyone?), but due to the climate many crops are grown in greenhouses that have to be heated during winter. The engines used run on gas and the resulting heat and carbon dioxide are used to create the optimum growing conditions. These ‘micro combined heat and power engines (Micro-CHP) produce also electricity however, and much more than needed to provide artificial lighting during the night hours. One options to feed the access power back to the grid or to feed it directly to nearby houses and company buildings. One such initiative includes using the power of 35 engines used to heat 220 hectares of greenhouses to power a new datacenter. The access heat produced by the datacenter is in turn fed back to the greenhouses. This initiative is an example of the increased emphasis on sustainability within many industries and at the role of technology as an enabler (e.g. smart grid).

Reducing the environmental footprint of information technology has its origin in the Energy Star initiative launched by the U.S. Environmental Protection Agency in 1992. Through this program manufacturers of energy-efficient monitors and other equipment could distinct themselves from less environment-focused competitors. Since then, ‘Green’ has seen a steady rise on the priority list of governments and companies all over the, including the implementation of legislation. In the United States the American Recovery and Reinvestment Act (ARRA) legislation allocated $90 billion to be invested in projects aimed at improving the energy efficiency of IT itself (‘green for IT’) and the use of information technology to increase the level of sustainability within other industries and the society as a whole (‘IT for green’). In France and Australia the adaptation of more efficient technologies is pushed by the government by the introduction of a carbon tax. In France companies with more than 500 employees have to report on their emissions and take action to reduce them and in Australia a ‘cap and trade’ system will be implemented by 2012. For the European Union as a whole both new legislation is underway and funds are freed for initiatives like Green Active Management of Energy in IT Service centers (GAMES). It is a research project aimed at developing best practices, methodologies and supporting tools to improve the energy efficiency of future data centers. Other organizations focus on creating standards and guidelines. Some more generic standards are:

ISO 26000 (social responsibility), ISO 14000 (environmental systems) and ISO 19011 (auditing of environmental management systems) from the International Standards Organization (ISO).
BS EN 16001 (Energy Management Certification) from the British Standards Institute (BSI).
Global Reporting Initiative (GRI),which publishes a widely adopted set of reporting standards on topics like human rights, environmental, anti-corruption and other sustainability related subjects.

Besides these generic standards there are also many aimed specifically at technology. Some are directly related with the manufacturing of the components while others focus on the deployment of them.

Manufacturing. The IEEE P1888 Working Group is developing UGCCNet (Ubiquitous Green Community Control Network) standard which allows various building components to interact with each other to improve energy efficiency. The IEEE P1801 is a standard for the design of low-powered integrated circuits, and IEEE 1680 specifies how to quantify the green properties of electronic devices like computers, printers and scanners.
Deployment. The Green Grid is a group of international companies which aim is to improve energy efficiency of data centers by introducing metrics and indices, allowing mutual comparison on both operational efficiency and maturity level. The CompTIA Strata Green IT and Information Systems Examination Board’s (ISEB) Foundation Certificate in Green IT are certifications aimed at IT managers and professionals who want to advance their knowledge on ‘green computing’.

Even though initiatives to increase the power efficiency of data centers and IT systems in general can have a substantial impact on both the environment and the electricity bill, are the largest (future) gains in be expected in the area of IT for Green initiatives. By implementing smart meters in houses, local CHP systems, supply chain optimalization or teleworking, scarce resources are used more efficiently. These technologies are often combined with initiatives to better inform consumers on their usage patterns, enabling them to change their behavior and thus benefits of the technology. Trackulous allows consumers to track their own impact on the environment, while GreenScanner provides information on the environmental impact of products . Information which will get increasingly detailed and complex with the introduction of Life Cycle Assessments. These kind of assessments allows companies to determine per phase in the value chain both the current impact on the environment, and the potential benefits that can be achieved.

