Amit Gupta John Plansky Roman Regelman. Creating an IT Clearinghouse Clearing Up the Supply- Demand Logjam

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1 Perspective Eduardo Alvarez Amit Gupta Joh Plasky Roma Regelma Creatig a IT Clearighouse Clearig Up the Supply- Demad Logjam

2 Booz & Compay is a leadig global maagemet cosultig firm, helpig the world s top busiesses, govermets, ad orgaizatios. Our fouder, Edwi Booz, defied the professio whe he established the first maagemet cosultig firm i Today, with more tha 3,300 people i 58 offices aroud the world, we brig foresight ad kowledge, deep fuctioal expertise, ad a practical approach to buildig capabilities ad deliverig real impact. We work closely with our cliets to create ad deliver essetial advatage. For our maagemet magazie strategy+busiess, visit Visit to lear more about Booz & Compay. CONTACT INFORMATION Bosto Joh Plasky Parter joh.plasky@booz.com Chicago Eduardo Alvarez Parter eduardo.alvarez@booz.com New York Amit Gupta Parter amit.gupta@booz.com Roma Regelma Pricipal roma.regelma@booz.com Ashish Jai, Aad Padya, ad Alberto Silva also cotributed to this perspective. Origially published as: Creatig a IT Clearighouse: Clearig Up the Supply-Demad Logjam, by Vaidyaatha Chadrashekhar, Amit Gupta, Joh Plasky, ad Roma Regelma, Booz Alle Hamilto, 2008.

3 1 Creatig a IT Clearighouse Clearig Up the Supply-Demad Logjam Market Turmoil ad the Need for Efficiecy The cost ageda for fiacial-services compaies is becomig icreasigly more importat as these compaies feel the egative effects of subprime defaults, deterioratig credit quality, ad tight iterest rates. These circumstaces have brought about a icreased focus o aggressive cost maagemet, to the poit where competitiveess i the fiacial-services idustry will be defied by a firm s ability to grow reveues more quickly tha expeses over exteded periods of time. Although the leadig fiacial-services compaies i the U.S. have drive dow their average efficiecy ratio from 66 percet to 62 percet betwee 2004 ad 2006, 1 these efforts eed to be accelerated, give curret challeges. I our recet experiece, cost reductio cotiues to be oe of the top priorities for fiacialservices compaies globally, alog with reveue growth. Sustaiig such improvemets requires a coordiated effort across the etire busiess system. IT remais a key compoet of the cost equatio ad the cost-reductio ageda. Despite ogoig efforts to optimize IT costs, major fiacial-services compaies cotiue to express frustratio with the spedig levels of their IT orgaizatios; at the same time, firms are stymied by iflexibility i IT just whe they eed imble ad fast-respodig IT departmets to provide busiess uits with the tools to support a global orgaizatio with a broad product mix. Throughout the fiacial-services idustry, there is a burig eed to get thigs doe faster, better, ad more efficietly while reducig the cycle time to add ew capabilities. Due to a variety of factors, IT departmets are strugglig to keep up with the ever-icreasig demads of the busiess uits, thus creatig sigificat tesio withi orgaizatios. Icreasig the size of the IT budget is rarely a optio, especially i a eviromet i which orgaizatios are aggressively maagig costs ad IT budgets are ot allocated i the most effective maer. We have foud that may fiacial-services compaies suffer from a combiatio of problems that lead to suboptimal resource utilizatio ad capability developmet. More ofte tha ot, busiess uits ad IT departmets do ot alig their priorities, leadig to iadequate IT resource allocatio relative to eterprise priorities ad eeds. Throughout the fiacial-services idustry, orgaizatios have limited uderstadig of their existig IT capabilities, resultig i sigificat duplicatio of efforts ad redudat capacity. We have also observed, both i global ad U.S. fiacialservices compaies, that third-party relatioships are ot fully coordiated across the eterprise. This 1 Booz Alle Hamilto aalysis. Efficiecy ratio is defied as the ratio of oiterest expese to total reveue.

