Chemical Leader M&G Achieves a Fully Cloud- Based, Lean and Low-Cost IT

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1 G Chemical Leader M&G Achieves a Fully Cloud- Based, Lean and Low-Cost IT Published: 20 July 2012 Analyst(s): Claudio Da Rold, Gianluca Tramacere Chemical leader Gruppo Mossi & Ghisolfi grew quickly through M&A and has created a lean, multisourced and low-cost IT division. By moving its SAP system onto cloud infrastructure as a service, it has established an asset-free IT delivery, and has learned much about cloud maturity and recoverability. Key Findings A business growth strategy based on acquisitions can be a catalyst for the fundamental redesign of an IT organization. Gruppo Mossi & Ghisolfi (M&G) shows how multisourcing can leverage cloud-based delivery models to enable industrialized low-cost services and differentiating solutions. The case also shows how an aggressive IT sourcing strategy can logically evolve toward cloud. IT services for a leading multinational organization can be delivered at a low cost when business strategy and company culture enable a simple business model and streamline business processes in an entrepreneurial environment. The critical role of personnel communication across this agile, multinational organization makes an essential core and non-commodity service that runs on a dedicated private hosted environment. Current cloud infrastructure as a service (IaaS) models are not necessarily compliant with business requirements for "recoverability" of complex environments such as those found in SAP systems. M&G discovered this and, consequently, implemented a custom solution for disaster recovery. Recommendations CIOs who face mergers and acquisitions (M&As), rising requirements for business value-added services and IT cost reductions, as well as the risk of migrations over a cloud-based delivery model must:

2 Focus on IT governance, demand management and key managerial capabilities in order to develop and implement a sourcing strategy that quickly answers their business requirements. 1 Expand their evaluation of solutions to test and pilot cloud delivery models and industrialized services. 2 Build multisourcing management capabilities as a multisourcing service integrator 3 (or as a cloud services broker) and proactively refresh their sourcing strategy and provider portfolio to manage price for performance and complexity of the delivery model, and to adapt to changing business or market requirements. Approach every cloud-based service from a disaster recovery and business continuity perspective. 4 Don't ask a provider if its service will fail; ask yourself what your business will do when that service fails. Analysis CIOs evaluate their organization's innovation potential, ensure business alignment and check ROIs to reach leadership goals. In that respect, the CIO of M&G a chemical and engineering multinational company, headquartered in Tortona and Milan, Italy has relentlessly focused efforts on creating a lean, multisourced and low-cost IT division. The main business unit of the M&G Group is PET Polymers, which develops polyethylene terephthalate (PET) resin packaging for the food and drink market (see Note 1). The company owns two of the world's largest PET production plants and is the world's second largest producer of PET for packaging applications with a production capacity of 1.7 million tons per year (see Note 2). Despite difficult market conditions generally, M&G's business strategy has unleashed growth through investments in new plants and technology, thus creating better economies of scale and areas for business innovation. The global business runs on guidelines that enable it to compete effectively in a global commodities market in the key competitive areas of low production costs, flexibility, responsiveness and agility. M&G Group revenue is almost $3 billion (of which about 80% is derived from PET operations) and it has roughly 2,200 employees. The PET business is a commodity, asset-intensive business for which 80% of the cost is from raw materials. The IT organization consistently focuses on guidelines based on business requirements and is driven by a business-oriented view toward the following objectives. To increase business ability to change IT functionality and support organic growth or growth through M&As. To continuously improve the quality of services and speed of reaction. To optimize operational costs and keep these in line with business requirements. Page 2 of 11 Gartner, Inc. G