The adaptation rate of green technology will in the end however be determined by the price and the value of the efficiency gain it enables. The illustration shows the relationship between the price of the more environmental friendly product and the number production volume required to become a competitive substitute for existing technologies. It shows that new technologies (e.g. ‘green’ data centers) can initially be substantially more expensive than established ones, but that initial support (e.g. ARRA funding), legislation and carbon tax can even the odds quickly for newcomers. This combined with the rising prices for fuel , raw materials and almost any other commodity, the value of the efficiency gains offered by new technologies will push the economic breakeven point increasingly to smaller production volumes.

The consumer as a micro-supplier

noreply@blogger.com (François Zielemans) — Thu, 17 Feb 2011 08:55:00 +0000

The interconnections between companies and their external stakeholders become more intens by the day. The world's leading provider of lithography systems for the semiconductor industry, ASML, is a company where several hundred external business partners are very closely integrated in the design, development, integration and servicing of the systems used to make CPU’s, GPU’s, memory modules and other advanced microchips. Up to 90% of the total system costs are supplied externally and business partners several tiers deep in the supply chain have access to relevant technology and product development information from ASML. It allows ASML fast access to new innovations created throughout its value chain, without the need to invest themselves in all these areas. ASML focuses on the high value-added integration role, including product competence and manufacturing cycle times while the business partners design and manufacture specialized subsystems.

But not only suppliers become part of the companies’ eco-systems. With the internet entering homes and mobile phones, the companies’ communication, distribution and sales channels end literally before the eyes of the consumer. The opportunity to tap the knowledge and creativity that becomes available this way is capitalized on my an increasing number of companies.

Companies that integrate consumers into their value chain are among others LEGO, shirt retailer Threadless and Unilever’s Ponds Institute. At LEGO consumers are invited to submit their idea’s for new products and are even financially rewarded if their idea proves to be a commercial success. At Threadless consumers are invited to interact very closely with the design department to shape the new collection while the Ponds Institute seeks your views about your look and feel in order to personalize the skin care they provide to you. Being it capturing new design idea’s, sourcing subassemblies from external business partners or test prototypes with consumers, an increasing number of companies embrace an ‘open’ innovation and cooperation model, contrary to the closed, vertically integrated approach companies like IBM, Bell Labs and Xerox are famous for.

In the future, everybody will have the opportunity to become part of a companies value chain. And not just because the company wants to have a share of your wallet, but because you as a consumer can have a tangible effect on the companies long term success. We can all become micro-suppliers.

Make way for new suppliers on the block! Part II

noreply@blogger.com (François Zielemans) — Thu, 06 Jan 2011 08:10:00 +0000

Imtech is an example of a (Dutch) Tier 3 supplier which has been successful in closing several considerable IT deals (e.g. deal of 124 million euro). One of their success factors in my opinion is their diversification strategy. They are not only strong in IT, but also in engineering disciplines like Mechanical and Electronics. This has three benefits:

Delivering engineering services to for example companies active in the automotive industry ensures Imtech has solid knowledge of that vertical, which can be leveraged on by the IT discipline.
The disciplines Mechanical Engineering, Electronics and IT are fusing increasingly together within many types of industry, requiring cross functional knowledge to deliver maximum added value as a company (or partner with other suppliers).
Having a contract with a company to provide electronic systems to control the chemical processes of a company, ensures there is an existing relationship the account managers of the other disciples can build on. Increasing the work scope with an existing client requires in general much less effort compared to establishing a relationship with a new client.

Does this mean that all suppliers should follow this strategy? No, of course not, but it is certainly one of the strategies smaller supplier can use to compete with the big IT suppliers as IBM, Accenture, Atos Origin, CSC, TCS, Wipro and so on.