4 2 is largely due to siloed orgaizatio structures ad limited uderstadig of the vedors capabilities ad associated cost structures. Fially, busiess uits employ various approaches ad methodologies while thily staffed iteral offices for trasactio processig proliferate globally. The impacts of suboptimal resource utilizatio ad capability developmet ca be felt throughout the orgaizatio. Orgaizatios realize limited beefit from their global scale. They require uecessarily high cycle times to develop ew capabilities whe existig capabilities could easily service the demad, leavig them vulerable to imbler competitors. Ubalaced supply capabilities do ot meet the demads of the busiess uits, geeratig escalatig frictio withi the orgaizatios. Multiple relatioships with the same third-party vedor weake leverage durig egotiatios, reducig potetial savigs from scale. The sharig of best practices across the eterprise becomes limited, ad fially, orgaizatios ed up spedig more o cotrol ad compliace issues. The IT Clearighouse: Eablig Efficiecy To address these issues, we propose the creatio of IT clearighouses i fiacial-services compaies, structured with three objectives (see Exhibit 1): Drive trasparecy across the IT orgaizatio. For differet stakeholders, it should brig to light how efforts are prioritized, how resources are allocated, ad what the reasos are for schedule delays. Maximize ROI for the eterprise from the IT sped. A clearighouse should eable this objective by drivig opportuities for supply optimizatio ad best-fit resource allocatio at the eterprise level. Ehace cotrols iterally ad for third-party magemet. This should be accomplished by establishig a stadard set of processes across the eterprise. The clearighouse is a mechaism that facilitates optimal matchig of IT demad requiremets ad supply capabilities across the orgaizatio. It provides supply optios to the busiess based o the ature of demad, eablig the eterprise to take advatage of scale ad existig capabilities. Due to the IT clearighouse s global ad cross-fuctioal ature, it ca become a platform to promote uiformity of Exhibit 1 IT Clearighouse Framework Drive Trasparecy Sources of Demad (ogoig lights-o eeds or ew capability developmet) Sources of Supply (iteral or exteral resources) Maximize ROI Ehace Cotrols Clearighouse Objectives Source: Booz Alle Hamilto

5 3 Exhibit 2 IT Clearighouse Core Fuctios Busiess Uits 1 2 Supply Trasparecy Supply Optimizatio Clearighouse 5 Ops Demad-Supply Arbitratio IT 3 Demad Maagemet 4 Best Practices Maagemet Third Parties Source: Booz Alle Hamilto methodologies, approaches, ad best practices across busiess uits ad geographies. Icorporatig staff from across the orgaizatio, icludig both busiess uits (BUs) ad IT, a well-desiged clearighouse should have five core fuctios, discussed below. Clearighouse Core Fuctios To meet the objectives outlied above, the IT clearighouse should be desiged to perform five key fuctios: supply trasparecy, supply optimizatio, demad maagemet, best practices maagemet, ad demad-supply arbitratio. Each of these fuctios addresses specific eeds i matchig demad with supply. Exhibit 2 illustrates the relatioship amog the core fuctios performed by the clearighouse. The supply trasparecy fuctio addresses how IT resources are allocated, tracked, maaged, ad upgraded. Implemetig supply trasparecy allows fiacial-services compaies to maage IT staff ad other resources more effectively i order to support the busiess eeds. To achieve this, IT must improve how it tracks ad maages IT supply capabilities. A cetralized resource ad capability trackig system, eve a very simple oe like a spreadsheet or access database, ca be a valid startig poit. The purpose of this trackig system is to offer a complete view of existig resources ad curret availability, so gaps ca be idetified ad trade-off decisios made for competig priorities. This practice will also eable the eterprise to compare ad cotrast pricig across silos, eablig fiacial trasparecy. There are two elemets ecessary to ru this fuctio: highquality iformatio ad the disciplie to maitai the cetralized repository. New requests should always be compared with preset projects, for it is ot ucommo for IT to receive requests that are virtually idetical (for example, to implemet a billig system) from differet BUs. The supply optimizatio fuctio idetifies opportuities to improve the utilizatio of curret IT capabilities. This trasparecy allows orgaizatios to track whe resources will become available to support other iitiatives ad assess the feasibility of

