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IT Strategy and Cost Alignment Presented by: Chad Doiron, KSA April, 2005.

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Presentation on theme: "IT Strategy and Cost Alignment Presented by: Chad Doiron, KSA April, 2005."— Presentation transcript:

1 IT Strategy and Cost Alignment Presented by: Chad Doiron, KSA April, 2005

2 1 What isnt IT Strategy and Cost Alignment? Perception is that IT Strategy and Cost Alignment is either: 1.List of big projects; or a, 2.Recommendation to outsource.

3 2 What is IT Strategy and Cost Alignment? Reality is that IT Strategy and Cost Alignment is: 1.Opportunity to Re-allocate IT Budget 2.Mechanism for IT and Business Alignment 3.Foundation for Engineering Effectiveness

4 3 What is the one metric we get asked about most? IT Expense % of Sales

5 4 AAFA Median is 1.9% of Sales Overwhelmingly, the most common metric for which KSA receives requests for information is IT Expense % of Sales. The goal of this metric is to assess the degree to which IT is contributing to the success of the business. However, AAFA numbers vary widely - which is typical for many industries. Due to this variation, it is impossible to use as an industry benchmark. The key reason is that the numbers have no direct relationship to a companies priorities. …based on respondent data, a full 78% of you should be at or below the CP industry average of 2.6% of sales. The median value for AAFA respondents is 1.9% of sales… compared with 2.6% for CP overall.

6 5 Initial Focus: $ IT Expense Taking a deeper look at this metric reveals the disconnects between its relevance as a measure of IT effectiveness and its usefulness as a means to manage the IT organization. Reduce Budget $ IT Expense / $ Sales

7 6 Question: Do you really want to reduce your budget? No! Re-allocate Budget What do you want to do? Well, retail is a conservative industry and we want to cut spending. Well, what are you going to do? Well. I have to replace my POS, I have this RFID thing to worry about, I have all this business process reengineering I have to figure out, we need to do more CRM because we have to drive incremental revenue. Mark Millstein, Big Picture Spend Trend, WWD, February 2005

8 7 Pressure to Expand IT Budgets You have indicated that the two greatest obstacles to success of the IT organization is Budget/Cost Constraints and Lack of Human Resources… …both of which suggest that improving the success of your organization would be better served by INCREASING your budget not decreasing it.

9 8 ITs Perspective on IT ValueBusinesss Perspective on IT Value A full 80% of you consider IT to be a key lever of the top-line… …however only 40% of you believe your business considers you a top-line contributor. ITs Role in the Organization Furthermore, your survey responses indicate that you typically viewed the IT organization as highly valuable to the success of your respective companies. (Although more so than your business users do.) Cutting spending when it is producing returns is inconsistent with corporate goals of profitable growth and therefore only makes sense if doing so does not diminish your ability to deliver on business value.

10 9 Objective: Re-allocation A primary objective is to enable re-allocation of current budget $s away from operations spending toward innovation spending – thereby increasing the level of strategic support to the rest of the business. - For Illustration Purposes Only – Reduce Cost 50% Increase Innovation 75%

11 10 Second Focus: $ Sales Returning to the original IT expense % of sales measure, the highly sales – centric nature of this metric implies that there is a priority for the IT organization to increase revenue. The real question is whether or not that is a high priority for your organization. Increase Sales $ IT Expense / $ Sales

12 11 Question: Should sales be your highest priority? No! Align with Business In a sign of the growing importance of technology to retail success, a huge percentage of executives said their companies IT and business strategies were either highly aligned, 49 percent, or close to highly aligned, 34 percent. Mark Millstein, Big Picture Spend Trend, WWD, February 2005 This should be a wakeup call for any retailer who is not aligned or only somewhat aligned because your competition is. Jeff Roster, Principal Analyst, Global Industries-Retail, Gartner

13 12 Overall IT Priorities When asked about your priorities, only a small percentage (30%) of your high priorities were in application categories that directly address sales. 4 of your top 5 high-priority categories focus on either reducing COGS or SG&A. The only top-5 high-priority category that directly addresses sales is merchandising. SalesCOGSSG&A 25%

14 13 Budget Allocation Consistent with Priorities And your budget allocation is very consistent with these priorities as you see them. Only 27% of your budgets are focused on increasing your companys sales. Correspondingly, 73% of your budgets are driving value that is not being reflected in the primary metric by which the rest of the business measures your success.