As stated in the previous post is an important USP of smaller suppliers their agility and capability to deliver new innovations to the market faster. With companies looking increasingly for solutions which allow them to become more competitive in the market place instead of solely looking for solutions op optimize the efficiency of back office processes (e.g. ERP), many opportunities are out there which the Tier 1 and 2 players find difficult to provision. This is why many (even larger) companies these days make two adjustments in their sourcing strategy:

Mix large, efficiency focused contracts and single vendor contracts, with smaller contracts allocated to multiple suppliers (‘multi vendor’)
Engage with niche players which can provide in the companies need to improve its flexibility, agility and speed to market

The main differences between the traditional ‘old school’ supplier and the ‘new kids on the block’ suppliers in my opinion:

Economics for old school suppliers is based on high fixed cost make large volumes essential to achieve low unit cost; economies of scale are key. Culture shaped by the continuing battle for scale; rapid consolidation, a few big players dominate. Competition is cost focused; stressed standardization, predictability and efficiency.
Economics for new entry suppliers is based on focusing on early market entry with new solutions enables charging premium prices and acquiring large market share, speed and innovation are key. Culture shaped by the battle for talent, low entry barriers, many small players can thrive. The competition is employee centered, coddling the creative stars which create the new solutions.

The trick for the company which wants to outsource is to create a sourcing strategy which can leverage on the strong points of both types and the capability to integrate the offerings within the internal organization.

Make way for new suppliers on the block! Part I

noreply@blogger.com (François Zielemans) — Tue, 02 Nov 2010 08:37:00 +0000

A side effect of globalization and informed customers is a shorter lifecycle of products and services. The competitive pressures introduced by globalization and buying behavior of customers in combination with the fast past of technological advances, shorten the payback time of investments in R&D and new production facilities. This requires organizations to become increasingly flexible and agile in order to quickly adjust production volumes and product mix.

The increasing complexity of services and products in combination with the ever higher investments required to improve quality, lower cost and renew the product and service portfolio, increase the entry barrier for new players.

Within the banking and insurance industry several new players have gained considerable market share over the last couple of years by leveraging technological advances and the desire of customers for a bigger bang for a buck. Think of web-based brokers which allow consumers to trade stock, derivatives and other financial instruments without expensive dealing rooms as intermediates. Or start-ups which offer pension products at considerably lower prices than traditional financial institutions. In both situations plays IT a crucial role. The new kids on the block use it as a key enabler to capitalize on business opportunities while the legacy IT of established banks and insurers limits the ability to adjust the business model to the changes in the market place.

One of the effects of the previously mentioned trends is the need as a company to specialize. Where General Motors used to own the whole value chain required to build a car, are many individual chains now allocated to sub-contractors. The benefits are lower cost through economies of scale and freeing up funds that can be invested in strengthening existing capabilities or innovation. Specialization however also means making choices. Choices about retaining which activities, assets and employees. And that brings me to the subject of the external supplier

‘Old school’ suppliers
‘Agile’ is a term which gained in popularity when the software development community introduced the Agile (SCRUM) concept. But not only in software development is often more agility required, the whole IT function has to become more agile to cope with the trend described in the previous paragraph. And that is an area most ‘traditional’ IT service providers don’t excel in. They are the masters of operational excellence: lowering cost through economies of scale.

As a result the big players find it difficult to response on developments like cloud computing, and ‘as-a-service’ solutions with truly agile solutions. Yes of course they advertise that they also can deliver it, but when looking beyond the marketing fluff one sees in most cases that the underlying technology and organization is still largely the same as used to deliver the traditional services.

Everything is ‘virtualized’, but short speed to market is only available if you stick to the standard solution of the supplier. There is typically no room for flexilibility in these concept other than in volume. You have to upgrade when they upgrade, you have to stick with their support and maintenance windows, you have to follow their patch policies, you have to…

	New school suppliers	Old-school suppliers
Economics	Early market entry enables charging premium prices and acquiring large market share, speed and innovation is key.	High fixed cost make large volumes essential to achieve low unit cost; economies of scale are key
Culture	Battle for talent, low entry barriers, many small players trive	Battle for scale; rapid consolidation, a few big players dominate
Competition	Employee centered, coddling the creative stars	Cost focused; stressed standardization, predictability and efficiency

And worse of all, it is in most cases the same service organization that supports it. An organization that is organized in functional silo’s with their concrete processes and procedures. The organizations that take ages to comes back to you when you have an issue and excel in ping ponging tickets between departments.