3 2000 Through 2003: Support Exponential Growth via M&A In 2000, M&G started an aggressive growth phase through M&As that transformed the Italian company with a staff of 700 into the global PET production leader. The new CIO then had 18 months to build a new IT organization infrastructure and applications to support the new business, which extended from Italy into the U.S., Mexico, South America and Asia/Pacific (see Note 3). M&G needed an IT organization that could: Mirror a lean business management structure. Scale up (or down) quickly to react to market changes and unknowns during the expansion strategy. Handle peaks of work during M&As. Run operations at a reduced cost, with high service availability, and support a multinational commodity business. The CIO's strategy was based on the following cornerstones. A lean, highly centralized IT management organization focused on IT leadership, strong vendor management, and control of how IT services and applications support business processes. Infrastructure management and application services (mostly outsourced). Best use of alternative delivery models, such as software as a service (SaaS), remote managed services, offshore and cloud. A centralized IT organization provided the key critical success factor in the smooth acquisition of large plants around the world, progressively interconnected via a Verizon network. A single SAP instance was applied to all core global business processes to enforce a high-degree of standardization and centralization. SAP NetWeaver was used as the integration platform for the application and information portfolio, which is a mix of global, centralized or local external applications. The company centralized the IT organization, IT governance and IT management in one site in Milan. Governance and IT management mostly comprise business analysts and relationship managers who understand business processes and act as sourcing strategists and vendor managers for all activities that are outsourced to multiple providers. Although this may seem simple, it requires people skilled in both business and IT, and is instrumental to the success of this multisourced model (see Note 4 for the IT organization structure). A few key activities (even some of the function analyses) are performed through external business analysts and an external application competency center. Stringent internal controls on business process design, change management and business-transaction documentation reduce the risk of losing know-how and enable M&G to leverage and manage multiple providers. The CIO entirely outsourced the initial project involving the implementation of a single instance SAP environment structured to be the cornerstone of the growth through M&As, which is applied to all core global business processes to enforce a high degree of standardization and centralization. Deloitte Italy helped to conduct that project starting with business process design and took Gartner, Inc. G Page 3 of 11

4 end-to-end responsibility to bring the system into production on a Milan-based outsourced infrastructure, to support M&G users through a service desk and to maintain the application Through 2010: Manage and Refine a Lean, Multisourced, Low-Cost IT While its international expansion progressed, M&G needed to support some specific core and peripheral requirements that could not always be ensured by its central SAP system. Business requirements that cannot be handled as global, centralized, single implementations are considered "local core." For example, products and raw materials in regions covered by the North American Free Trade Agreement (NAFTA) are mainly transported by train. M&G did not have an SAP implementation for railway-based chemical transportation and selected an industry-specific third party, Bourque Data Systems (BDS), to deliver a SaaS application that interfaces with the SAP system. M&G and BDS agreed on application support, which includes tracking and electronic billing management for railcars and trucks, and for specific implementations. Since 2003, M&G has used this SaaS for that core, business-critical application. M&G uses other SaaS applications, including: Online HR services from ADP (while SuccessFactors is currently under evaluation) Sales force automation and claims management in Italy from salesforce.com Other financial and administrative functions Over time, M&G's IT staff learned how to govern external service providers (ESPs) that centrally manage the user help desk, systems, network, security and disaster recovery. Criteria used to select ESPs included their global presence, and their capability to deliver advanced agile solutions that fit the M&G business model and culture. The multisourced environment that M&G had in place until 2010 (see Note 5 for details) was based on these components and four providers: Deloitte (business processes and applications); Thales (application operations); HP (infrastructure operations); and Verizon (networks). 2011: Migrate IT Into an Outsourced, Cloud-Based, Lean and Low-Cost IT Architecture In 2010, M&G started to evaluate how to further progress its sourcing and technology strategies and build on growing cloud-based architecture and services. Conscious of the potential and the limited maturity of cloud solutions, M&G's CIO (who also manages the Group's HR activities and sits on the group executive committee) decided to: Launch an aggressive project to migrate all its applications to cloud Leverage the potential of disintermediation provided by cloud Take a further step into a lean and business-oriented strategic vendor relationship In a cloud architecture, some (and progressively more) operational tasks are becoming more automated, so M&G's CIO decided to try to directly link the top and the bottom of IT (processes, applications and infrastructures), thereby reducing the number of providers and simplifying IT's Page 4 of 11 Gartner, Inc. G

