Mutualism: An Approach to Optimizing Shareholder Value

Transcription

1 Mutualism: An Approach to Optimizing Shareholder Value In the new world which is emerging from the primordial soup of the recent financial / economic maelstrom as well as dealing with the underlying shifts in consumer trends, organizations would be wise to consider a new approach to developing and executing the right plan for optimizing shareholder value. This new approach, or mutualism, is a practice that drives the formulation and implementation of the most favorable value creation decisions by recognizing and taking advantage of the co-dependence of all of the various entities that make up an enterprise. From the business perspective, IT is viewed as a revenue generator and cost cutting engine rather than merely a cost of doing business. From IT s perspective, practicing mutualism provides the opportunity to move from order taker to strategic partner and trusted advisor.

2 About the Author Courtney Wood Courtney Wood is a Director in TCS North American Banking & Financial Services Consulting Practice, leading the Business Operations Excellence ( BOE ) solutions group. BOE focuses on determining the right integrated and strategically aligned set and roadmap of changes to people, process, and technology to optimize shareholder value. Courtney has spent the bulk of her 24-year career providing business transformation, process improvement, and new venture development consulting services. Prior to consulting, Courtney earned an M.B.A. from the Columbia Business School and a B.A., cum laude, in Economics from DePauw University; as well as worked in the areas of commercial lending and investment banking. 1

3 Table of Contents 1. Mutualism Defined 3 2. Benefits of Mutualism 4 3. Mutualism Step-by-step 6 4. Closing Remarks 8 2

4 Mutualism Defined Quite simply, as we all learned in biology class, mutualism is the recognition by the various organisms that make up an ecosystem that their respective welfares are a function of their mutual dependence. The effective practice of mutualism is measured by the health of the organisms as well as the health of the larger ecosystem. Take for example the mutualistic relationship of the lichen. While a lichen may look like a plant, it is actually an ecosystem, i.e., a complicated association between a species of fungus and algae. The fungus attaches the lichen structure to a surface such as a log and absorbs nutrients from the surrounding environment. The algae inside the protective envelope of the lichen structure uses the nutrients absorbed and carbon dioxide produced from photosynthesis by the fungus. In turn, the sugars and oxygen created by the algae is used for food by the fungus. The benefit of this highly successful mutualistic relationship is the lichen s ability to colonize habitats that are hardly (1) survivable by other plants and animals. In the world of business, the ecosystem could be as large as the U.S. economy. For the purpose of this article, the ecosystem is the corporate enterprise; and the organisms that make it up are the entities that make up the enterprise (e.g., business and IT ). The health of the enterprise is measured by shareholder value; and the health of the entities is measured by the value they generate the contributions they make to growing revenue, decreasing expense, increasing leverage, and/or reducing risk. Therefore, at its core, mutualism is a collaborative decision-making and implementation approach that is focused on maximizing shareholder value over the longer term. 3

5 Benefits of Mutualism Commonly, business and IT do not make shareholder value-impacting decisions mutualistically or inside the longer term goals of the organization. The result is that decisions deemed appropriate for IT may not be good for the business, and vice versa; and decisions believed to be appropriate for short-term financial results may not be good for the sustained health of the organization. Hence, the company s ability to achieve and/or maintain competitive advantage and ultimately grow shareholder value is compromised. Case in point, due to the financial markets meltdown and ongoing economic distraction, organizations are taking a weed wacker approach to cutting costs in an effort to dramatically reduce expenses. Because IT is typically measured by the size of its budget and not the return it produces for the business, IT organizations are usually the first to be hit. The enabling solutions and capabilities eliminated and the improvement initiatives abandoned by IT may cost the overall business more in performance and operational efficiency than it saves in lowering IT expense. According to the MIT s Sloan School of Management, IT averages about 5% of the total cost of business, which means (2) that even by shrinking IT costs by 50%, fewer savings are achieved than by cutting business operations costs by 3%. Additionally, over 12 to 18 months, modest investments in IT projects related to cost reduction and/or revenue (3) generation (e.g., customer retention) can return up to ten times the bottom-line impact of IT expense reductions. To reduce business operating costs, and for that matter to increase revenue, business and IT must look beyond just completing the work of the day. Business should take the time and invest the resources to streamline processes; create automation opportunities; develop shared services across multiple functions or lines of business; and change policies that drive the organization to support, for example, unprofitable customers. In turn, IT should proactively inform the business of the potential of new and disrupting technologies, as well as provoke the generation of ideas to support the business in creating sustainable competitive advantage. Further, IT should take advantage of its unique position to bridge functional silos and bring together business unit and corporate executives to identify and prioritize initiatives consistent with the strategic objectives and performance goals of the enterprise. By not taking a mutualistic approach, the business and IT compromise the health of the enterprise by jeopardizing the health of themselves and each other. The business sub-optimizes its results and drives IT to maintain unnecessary capabilities and build complexity into its application portfolio. Likewise, IT threatens its own relevance as a trusted advisor and strategic partner, and perpetuates the frustrations it likely has in supporting the business frustrations that often are a result of supporting poorly defined business processes and having to respond to one-off, wish list type of functional requirements. 4