6 4 Exhibit 3 Refiig the IT Delivery Model Eablig Factors for Efficiet Delivery Models Reducig Overall Complexity High Reasoably Regimeted Commo platforms, policies, ad processes exist across the eterprise Nevertheless, dispersed uits fail to capture beefits of scale from egagig i like activities Highly Syergistic Global ad/or regioal syergies are realized through right placemet or formig utilities Scale beefits are achieved Geeral complexity is reduced, but By leveragig idustry - stadard solutios, we ca reduce applicatio proliferatio ad free up IT capacity complexity of maagig the eterprise may icrease Stadardizatio Loosely Liked Cocetrated Chaos Nostarter situatio Physical itegratio is achieved Examples: Process, Techology Operatios are fragmeted, icosistet, ad ofte weakly coordiated Factor costs are usually optimized However, fuctioal areas ted to operate i a osystematic way, ofte reivetig the wheel Low Low Examples: Geographical, Physical Cosolidatio Achievig Scale Beefits High Source: Booz Alle Hamilto supportig future iitiatives i the pipelie. The supply optimizatio fuctio may also idetify ways to refie the IT delivery model via supply cosolidatio ad stadardizatio opportuities, such as formig utilities, creatig shared services, ad developig a ceter of excellece (see Exhibit 3). Oce opportuities to better utilize IT capabilities are idetified, this fuctio develops a busiess case to estimate value, performs high-level prioritizatio to assess feasibility ad viability, ad creates a short list for implemetatio. The clearighouse should establish eterprise-wide global sourcig policies ad decisio-makig processes. This will also help idetify opportuities to optimize vedors across IT fuctios, for example by creatig healthy competitio amog vedors through ogoig performace maagemet. The demad maagemet fuctio facilitates the selectio, categorizatio, ad prioritizatio of iitiatives to esure aligmet with the overall eterprise strategy ad busiess goals. It allows BUs to defie project requests accurately i terms of cost, timig, ad value to the compay ad creates joit resposibility betwee BUs ad IT for executig iitiatives ad realizig the beefits. The demad maagemet fuctio should also focus o establishig a commo set of categories to aggregate IT projects. These categories are ot BU based but, rather, drive by a hierarchy that reflects their scope ad potetial impact. This hierarchy typically aggregates iitiatives i four broad categories: global strategic iitiatives; cross-busiess projects; projects for a sigle busiess uit; ad fially, maiteace ad support, i.e., busiess as usual. A very importat factor i this process is the selectio of projects that have the appropriate level ad quality of iformatio. The clearighouse must develop ad eforce miimum stadards to esure the use of a busiess case to justify the proposal ad estimate the beefits ad costs with fiacial rigor. To icrease

7 5 the accuracy ad quality of data used i busiess case developmet, IT should be ivolved up frot i feasibility ad cost estimatio. Oce projects are properly categorized, they eed to be scored for strategic importace. The scorig methodology to be used to determie the relative priority of projects as they compete for fudig ad resources must be clearly uderstood ad accepted by all areas of the compay. Scorig is a complex process, i which each project is assiged a score based o specific ad predetermied metrics. Some typical categories are risk mitigatio, cost/beefit projectios, strategic aligmet, customer impact, criticality, ad regulatory compliace. The beefit of this scorig i determiig a project s priority is that it is clear ad trasparet to everyoe, ad miimizes the subjective compoet of the decisio-makig process. This iitial prioritizatio provides for a rapid demad-supply arbitratio process. I terms of best practices maagemet for the eterprise, the clearighouse should aggregate iformatio o best practices ad eable this iformatio to be easily shared. A key part of this fuctio is to gather exteral data o sourcig capabilities to cotiuously improve the sourcig processes ad methodologies withi the orgaizatio ad develop sourcig playbooks, tool kits, ad starter documets. This icludes providig advice for sourcig trasactios by servig as the storefrot for iteral service groups (e.g., legal, tax, cotractig, iformatio security, o-boardig). It also establishes key service stadards; maitais stadards for the desig of iteral cotracts ad service-level agreemets; ad oversees compliace with these stadards. Last but ot least, it should help idetify exteral leadig practices that may be relevat for the orgaizatio ad dispeses them across the eterprise-for istace, lea processes, capability maturity model itegratio (CMMI), agile testig, ad project maagemet. Essetially, the clearighouse should act as a sigle poit of cotact for fuctioal IT expertise ad greater trasparecy i cotract desig. All four of these fuctios feed ito demad-supply arbitratio, the fifth ad fial fuctio performed by the clearighouse. Its purpose is to idetify the most efficiet optio to meet demad from the busiess. Iput from the supply trasparecy, supply optimizatio, ad demad maagemet clearighouse fuctios comes together to idicate the best decisio for the eterprise overall, while takig ito cosideratio the eeds of the busiess uit makig the request. This decisio should be drive by a uderstadig of eterprise-wide demad requiremets, idetificatio of appropriate iteral ad exteral supply optios, ad facilitatio of their optimal matchig through busiess cases ad rules-based processes. The core activities withi this fuctio also iclude detailed ecoomic assessmet of various optios, icludig volume, price, ad risk trade-offs. This fuctio provides value by improvig the utilizatio of resources, addig trasparecy to IT, ad reducig the siloed approach so commo today. Clearighouse Operatig Model The clearighouse operatig model desig should cosider four key parameters. First, the clearighouse must ot become a bureaucratic layer that does ot brig value to the eterprise. It should act as a facilitator of the dialogue betwee busiess ad IT orgaizatios. Secod, the goverace structures orgaizatio, goverace, processes, ad tools ad iformatio should esure participatio from busiess ad IT (see Exhibit 4, page 6). Third, the processes ad tools must be tailored to meet the specific busiess eeds ad culture of the eterprise. Fially, the operatig model must leverage existig goverace forums ad capabilities where possible to esure cotiuity ad reduce the admiistrative burde o seior maagemet. Orgaizatio. Geerally, we propose a virtual orgaizatio model, but the level of formality ad thickess of the orgaizatio varies depedig o the eeds of the eterprise. The clearighouse requires the ivolvemet of key stakeholders from across the eterprise, icludig BU ad IT leaders.