5 management stack. This process resulted in a more strategic agreement between M&G and Deloitte (for processes and applications) and between M&G and Verizon (for network and managed cloud IaaS). The two suppliers agreed to collaborate with clients to build a new delivery model, predicated on only two providers and entirely supported by a cloud infrastructure. A limited extension of duties and responsibilities laid on these key providers caused the entire disintermediation of the two "outsourcers" (Thales and HP) that were previously running the operations and that are no longer engaged with M&G. The cloud project started in early 2011 with testing and pilots based on Verizon's Enterprise Cloud: Managed Edition (delivered from its data center in the Netherlands) and achieved an important milestone with the migration of M&G's SAP Data Warehouse and its release upgrade in May 2011 on the Verizon VDC offering. The migration of SAP ERP and business intelligence applications to the Verizon IaaS was completed in September The migration of non-sap systems (engineering, intergraph, and so on) on cloud IaaS was completed by January M&G's drivers were to increase flexibility and reduce risk on an already low-cost IT, so the transaction was designed to achieve a complete cloud migration and delivery with the same level of cost. M&G and its two suppliers acknowledged that this approach was innovative and brave, and required a collaborative effort to overcome unknowns and potential problems. The clearest example of that has been the backup and disaster recovery solution. Based on early experience, M&G and Verizon recognized that the current backup, restore and recovery procedures available as standard features of Verizon Enterprise Cloud were not compliant with M&G's requirements (because of the complexity of the environment, cost, and data privacy compliance). Therefore, M&G and its two suppliers had to implement a custom solution to M&G's SAP backup/recovery. 6 Also, the negotiation of specific terms and conditions with Verizon has taken much longer than expected in restructuring the master service agreement for the delivery of complex IT and telecom services, data location issues, customer data definition, and audit on operational processes. M&G also evaluated Google Apps, but did not find enough reasons to adopt that service. In fact, several attempts to evaluate Google Mail led to the conclusion that in M&G's specific case (a business leadership accustomed to driving the business in real time), mail and interpersonal communications are important enough to make that service business-critical and the opposite of a commodity. Therefore, the mail is running in a single instance of Exchange, hosted on a virtualized infrastructure on the same data center used for recovery purposes. As a result, all M&G IT services are currently delivered through a cloud-based delivery model (at both IaaS and SaaS levels), plus a virtualized hosted environment for recovery and mail. Results M&G's streamlined business structure, linear business model and production processes and its innovative approach to IT, multisourcing and industrialized low-cost services has enabled it to achieve a 24/365 service availability for a multinational IT company that is: Better: IT credibility is very high. M&G rates itself between Levels 4 and 5 on the Gartner IT Credibility Maturity Model. Internal IT personnel are motivated and business-oriented, and staff turnover is low. Business managers and executives are happy with IT's contribution to the business. Gartner, Inc. G Page 5 of 11

6 Cheaper: M&G's IT budget (less than $10 million a year) is less than 0.3% of the company's revenue. This is an outstanding result when compared to average IT spending as a percentage of revenue that in 2011 has been 1.3% in the chemical industry and 3.6% across all industries. 7 Faster: Reactivity to business requirements is now faster (from months to just 40 minutes for the availability of a new testing and quality assurance environment). New SAP releases can be installed quickly (on average in 2.5 months or less), and the business considers the availability and quality of service positive. M&G doesn't own substantial physical IT assets anymore. Despite the original objective of a flat cost, reality shows a further 5% reduction on its already low-cost IT, and the recent price reduction announced by leading cloud providers (Google, Microsoft and Amazon) indicates that M&G is on a platform that is very likely to enjoy progressive improvements in terms of price-per-performance ratios. Critical Success Factors The business strategy of growth through M&A has driven both IT and sourcing strategies. The CIO participates in the executive committee and manages HR, and the organizational structure has few hierarchical levels. A few, talented and motivated staff with an approach that focuses on business outcomes have created the new IT organization. M&G business processes enable selecting relatively simple, standardized application solutions that require little customization. A simplified, lean and disintermediated multisourcing environment has been implemented that relies on cloud services and increases the responsibility of the key providers. Lessons Learned M&G is applying Gartner's sourcing model options 8 and alternative delivery models to an advanced extent, with almost entirely outsourced services, a full cloud-based IT delivery and resulting low costs. Cloud risks and unknowns require collaboration among providers, clarity of roles and responsibilities, end-to-end SLAs, data and process integration, overall risk management and a critical disaster recovery and business continuity vision of the service. In a fully outsourced environment, the main responsibilities of internal IT are demand management, architectural choices, and the integration and management of different vendors. M&G spends 15% of its IT budget on these critical functions. The most complex areas in SaaS and cloud delivery are business process integrity, data integration, negotiation of custom requirements, service support and the appropriateness of SLAs to business requirements. Page 6 of 11 Gartner, Inc. G