New school suppliers
As described in the previous post, are the traditional service offerings excellent for a large part of the typical service portfolio of an organization (e.g. Key Operational services), but especially for the services related to the quadrant High Potential, the offering has to be truly agile, quick and innovative. And that is why especially in cloud and as-a-service solutions new players can be successful. They fulfill a business need both the internal IT organization struggles to fulfill and which traditional service providers are also not capable to deliver.

The newcomers allow the internal IT organization to ‘rent’ their innovations and new capabilities and incorporate them into their own service portfolio. This in term allows the internal IT organization to finally transform itself from delivering business process automation services and other low added value solutions. More on these new kids on the block in the second part.

Outsourcing and innovation: a contradiction or not?

noreply@blogger.com (François Zielemans) — Fri, 01 Oct 2010 19:07:00 +0000

Outsourcing IT to improve the capabilities of the IT to innovate and improve speed-to-market looks at first a contradiction. Typically outsourcing is used to reduce IT cost, with standardization and less responsiveness regarding new business demand as a side effect.

However, outsourcing can actually help an IT organization to improve their speed-to-market and ability to deliver new services that add value to the business. A business that wants to grow again after a period of economic downturn and expects IT to act accordingly. There are two basic keys to achieving this goal.

First key

The first part is understanding that the dynamics to manage on speed-to-market and innovation is fundamentally different from delivering reliable (standard) solutions at high availability levels. The first type of service requires agility, flexibility and a general focus on benefits. The second type focuses on reducing the change of an operational risk materializing. In other words: solid build, test, acceptance and operation procedures, checklist, manuals etc. Not an approach that facilities innovation…

Realizing the required differentiation starts with a better understanding of the dynamics of the services provided by the IT organization. Classification based on the portfolio model of Ward et al (1996) can help this. This model maps services to four quadrants accordingly to their contribution to the primary business objectives and the extent to which business processes are dependent on them for their day-to-day operation (illustration).

Strategic. These services are critical to maintain the existing competitive advantages and to develop them further. IT investments in this quadrant are used for innovation that contributes to the maintaining and developing the current competitive advantage.
High Potential. In this quadrant are services that have in most cases no yet yielded a positive contribution to the financial result, but show a lot of potential. The services in this quadrant have a high level of investment risk and should be managed as such. In this quadrant focus is on innovation and speed to market.
Key Operational. In this quadrant are the services that are crucial for running the current operations of the business. The underlying IT systems enable the organization to execute its business processes in an effective and efficient manner. The focus in this quadrant is on reliability and availability.
Support. The added value in this quadrant is limited to the automation of business processes in order to execute them more efficiently.

The dynamics between the quadrant High Potential on one side and the quadrants Key Operational and Support on the other side differs fundamentally. Within the High Potential quadrant, the speed-to-market of new features and innovations the primary focus. Within the quadrants Key Operational and Support, the emphasis is on high reliability and availability figures.

Second key

From business perspective, the services in the Support quadrant add the least value, so the trick is to minimize the budget of this quadrant and transfer the achieved reduction to the quadrant High Potential (= the innovation quadrant). In short, source standard solutions for the Support quadrant, which are build and operated by external vendors.

Additional financial room can be created by applying specific sourcing strategies to the other quadrants. The outline of these sourcing strategies could be as follows.

Financial room (both CAPEX and OPEX) can be unlocked by deploying cloud-based solutions for the services in the High Potential quadrant. An additional advantage of using cloud services in this quadrant is it reduces the investment risk. Not every service in this quadrant will reach ‘adulthood’ and move to another quadrant. For many another exit strategy will be necessary. Another reason to work more with external parties for services in this quadrant is the disruption caused by the dynamic of innovation on building and managing systems in the Key Operational quadrant.