6 Below are a few examples of the benefits of mutualism in action: Company A had a client-facing web application that still relied on an antiquated browser. This application not only required a cadre of specialists to support it, but customers were having less than satisfactory interactions with the business. By looking at what to do with this application through the lens of mutualism, i.e., the filters of both reducing complexity and obsolescence and improving business performance, IT and the business together developed the optimal requirements and made a strong business case to replace the dated application with one that had a bigger price tag but provided greater strategic advantages. Had IT not ventured outside its world and simply updated or replaced the application with a less costly technology, IT would have continued to support unnecessary functionality and business would have continued to suffer from customer retention and acquisition issues. Seeking to reduce expense through systems consolidation that was not at cross-purposes with the larger enterprise, Company B s IT department reached out to the different product, customer, and functional groups that were supported by the various systems and worked with them to identify ways to Streamline their business processes to reduce workaround capability requirements Increase the number of common sets of activities performed across these different areas so as to decrease the number of unique functional requirements Improve the business processes such that the application rationalization decisions were based on the set of criteria that was right for the organization today and tomorrow By approaching systems consolidation in this manner, IT not only achieved its goal, but enabled the business to improve its operating performance at the same time, e.g., decrease the cost and turnaround time of processing an insurance claim. 5

7 Mutualism Step-by-Step As previously stated, mutualism is a collaborative decision-making and implementation approach. It not only determines what needs to be done to maximize shareholder value over the long term, it ensures that the capabilities of the enterprise continue to improve and evolve with the strategy and goals of the organization. To understand the type of actions an enterprise can take to put mutualism into practice, refer to the below. Mutualistic Best Practices High-level Action Description Implement an executive-level, cross-functional governance structure Include the usual suspects such as business unit and corporate (e.g., Finance and HR) executives; and embed IT Require IT representatives to participate in planning and other executive-level activities that traditionally have excluded them Establish a Transformation Management Office Governed by an integrated board of business, IT, finance, and HR stakeholders, the Transformation Management Office performs the typical activities of a PMO as well as: Tracks the realization of expected benefits and investments (4) Drives the continued refreshment of change initiatives based on shifts in the market, corporate strategy, business objectives, and constraints Employs a gated investment framework 6

8 Mutualistic Best Practices (continued) High-level Action Description Start with the end in mind Do not let the events of today obscure longer term trends and realities of the new world, such as significantly less financial leverage, sloweru.s. income growth, shifting customer demographics, and increased regulatory oversight Translate the enterprise s longer term corporate vision, strategy, and objectives into the defined set of capabilities (5) required to meet those objectives Define the enterprise and IT architectures based on the required capabilities Develop optimal business process, people, and operating model (6) designs based on the capability requirements identified Define a Balanced Scorecard of performance measures and target metrics (consistent with the enterprise s strategic objectives) that cascade down to the lowest levels of activity within each entity as appropriate Use the optimal business process designs to define the functional requirements which will be used to develop, enhance, and rationalize applications Calibrate application locations based on the optimized operating model, e.g., one that includes third-party business process outsourcing as well as, potentially, the associated application support and maintenance Re-orient the organization to embrace continuous improvement Implement lagging and leading indicator dashboards based on the cascaded Balanced Scorecard of performance measures and target metrics Formalize performance gap closing analysis and solution development mechanisms Revisit / refresh the measures that matter Reward continuous improvement behavior, e.g., those that put themselves out of a job Address organizational change systematically and robustly Assess the readiness of all tiers of the organization to change Based on the assessment, design the right strategy for ensuring the timely, efficient, and effective institutionalization of change Create overall and stakeholder-specific what s in it for me communications and training plans Monitor adoption and institutionalization of the change, and makes course corrections as as necessary 7

9 Closing Remarks As always, but particularly in today s complicated environment and beyond, making the right decisions about where to take the company and how to get there is essential. And formulating the right plans for survival as well as creating sustainable competitive advantage requires the best of the collective thinking of the ecosystem and a robust, systematic, and consistent approach. Successfully implementing these plans requires leveraging the synergies of the organisms strengths. The benefits of mutualism include the ability to make optimal decisions about such things as the following: Building more strategic capabilities Freeing up resources to develop differentiating products, provide unique services, and support the growth of the business Enhancing existing systems and developing necessary solutions correctly the first time Maintaining a portfolio of the right, critical few applications Delivering IT support to the business in a structured and logical fashion that is not at cross-purposes In the end, if corporate ecosytems behaved like lichens, they would put themselves in a position to maximize shareholder value over the long term, a position "to colonize habitats that are hardly survivable by other plants and animals. Who says co-dependence is not a good thing. Footnotes (1) (2) Center for Information Systems Research, Sloan School of Management, Massachusetts Institute of Technology, Research Briefing, Volume IX, Number 2, February 2009 (3) (4) The McKinsey Quarterly, Managing IT Spending, December 2008 Change initiatives include related modifications in business process, operating model, people, enabling solutions, and/or information management; and have associated CBAs and risks. Initiative prioritization criteria may include more that just financial hurdles, e.g., strategic and organization impact. (5) Examples of capabilities, at a high level, include develop products and services, generate demand, fulfill demand, collaborate with partners, and plan and manage the enterprise. Capabilities are the combination of specific sets of processes that are performed by a relevantly skilled set of resources in particular locations enabled by applicable solutions / business applications. (6) Operating model designs may include shared services, outsourcing, and alliances. 8

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