7 M&G works continuously to streamline its IT and business operations in order to leverage the strength of its sourcing model, while balancing its efficiency with business continuity and risk. Recommended Reading Some documents may not be available as part of your current Gartner subscription. "Riding the Wave of Industrialized Low-Cost IT Services" "CIOs Should Beware of a Return to Full Outsourcing" "Gartner's Top Predictions for IT Organizations and Users, 2012 and Beyond: Control Slips Away" Evidence 1 Three key rules can drive outsourcing decisions and help organizations decide what they should never outsource, but also how to prepare to outsource to support business strategies and rapidly fulfill critical business requirements. CIOs, sourcing managers and strategists can use the rules discussed in this research to test the quality of their sourcing decisions, correct false assumptions and improve their decision-making processes (see "What You Should Never Outsource: Three Key Rules"). 2 New service options can improve issues of finance, time and risk compared with traditional outsourcing approaches. CIOs and sourcing managers should use this research to avoid the classic expensive mistakes when outsourcing services (see "Buy Industrialized Services to Quickly Reduce Outsourcing Costs and Risks"). 3 As multisourcing increases, more sourcing managers are grappling with the key decision on whether to implement the role of a multisourcing services integrator and then whether to insource or outsource it (see "Should You Insource or Outsource the Multisourcing Service Integrator Role?"). Additionally, as cloud services brokerage proliferates, companies must assess the best way to manage their cloud ecosystems and the consumption of cloud services (see "How to Determine When to Use a Cloud Services Brokerage"). 4 Recent cloud services outages (Amazon, Microsoft and others) have brought a great deal more attention to security, compliance, continuity of service and recoverability. For lessons learned from these recent events (very similar to the lessons learned from past events), and emerging practices for cloud-specific risk and contingency management (see "The Realities of Cloud Services Downtime: What You Must Know and Do"). 5 For an announcement about the migration completion see "Mossi & Ghisolfi Trusts Verizon s Enterprise Cloud to Deliver Critical Business Applications" and for a testimonial of the migration please see "Deloitte LLP SAP shares innovative technology with M&G Group." Gartner, Inc. G Page 7 of 11