In the Key Operational quadrant there are possibilities to outsource parts of the infrastructure layer, provided they are not too intertwined with the application layer. Suppliers will have the least work in the Strategic quadrant, given the importance to the organization. Here is would be best to work only with hiring of capacity where necessary.

The approach outlined here gives only part of the puzzle. The difference in dynamics among the different quadrants impacts also aspects like HR management, processes, architecture and the like. Only from a holistic approach, the IT organization will be able to actually roll out new innovations faster.

Why government run shared services often fail, part 2

noreply@blogger.com (François Zielemans) — Fri, 10 Sep 2010 07:58:00 +0000

This blog is a follow up on this piece in which I wrote on some of my experiences with IT shared services in the government sector. Here I want to write about two solutions which would improve the success rate of a shared service center.

Practical example

The organization is a grouping of local government agencies which have a long history of semi independence. Policy is partially dictated from a ministry and national politics, but there is also room for local decision making. To align, the governors of the local agencies gather on a yearly basis to agree on long term policy and cooperation.

One of the decision was starting an IT-shared service center some ten years ago, because the processes of the agencies showed considerable similarities. However, these similarities turned out to be far fewer than expected and every local agency had a list with arguments why its deviations had to stay. The result was IT systems which had more custom code than common code.

The SCC was in the meantime held accountable for the accompanying budget and time-overruns. Efforts to not make the same mistake for the next IT system, resulted in months of discussion with the local agencies about which functionalities to incorporate and which not. And if there was agreement on the functionalities they were at such a high detail level that designers and programmers could only guess the underlying requirement…. and thus build something that was rejected during functional testing.

The combination of semi-independence, high budgets and local processes which were developed over several hundreds of years, resulted in a failure of transforming the intention to cooperate into a success. This combined with the ‘client-supplier’ relationship which came with the establishment of the SSC, resulted in local agencies putting all the blame with the SSC. The SSC got paid after all to build and operate IT services, and the client is always right….. (illustration 1)

The employees of the SSC had by now the feeling to be stuck between hammer and anvil.

Getting the Principal and SSC closer together

The cooperation between the local agencies and the SSC is depicted in illustration 2. Together, the yearly long term targets are defined, which the SSC is then expected to execute, with the help of the local agencies.

The first solution direction is depicted as option 1 in illustration 3. In other words, the various activities related to governance, information management and functional management are centralized in a ‘director-function’ between local agencies (the principles) and the SSC (the ‘supplier’). This ensures that the fights among the local agencies regarding their differentiations in demand are not fought in the front garden of the SSC.

The SSC is able to focus on building and operating IT services. Building functionalities which have been streamlined and made uniform before communicating them to the SSC. The ‘director function’ was made responsible for alignment of demand-supply and reported directly to the overall government board of the local agencies. Escalations were thus dealt with within the business domain and did not reach the SSC.

Illustration 3, option 2 provides another solution to reduce the tension between SSC and the principles. The second option focuses on a (temporarily) cut of the ambition level by cutting the IT portfolio in two parts. One part is build and operated by the SSC while the remaining services are decentralized again. For this second part a local agency can source independently from the SSC and other local agencies. To apply this second approach for the area’s with the highest level of differentiation, the overall tension level would be reduced.

By focusing the energy to IT services where it is more likely to be successful, a positive feedback spiral would in time lead to a situation where also more difficult challenges could be addressed. In time the end result would be the same, it would just take more time. And time is not a short supply in most government agencies.

The additional cost which accompanying these two options will in practice disappear against the budget overruns on ongoing projects which are executed in the ‘old’ fashion. The impact will therefore be mostly on the organizational side. With option 1, the SCC will have to split off its capabilities regarding information management and functional management as it would become part of the new director function in the business domain. With option 2, the shared service center would lose (temporarily) part of its portfolio and this resources and budget.

