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Working Draft - Last Modified 1/4/2006 2:33:36 PM Printed 0 WCO-ZXJ269-20080225-02 Spend Where IT Matters Technology Executive’s Peer Group CONFIDENTIAL Document February 27, 2008 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
Working Draft - Last Modified 1/4/2006 2:33:36 PM Printed 1 WCO-ZXJ269-20080225-02 How CEOs and business leaders often think of IT investments...
Working Draft - Last Modified 1/4/2006 2:33:36 PM Printed 2 WCO-ZXJ269-20080225-02 8,540 8,575 8,669 9,983 10,325 11,703 14,079 14,329 16,687 2,187 3,205 3,915 4,817 5,150 5,716 5,978 6,310 6,687 7,670 18,244 20,143 20,144 11,131 IT spending varies widely by industry, but averages 3.6% of revenue Source:Gartner Consulting Worldwide IT benchmark Service IT spending per employee by industry/sector, 2005 Dollars Education Metals and natural resources Transportation Hospitality and travel Food and beverage processing Professional services Retail Consumer products Construction and engineering Government Manufacturing Electronics Chemicals Media Information technology Pharmaceuticals and medical products Utilities Healthcare Energy Telecommunications Insurance Banking and financial services Database average IT spending as a percentage of revenue by industry, 2005 Percent Organizations with more than $1 billion revenue
Working Draft - Last Modified 1/4/2006 2:33:36 PM Printed 3 WCO-ZXJ269-20080225-02 While most spending goes to “staying in the race,” CIOs routinely seek a broader role Source: Gartner Worldwide IT Benchmark Report 2006: Volume 1: IT Spending & Staffing Analysis; McKinsey Business Technology practice 2007 12 23 65 100 Meaning IT’s contribution “Stay in the race” IT is now the cost of doing business in this market, a “commodity” not a differentiator Reliability, regulatory compliance, cost management “Win the race” IT helps compete and win by differentiated products, services, or prices; faster rollout or deployment; or better margins On-time, on-budget project delivery “Change the rules” IT enables new markets or services, brings significantly lower price points, or transforms the industry value chain Strategy-setting and counsel across the business Percent of IT spending
Working Draft - Last Modified 1/4/2006 2:33:36 PM Printed 4 WCO-ZXJ269-20080225-02 How to spend where it matters Inventory your spend by business process, not by system Spot which processes need the most IT enablement Assign a service level to applications according to process Map your processes by value and degree of IT enablement 12 34
5 Step 1: Inventory your spend by business process, not by system Source: McKinsey Business Technology Practice ILLUSTRATIVE Percent of IT spend Finance 5% 1.0 Develop 20% 2.0 Market and sell 10% 3.0 Manufacture 20% HR 2% Risk 1% Legal 1% Facilities 1% IT 5% 4.0 Fulfill and bill 30% 5.0 Support 5% 7.08.09.010.011.0 6.0 Research market 4% Select products 3% Design products 5% Prototype and test 4% Engineer 3% Manage library 1% 184.108.40.206.41.51.6 Develop campaigns 3% Market to customers 4% Respond to inquiries 1% Validate sales 2% 220.127.116.11.4 Design for manufacture 5% Source materials 4% Schedule operations 4% Produce 2% Manage inventory 3% Improve quality 2% 18.104.22.168.43.53.6 Process orders 5% Invoice 2% Manage logistics 3% Ship to customer 4% Process returns 9% Collect 7% 22.214.171.124.4 4.5 Operate call center 2% Dispatch field service 1% Manage problems 1% Manage self-service 1% 126.96.36.199.4
6 Step 2: Map your processes by value and degree of IT enablement Source:McKinsey Business Technology practice Develop Market and sell Manufacture Fulfill and bill Support Manage business IT supports the least strategic areas just as well as the most strategic Spending is higher in many non-strategic areas A significant number of strategic capabilities are “broken” Low (stay) Strategic value Broken Meets needs World-class IT enablement Current state Medium (win)High (change) Low spend High spend
7 Step 3: Spot which processes need the most improvement in IT enablement Source:McKinsey Business Technology practice Develop Market and sell Manufacture Fulfill and bill Support Manage business IT over delivers on order processing and finance, and can maintain lower spending levels Strategic areas of product development need better IT enablement Several non-strategic areas, such as logistics and inventory management, are broken and need basic improvements Low spend High spend Low (stay) Strategic value Broken Meets needs World-class IT enablement Current state Medium (win)High (change) Process orders Manage logistics Finance Manage inventory Research market Market to customers Manage library Prototype and test
8 Step 4: Assign a service level to applications according to strategic value and need for enhancement Source:McKinsey Business Technology practice Low (stay) Strategic value Broken Meets needs World-class IT enablement Current state Medium (win)High (change) Service levels Support classes Break- fix 2 Enhan- Cement Hours Pro- ject Break- fix resp. time Hours No sup- port* Bronze1 day Gold2-4 160 Silver2-4 440 DRAFT
Working Draft - Last Modified 1/4/2006 2:33:36 PM Printed 9 WCO-ZXJ269-20080225-02 Questions for the group What proportion of your budget goes to “stay,” “win,” and “change”? What do you want it to be? Which processes consume the bulk of your budget? Which processes are the most strategic? Which strategic processes need the most improvement in IT capabilities? How do you set application support levels?
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