8 6 The custom backup and disaster recovery function is based on the configuration previously used for the production environment in Verizon's Milan data center. A physical synchronous copy ensures alignment with the volumes in the Milan data center to those volumes supporting the production in the cloud virtual data center in the Netherlands while the network has been redesigned. In case of cloud service disruption, the network can be switched and the systems can be restarted from the Milan data center and the mirrored data and software in there. 7 The Gartner IT Key Metrics Data reports contain relevant database averages from a subset of metrics and prescriptive engagements available through Gartner Benchmark Analytics. IT Key Metrics Data should be used as a high-level directional indicator and to create planning assumptions, but should not be viewed as an absolute benchmark (see "IT Key Metrics Data 2012: Executive Summary"). 8 Sourcing models can help organizations build appropriate business-driven sourcing strategies, which are increasingly critical in a globalized, connected and intellectual property-based economy, where markets, consumers and business success factors are changing rapidly. IT and sourcing leaders looking to explore the differences between the main sourcing models, the potential to combine models and how other organizations have used these models can refer to "How to Put Sourcing Models into Action to Address Business and Market Dynamics." Note 1 PET and Polyester PET resins are used in the production of disposable and returnable rigid packaging for soft drinks, mineral water, beer, juice, tea, jelly, sauce, cooking oil, cosmetics, fertilizer and disinfectants, among countless other applications. The polyester fiber is the most versatile of the textile fibers. It can be used in blends with cotton, viscose, linen and silk, producing beautiful, comfortable and resistant articles. Polyester fibers are used in fabrics, pillow filling, cushions, bedspreads, toys, cushioned furniture, carpets and nonwoven fabrics. Note 2 M&G Production Founded in 1953, the company initially focused on customer packaging and engineering services. In the 1990s, M&G integrated its activities into the development and production of PET. In 2000, M&G began a production expansion phase with the acquisition of Shell's PET business. In 2002, M&G acquired its Brazilian subsidiary Rhodia-ster from Rhone-Poulenc. M&G acquired Chemtex International in 2004 to expand its engineering, procurement and construction capabilities. As of 2004, M&G operated the then world's largest PET production unit in Altamira, Mexico. That plant was then surpassed by M&G's new single-reactor plant in Suape, Brazil, the world's largest with a yearly production of 650 kilotons per year. M&G recently announced the creation of its next-generation PET plant in the U.S. Gulf Coast region with a capacity of 1,200 kilotons per year of purified terephthalic acid (PTA) a PET raw material and 1,000 kilotons per years of PET. At the same time, its newly formed bio polyester feedstock unit has the mission to enable the production of PET resin from renewable-source biomasses. Using the proprietary PROESA technology as a base, the company is developing its own routes for the Page 8 of 11 Gartner, Inc. G

9 production of all main polyester raw materials from biomass and is opening a new plant in Crescentino, Italy. Note 3 M&G Locations With more than 2,200 staff across six nations, the group has: Two head offices (Milan, Italy and Tortona, Italy) Three regional sales offices (Milan, Italy; Houston, Texas; and Sao Paulo, Brazil) Three R&D centers (Rivalta, Italy; Sharon Center, Ohio; and Pocos De Caldas, Brazil) Six engineering offices (Beijing, China; Mumbai, India; Wilmington, North Carolina; Bangalore, India; Shanghai, China; and Tortona, Italy) Ten plants (throughout Brazil, Italy, Mexico and the U.S.) Note 4 Structure of the "IT Lite" organization The central IT structure is organized in two departments: 1. Infrastructure and operations: one manager and three staff 2. Processes and applications: one manager and six staff, structured in three functional areas 1. Finance and accounting 2. Sales and outbound logistics 3. Inbound logistics and production An additional pool of 22 employees were initially located at production and commercial sites around the world to provide first-level support for local business needs (those were not IT full-time equivalents). The number of these resources is being currently reduced thanks to standardization and leverage on local providers capabilities. Note 5 Multisourcing Environment Until 2010 Management, maintenance, development and integration, strategy, and design: M&G retained the strategy and high-level decision making for design and implementations, as well as SAP's Program Management application. Deloitte provided the application help desk (Level 1, Level 2 and, partially, Level 3) on SAP applications, and provides incident, problem management and resolution. Implementation projects were executed by Deloitte or third parties, depending on the size and type of work required. SAP Basis, database services and application operations: Thales managed application operations (up to SAP Basis), data management and security for production, development and quality assurance environments through an office-hours help desk, plus on-call availability. Application monitoring was ensured 24/365 via SAP Solution Manager. The Thales team also Gartner, Inc. G Page 9 of 11

10 operated other centralized applications covering functional areas like laboratory; treasury; and project management. Infrastructure management and disaster recovery: HP managed the M&G hardware and software infrastructures, operated the system and data security, and provided a full data recovery service for SAP ERP Central Component 6 and SAP BW. HP also cooperated with Thales and Verizon to ensure 24/365 availability (Level 1 and Level 2 hardware and operating systems). Network: Verizon provides network availability and physical security for data and Internet access for all M&G offices and plants on a 24/365 basis. The M&G Italian data center was located in Verizon's Italian data center to achieve complete integration with the network. This data center included all production systems (now on cloud IaaS) for M&G's centralized applications at all its global sites. Page 10 of 11 Gartner, Inc. G

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