8 6 Exhibit 4 Clearighouse Operatig Model Clearighouse Key Operatig Model Compoets Orgaizatioal model: orgaizatio structure, key roles ad resposibilities Iteractio model Orgaizatio Goverace Key rules ad policies Decisio rights Goverace forums Core Fuctios Maagemet processes Operatioal processes Key reports Processes Tools ad Iformatio Trasparecy tools Source: Booz Alle Hamilto The clearighouse should iclude several teams, each havig specific roles ad resposibilities ad desired skill sets. Typical teams iclude a supply aalytics ad restructurig team, demad-supply arbitratio team, vedor optimizatio team, ad teams dedicated to spreadig best practices throughout the orgaizatio ad providig corporate services such as project maagemet. Where possible, these teams should be created from existig capabilities withi the orgaizatio. Goverace. The objective of a clearighouse goverace model is to esure the aligmet of busiess ad IT ad create shared owership. The goverace model details priciples, decisio rights, ad rules that gover the selectio, prioritizatio, ad implemetatio of iitiatives across the eterprise. The cross-fuctioal ature of the goverace model esures that IT projects ad priorities are aliged with the eeds of the eterprise. Goverace models vary based o specific orgaizatio eeds, but we have foud that leadig firms typically employ a threetiered goverace process cosistig of a executive committee, supply-demad goverace boards, ad supply ad demad workig groups. Specific roles ad resposibilities vary across the three levels: The executive committee usually cosists of C-suite executives ad other seior leadership. Their core resposibilities iclude idetifyig critical iitiatives that must be implemeted, settig the overall strategic directio for the orgaizatio (both busiess ad IT), commuicatig busiess priorities to the busiess uits, ad settig a high-level budget. At the ext level, goverace boards maage supply ad demad i two groups that iteract closely with their couterparts o the other side. The demad goverace board geerally cosists of BU ad IT executives who are primarily resposible