In the third part I will write about the application of both approaches and provide some general guidelines based on my experience.

The CIO agenda of tomorrow, part II

noreply@blogger.com (François Zielemans) — Fri, 03 Sep 2010 07:08:00 +0000

To execute innovation for low cost and ‘lean customization’ more successful than next doors competitor, one shared ingredient is necessary: information dominance. Where achieving air dominance is crucial to decide a military conflict in your favor, will gaining information dominance be central in doing business in the years to come. It can be simple like soccer team AC Milan using a mathematical model to predict the chance players will get struck by an injury. Google uses self-learning algorithms to improve search results and present advertisements while the success of retailers Wal-Mart and Ahold is derived from knowing more of consumers and suppliers than their competitors.

These organization have been able to get a grip on the massive data amounts and can predict to a high degree what an individual customer will buy next. Smart technology alone is however not enough as all relevant information was available on the terrorist who boarded the flight between Amsterdam and Detroit in December 2009. In this case the human factor prevented the proper conclusion to be draw. In that sense is terrorist hunting like doing business, IT can do a lot, but the chain is as strong as the weakest chain.

What else on tomorrows agenda? Expect more patent lawsuits related to business models. Companies increasingly approach new business models or methods as intellectual property and try to protect it with a patent. With several e-commerce related patents being awarded, is it also for IT important to be vigilant when the business requests mimicking somebody else’s e-business concept. Patenting a new business concepts is however at the same time also a mechanism for startup companies to defend themselves against the might of established companies.

Established companies which have capital to spend, but lack the flexibility, creativity and drive of small companies. Many large corporations have insulated themselves over time from their customers, with the financial services industry as an obvious recent example. Transforming large corporations into more nimble organizations is therefore one of the main challenges for tomorrows graduating MBA student. Corporations are increasingly being challenged by SME’s which rely heavily utilizing the latest technological advances to provide higher quality products and services at lower cost levels.

The CIO agenda of tomorrow, part I

noreply@blogger.com (François Zielemans) — Tue, 24 Aug 2010 12:02:00 +0000

One of the effects of the recent economic meltdown is American and Western European consumers looking for cheaper products. Many are shaken and struggle to pay off existing loans, let alone feel comfortable to engage new ones. At the same time are billions of consumers in Asia, South America and in a lesser extent Africa, entering the middle class. But a middle class which can only afford cheap products. Companies react to these developments by producing cheaper products and services, like the one Lac (2,000 dollar) car from Tata.

In the Harvard Business Review article ‘Innovation’s Holy Grail’, C.K. Prahalad and R.A. Mashelkar argue that this change in demand requires companies to think differently about innovation. Where traditional innovation is built on the assumption of abundance in capital, knowledge and other resources, will future innovation be driven by the need to build more products with fewer resources. According to the authors, companies should focus on ‘affordability and sustainability, not premium pricing and abundance’. The subsequent global search for lower cost, affordable talent pools will lead to even more dispersed value chains, requiring sophisticated IT solutions to manage the accompanying complexity.

Other business models are based on free, as free is better than cheap. This business model is based on providing free services to most consumers in combination with adjacent revenue sources that cover the cost. The concept of free services was made popular by author and Wired editor Chris Anderson in his book Free: The Future of a Radical Price . In reality is the product or service is indeed free for most consumers, with advertisers or ‘premium users’ generating the necessary revenue. Will this the future? Not very likely as the available revenue pool generated by advertisement or user-upgrades is limited. Even Facebook with 500 million users still requires cash donations from its owners.