15 14 Taxes Sales COGS Operating Expense Depreciation / Amortization The Highest Common Denominator … $ EBIT GP EBITDA EBIT Earnings …track these metrics over time. For these projects categories… $ IT Depreciation (Revenue Projects) Per $ Revenue $ IT Depreciation (COGS Projects) Per $ COGS $ IT Depreciation (COGS Projects) Per $ COGS $ IT Depreciation (SG&A) Per $ SG&A $ IT Depreciation (IT Cost Reduction) Per $ IT Op. Exp. MerchandisingSales Product Development, Production Logistics and Distribution IT Rationalization & Rightsizing

16 15 Since the value of IT is in the business innovation that it supports… …doing a better job will result in dramatically improved return on investment. Therefore the only universal metric that allows for comparison of IT alignment with the business must be one that takes into consideration all business objectives. Companys are asking IT to deliver value for dollars invested. Over time, this means an increase in $ EBIT / $ IT Spend. - For Illustration Purposes Only – Improve Return Objective: Align IT with Business ($ EBIT/$ IT Spend)

17 16 Question: Is there anything else? Yes! Engineer Effectiveness The majority of failures of technology implementations are due to poorly executed business process reengineering. It is typically a people problem more than a technology problem – a lack of staffing, which is historic, and a lack of funding. Mark Millstein, Big Picture Spend Trend, WWD, February 2005

18 17 Remaining Obstacles Relate to IT Best Practices Returning to the obstacles to success chart on from page 7, the remaining 33% of your responses are best addressed by improving the reliance on best practices.

19 18 Most Contributors to Success Tie to Best Practices Best practices also contribute to 73% of the success factors you sited for your organizations.

20 19 IT Planning Objective: Engineer Effectiveness IT Operations IT Policies Therefore not only is it critical to drive innovation spending and align with the business priorities, but it is equally important to create a way of maintaining the end state.

21 20 Objectives Summary ObjectivesGoals 1 Enable Budget Re-allocation 1Identify opportunities to reduce operating costs associated with running IT 2 Architect application and infrastructure solutions to support the future needs of the business 2 Align with Business Priorities 3 Drive innovation in revenue and cost effectiveness based on business priorities 3 Engineer for Future Effectiveness 4 Implement best-practices to efficiently maintain alignment between the business and IT 5 Structure the organization to enable effective execution of business requirements The objectives of IT Strategy and Cost Alignment are three-fold… …however, there are five corresponding and actionable goals to consider.

22 21 What should you do tomorrow? 1.Internal Review 2.Consider Approach

23 22 Internal Review: Objectives Detail 1 Identify opportunities to reduce operating costs associated with running IT Are systems replacement prioritized based on cost/benefit and user requirements? Do the systems leverage common development environments and tools, and reusable components where possible so as to allow for more cost effective application solutions? How can you reduce costs associated with incompatible systems? 2 Architect application and infrastructure solutions to support the future needs of the business What infrastructure capabilities will be required to accommodate organic growth and new acquisitions? Will the current systems architecture be adequate to absorb and integrate future acquisitions? Are there gaps in the current applications portfolio that inhibit the achievement of strategic objectives? How flexible is the current applications portfolio to support new and yet unknown objectives of the business? How can IT be more cost effective? 3 Drive innovation in revenue and cost effectiveness based on business priorities Do you possess a strategic implementation plan that ensures information systems will be aligned with the business strategy and the processes needed to support the strategy while remaining flexible enough to accommodate future changes? Is the implementation timing of technology linked to major business milestones so it is in place to support business initiatives? 4 Implement best-practices to efficiently maintain alignment between the business and IT What processes need to be in place to ensure that IT priorities are established that yield the highest value and maintain alignment with strategic business needs? How can the current process for determining cost/benefit of new IT opportunities be improved? What policy changes will be required to sustain the best practices? 5 Structure the organization to enable effective execution of business requirements Does the current IT organization posses the skills needed to support the business into the future? How can the IT organization be structured to align more closely with the business and improve the effectiveness of its operations? What aspects of the broader organization beyond IT are inhibiting rapid IT solution identification and execution? How can the business become a better customer of IT? Leave here today asking yourself these questions of each of the five goals…

24 23 Scope of Full IT Strategy Business Strategy IT Alignment IT Infrastructure ApplicationsCapabilities IT Practices & Funding IT Organization Consider Approach: 5 Key IT Elements of ITS & CA Developing the right people and partnerships to deliver results Engineering processes and controls for IT and the business that drive value and alignment Understanding and supporting business strategy with IT initiatives Determining key business needs and how to gain enterprise-wide leverage Establishing the right base technologies and architectures to enable business growth and flexibility Consider achieving these objectives by addressing capabilities and needs across the five key elements of any IT operation. 1 2 3 4 5


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