9 7 for approvig the iitiatives to be implemeted, allocatig budgets, ad idetifyig key eterpriselevel iitiatives. They also may egage i idetifyig workig group participats ad serve as a escalatio body to resolve critical portfolio issues ad coflicts betwee busiess uits. The supply goverace board at this level, cosistig primarily of participats from the IT side, focuses o idetifyig ew capabilities ad ways to improve processes, traiig staff, makig sure project status reports are doe o time, ad resolvig issues ad coflicts. Fially, the demad workig group typically icludes seior BU ad IT maagers. Their resposibilities iclude establishig a master list of project priorities, uderstadig ad addressig product capability gaps, maagig a project release schedule, assessig i-flight projects ad systems, ad rebalacig the portfolio give busiess eeds ad resource availability. The supply workig group at this level, agai cosistig primarily of people from the IT side, provides oversight, support, ad reportig for cetralized IT supply processes. Processes. Establishig clear ad trasparet processes is a critical compoet to eable the clearighouse cocept. Clearighouse processes should esure visibility ito the key metrics, policies, ad procedures that are used to make decisios. As idividuals ad teams kow what eeds to be doe ad what to expect, orgaizatios should be motivated to follow the outlied processes. Processes should be desiged to foster collaboratio betwee teams ad improve the chaces of completig projects o time. These processes are geerally placed ito four categories: uderstad requiremets, assess ad prioritize opportuities, implemet prioritized opportuities, ad maage ogoig performace. They should be tailored to meet requiremets ad maturity of the orgaizatio. Tools ad iformatio. May off-the-shelf project-maagemet tools have made sigificat improvemets ad ca help provide required iformatio to maagers. For example, demadmaagemet tools itegrate project trackig ad portfolio-maagemet tools, provide project status scorecards, ad act as a sigle repository of all project data. Supply-optimizatio tools track resource availability ad facilitate schedulig of projects; may also iclude time-recordig systems to measure utilizatio, as well as databases that classify skills ad provide isight about critical skill eeds ad shortages. Project-maagemet tools allow users to costruct ad track project work plas, automate workflow with project status reportig, ad simplify budget trackig. Some leadig compaies are cotemplatig ew Web 2.0-based tools to further eable clearighouse capabilities. These tools allow for more collaboratio, improved data retrieval ad search fuctioality, ad improved workflow maagemet. Some iterestig examples of ew Web 2.0 capabilities iclude taggig, which allows users to use keywords to idetify meaigful iformatio; live collaboratio, which allows stakeholders to provide real-time commetary o ew opportuities through wikis ad blogs; ad data stores, which record capabilities ad request histories. Other examples iclude ratig ad autheticatio tools, alerts, ad itelliget search. The beefits of each of the tools outlied above ad the ew capabilities are amplified by the use of applicatios that itegrate easily with existig systems, ad workflow software that automates process steps ad approval trasactios. IT Clearighouse Beefits I order to establish a clearighouse, compaies will have to ivest iitially to be able to istitute the ew processes ad orgaizatioal chages. However, the beefits achieved i ogoig efficiecy more tha offset the iitial ivestmet. Each of the compoets discussed above will cotribute to meetig the clearighouse objectives. Buildig a IT clearighouse

10 8 based o the priciples ad elemets that we have described ca deliver the followig results: Reduce costs by prevetig uecessary ivestmets i buildig redudat capabilities ad by achievig scale beefits via demad aggregatio. Further cost reductios ca be achieved by idetifyig optimizatio opportuities across silos ad better maagig workload agaist available capacity. Additioally, the clearighouse ca help i the idetificatio of ew opportuities to optimize processes. Icrease retur o IT ivestmets as projects are aliged with the firm s priorities. Furthermore, trasparet reportig o project executio iforms busiess ad IT maagemet ad makes it more likely that iitiatives will be completed. Improve service quality by providig a higher level of service cosistecy. The clearighouse achieves this objective by reducig variatio i processes ad leveragig deeper experiece o issues related to differet demad profiles. Improved service quality ca also be achieved by suggestig higher service levels at a better price poit for differet demad profiles, givig the frot office the chace to offer a better customer experiece ad to hadle iteral processes (e.g., loa origiatio) more efficietly. Ehace cotrols by gaiig more isight ito supply-side cotrol issues ad developig solutios as eeded. Cotrols ca be ehaced by providig guidelies or stadardized sets of criteria across iteral ad exteral supply capabilities. Such cotrols also improve how IT allocates ad maages staff ad other resources to support the busiess eeds. They sigificatly improve the resolutio of coflicts ad provide adequate trasparecy for decisio makig. Create improved iteractio betwee the BUs ad IT with icreased aligmet ad trasparecy. Whe it fuctios well, goverace ca help bridge the traditioal gap i BU ad IT priorities. As fiacial-services compaies embark o a period of ucertaity ad accetuated volatility, the ability to have a rigorous uderstadig of IT demad ad supply characteristics ad priorities will offer a select few players the opportuity to distace themselves from the pack. Certaily, implemetig this etirely ew way of approachig IT is a sigificat challege. But the savigs ad value creatio that result make it ot merely beeficial but ecessary i today s competitive climate.

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