While being price conscious are consumers at the same time looking for products which reflect their desire for individualism. Companies like Netflix and Amazon.com have already mastered the skill of selling a large number of unique items in relatively small quantities, while still making a profit. Chris Anderson described this concept in this book The Long Tail: Why the Future of Business Is Selling Less of More and this retail concept is gaining in popularity with the consumers’ desire to reflect their personality in the products and services they buy. The ‘Long Tail’ in the book title refers to the statistical property that a larger share of consumers rests within the tail of a probability distribution than observed under a 'normal' or Gaussian distribution. More simply stated, consumers used to be happy with a black Ford, but not anymore. They expect all available colors of the rainbow, paying only a minimum premium for that added value. This requires companies to combine two, on first sight conflicting, requirements in their production process: efficiency and differentiation.

Offering a wide variety of customizations without adversely impacting cost is a skill which Western European car manufacturers learned to master. There the customization process starts with feeding information left behind by visitors of their websites regarding preferred models, colors and options into the production process. A production process which is based on the capability of putting a wide variety of modules together as a jigsaw puzzle. The flexibility these modules bring into in the design process and supply chain is the cornerstone of the car industries’ ability to combine product flexibility and efficiency. It drives the adding and removing of functionalities, integration with suppliers, and allocation of R&D efforts among all companies involved.

This post is from the 2nd chapter in the book I’m writing on orchestrating the Business IT value chain.

Outsourcing with Solvency II in your back pocket

noreply@blogger.com (François Zielemans) — Thu, 29 Jul 2010 17:54:00 +0000

Getting outsourcing contracts to comply with Solvency II is not rocket science, but requires a certain amount of attention. Here are some practical guidelines.

Where within banks the Basel II implementation projects come to an end, are insurers burning the midnight oil to get Solvency II implemented before the end of 2012. The Solvency II legislation is aimed at improving risk management practices within insurance companies and providing better protection for policyholders. For this purpose, the legislation demands:

the insurer to hold enough capital to survive a period of economic hardship (pillar 1),
adequate quality of internal controls and governance (Pillar 2) and
greater transparency in communication with the regulator and market (Pillar 3).

These three topics have been translated into clauses that must be complied with. If the insurer has not outsourced any IT or business processes, it is sufficient for the insurer to translate the legislation into internal controls. If the insurer has however outsourced activities then two activities are added to the project:

Compliance with specific outsourcing requirements (in particular Article 49)
Translating internal controls into a framework the supplier has to adhere to.

Specific requirements for outsourcing
Before going into more deatil, is it important to note that currently only the top-level requirements have been published (known as level 1). These requirements are now being developed further into more detailed demands (level 2 to level 4). Ensure therefore to incorporate sufficient flexibility in new outsourcing contracts to cater for additional future requirements. Otherwise you might have to break open the contract and renegotiate parts of it.

At the highest detail level the specific requirements the insurer has to comply with related to outsourcing are:

the insurer remains fully responsible for compliance with Solvency II. In short, the insurer does not get away with pointing its finger at the vendor if it does not comply with the legislation.
The insurer must have written policies regarding outsourcing and adhere to them.
Outsourcing should not adversely impact on the quality of the governance system. In short: good control over the vendor is key.
Outsourcing should not adversely affect operational risk. In short: define the operational risk profile before outsourcing and ensure that sufficient mechanisms are in place to manage the operational risk profile after outsorucing.
Outsourcing should not adversely affect the ability of the regulator to check whether the insurer meets its obligations. This includes the requirement of the regulator to have access to the location of the supplier. In short, it is possible that a regulator wants to take a plane to India to audit a vendor.
Outsourcing may not adversely affect the continuity and adequacy of services.
The insurer will inform the supervisor prior to the outsourcing of critical or important functions or activities. In addition, the supervisor has to be informed in case of substantial changes to the contract.

It seems on first sight a relatively simple list, but demonstrating compliance to the regulator requires still some thought. In addition, not all (foreign) suppliers are eager to get a foreign regulator on its premises.

Translating internal controls

When a (part of) a business process or IT systems is outsourced, it must continue to meet the requirements set by Solvency II. The easiest way is to impose the existing internal control framework on the vendor. This is also the most expensive solution, because the vendor would not be able to use its own processes and best practices regarding risk management. Using standard SAS70 / ISAE 3402 as a compliance-cure will not do, because its scope does not match the specific demands posed by Solvency II.

Without going into too much detail, the following recommendations will guide you in the right direction:

Define for the outsourced activities a "Solvency II risk profile”. Some activities and IT systems will hardly be affected by Solvency II, while other parts will be heavily impacted by Solvency II.
Differentiate the design of the risk control framework based on the risk profile. Think of a 'bronze' approach for activities with a low risk and a silver and gold framework for critical processes.
Translate the bronze, silver and gold profiles in specific control measurements and requirements the vendor has to comply with. Put relatively mild measures for bronze (e.g. reporting, due diligence on policies, relying on monitoring framework of vendor) and put heavier measures when outsourcing more risky activities (e.g. prescribing controls, third party audits, strict monitoring of vendor compliance ).

This approach allows for an optimal allocation of scarce time and resources to existing and planned outsourcing contracts in order to make them comply with Solvency II. It's not rocket science, but especially translating an internal control framework into an adequate framework for the vendor requires some thought and attention.

Why government run shared services often fail

noreply@blogger.com (François Zielemans) — Tue, 27 Jul 2010 15:50:00 +0000

In this blog and the next blog I want to share some of my thoughts on government agencies using shared services. More specifically: why do they often function so cumbersome that they make it into the newspapers.

What makes shared services within government different
Centralization of IT or processes like finance, HR administration offers the ability to rationalize and standardize processes, allowing for lower cost, more consistent quality level and faster decision making. As voters expect their ministries and other government agencies to eat as little as their tax money as possible (especially in these times of economic hardship in the US and Europe), is sharing resources and processes a useful vehicle to achieve that goal.

As a result many ambitious objectives have been defined by high ranking government officials. These government officials did however not always realize that ‘sharing resources and processes’ also effects their power base. Where they use to rule their little kingdom, they now have to talk to other little kings about a common approach. Sharing that hard earned throne is however not something that is part of the standard government culture.

A culture which is shaped by the political context they operate in and often hundreds of years of semi-independency. The political context is influenced by objectives and tasks from various stakeholders. Stakeholders like voters, politicians and government workers higher up in the food chain. To make things even more complex, the needs of these stakeholders are not static, they change. This results in a very complex and dynamic environment. And complexity and especially dynamics are not friends of a shared services. Shared service centers (SSC) have their optimal working area in a relatively static environment as this allows for standardization and functional pooling of resources.

When a SSC is created this ‘tension’ between demand (the ‘business’) and supply (‘supply’) remains under water as creating an organizational structure and filling it with people does not actually change anything yet. All the little kingdoms are still as they were before. The actual change starts when the first processes have to be transferred or the first shared project is initiated. Then all of a sudden all the differences surface. Differences which are often considered insignificant by somebody working in a commercial company, but can result in years of trench wars within government agencies.

Splits between demand and supply
The SSC finds itself now in an impossible position. The Principles that initiated the shared service center and gave it the objective to cut cost, are the same people that prevent it achieving that objective. The result is a nice negative feedback loop. In order to keep the Principles ‘on board’ the SSC creates a lot of exceptions and customizations. This increases however the cost level (and thus financial charge for the Principle), increasing the frustration and need for the SSC to be even more willing to allow for customizations next time round.

In other words: the difference in optimum working area of the SSC and the dynamics of its Principles often leads to considerable tension between supply and demand. The result are budget overruns and missed timelines. In most cases both parties acknowledge that there is an issue/mismatch, but the next projects ends the same way is the culture turns out to be stronger than the rational dictation change. At the end of the day, the king wants to remain king.

In a follow up blog I will share two approaches to ease the tension and bring demand and supply closer together.