Boosting Transformation, Lowering TCO

Feature Article | July 19, 2004 by admin

As the global economy continues to experience ups and downs, long-term corporate goal – increasing revenue and containing costs – remain constant. However, as the economic pendulum swings slowly back into expansion mode, industry executives are again contemplat-ing growth and ways of gaining leadership advantage. In doing so, many have carefully re-exam-ined their business, giving serious consideration to its present value structure and primary focus. Today’s C-level leaders see revenue growth, realized through delivery of new, dif-ferentiated products and services, as their primary business objective, with cost control running a close second in corporate priorities.

As total cost of ownership increases – at the expense of developing and implement-ing successful, new business objectives – C-level executives are looking for ways to lower expenses and reinvest savings in revenue growth strategies that can transform the business and boost financial performance. Increasingly, companies are turning to outside experts like IBM to help manage and run non-core business systems and practices. By optimizing and, in some instances, outsourcing non-essential functions, corporate leaders can better focus on, and further develop, core business competencies while lowering total cost of ownership.

Companies concentrate on core competencies to gain competitive edge

Companies are increasingly re-deploying scarce resources, people, capital and, perhaps most important, management attention, to focus on core areas of business. Organizations must somehow strike a balance among driving revenue, improving operating margins, effectively executing fundamental business procedures, and, in parallel, making certain that non-core business areas run efficiently. In addition, in the drive to extend value and benefits, operational optimization must now extend beyond the corporate four walls as companies engage directly with customers, consumers, partners, and suppliers.

Like other business organiza-tions, companies that depend on SAP enterprise resource management planning (ERP) tools must pit revenue growth desires against cost realities. They want to take advantage of procedures that will both differentiate their companies from the competition and lower total cost of ownership. The IBM Full Economy Model for SAP can help an organization optimize cost savings, integrate information tech-nology (IT) infrastructures, and facili-tate business process adaptation to unlock hidden value.

IT: living up to earlier promise by delivering new value

IT has always been viewed as a critical business enabler. Over the last 20 years, tremendous change has occurred in technology, software, and business process and organization support models. Companies no longer use IT just to facilitate basic business functions. Today, more organizations count on IT both to help ensure seamless integration over the extended value network and to make information available for informed, proactive business decisions.

Companies rely on IT to reduce operating and support costs – without sacrificing quality – and to enable new business processes and functions, such as customer relationship management (CRM) and product life cycle management (PLM). Increasingly, organizations are moving many back-office support functions, including customer, financial, and human-resource tasks, to either a shared-services or third-party outsourcing provider.

The role of IT to drive process, organization, and technical change has never been more challenging and important. Heightened technology capabilities have arrived just in time, as increased business complexity makes more demands on companies – demands that require increasingly precise business process implementation and follow-through. Additionally, in the wake of stricter international regulatory requirements, like those of the USA PATRIOT and Sarbanes-Oxley Acts, IT capabilities have become critical to integrating and performing repetitive and time-consuming processes like data gathering, processing, and presentation. Companies rely on IT to maintain and meet basic regulatory agency rules. These enhanced needs have focused attention on using the integrated capabilities of SAP to rapidly drive business benefits in areas such as marketing, sales, product innovation, and the supply chain.

Outsourcing helps lower TCO

For historical reasons, many large companies have implemented ERP in a piecemeal fashion – site-by-site, country-by-country, or business unit by business unit. Typically, much corporate IT spending goes toward maintenance costs. Remaining IT funds are generally insufficient for companies to achieve the business and technology transformations they desire. By streamlining processes and components, and outsourcing non-core business activities, a company can gain greater IT flex-ibility, and savings can be redirected to business dif-ferentiation tactics. By refocusing and reinvesting in areas such as consumer marketing and innova-tion, as well as by aligning human and working capital with strategic priorities, businesses can begin unlocking revenue and driving growth.

Many best-of-breed technology suppliers can offer outsourcing clients unprecedented efficiencies and operating capabili-ties. Tier-1 solution providers – such as IBM – are offering full-scale services in most major industry areas. Taking advantage of outsourcing partners enables better focus on core functions, reduced costs and more flexible, scalable IT environ-ments, all of which support new business-model development. The first task is to differentiate between core and non-core business segments and identify areas where outside service providers can offer optimum savings. It is also necessary to prioritize the allocation of IT resources across core business components. This requires a balance of organizational effectiveness and efficiency.

IT optimization to reduce TCO

Toyota Australia

Toyota Australia

Although they can see the benefits of outsourcing, some business leaders – even those heading large companies – are not yet ready to outsource enterprise IT systems. However, IBM offers companies relying on SAP an efficient alternate strategy to reduce total cost of ownership.

With industry-leading SAP technology solutions, IBM can enhance existing IT systems through consolidation, simplification, and automated resource provisioning and management. Through IT optimization, IBM has consistently demonstrated 15 to 30 percent reductions in total cost of ownership, while delivering higher performance and secure, more reliable systems. Ultimately, enterprise wide IT optimization can be the stepping stone to IT outsourcing in a company’s journey to becoming an on-demand business.

Outsourcing and optimization foster growth initiatives

The IBM Full Economy Model for SAP strives to foster a company’s growth initiatives and core business competencies by increasing corporate focus on sales, marketing, and new product development and innovation. IBM professionals help redesign and enhance systems to gain flexibility and make the most of current and future ERP investments. The IBM Full Economy Model for SAP creates a functional business system by integrating piecemeal, legacy technology with IBM services, software, and hardware. Implementing our model, an organization can do a better job of transforming core and non-core business operations, optimizing cost savings, and reducing total cost of ownership.

Before launching its Full Economy Model for SAP, IBM takes the company’s management team through a four- to eight-week-long, seven-step procedure to map the transformation process. IBM begins by classifying core versus non-core business processes and functions, to create a strategic plan that identifies specific tasks that will generate cost savings. IBM also identifies core competency areas that can drive increased revenue opportunities and profitable growth. A wrap-up review verifies that the IBM vision matches corporate expectations.

Levers to enabling a full economy model

The IBM Full Economy Model for SAP has a variety of IT service and capabil-ity levers for achieving a company’s value transformation. Each company’s unique situation dictates a different mix of levers, depending on whether the goal is to:

  • Reduce SAP or other ERP implementation and maintenance costs by bundling next-generation hardware, software, and storage solutions
  • Reduce non-core business function costs through consolidation and outsourcing
  • Enable and integrate core business processes by using the latest SAP technologies and software, such as customer relationship management, product life cycle management, search engine marketing, or business intelligence

Selecting the right lever is critical to the amount of value that can be unlocked. IBM projects benefit and cost savings for each combination of levers. A company can choose to implement as few as one or as many as ten levers to achieve enterprise-wide transformation. Because each lever builds on the others, implementing all ten will deliver the greatest possible value and cost savings over time. The Full Economy Model for SAP enables a management team to fund core initiatives by improving non-core business efficiencies, thus reducing costs and potentially increasing revenues. By unlocking multiple transformational goals in parallel and helping revamp operations, the IBM Full Economy Model for SAP can help drive competitive advantage and best-in-class innovation.

Saving millions in a US$10-billion company

Based on our experience as a leading SAP implementation company, IBM has found that a typical US$10-billion company spends the majority of its IT money on application and infrastructure support. Human efforts, as well as hardware and software technology, are often duplicated throughout the enterprise, dramatically increasing overhead. Technology obsolescence and insufficient capacity for storage or processing, heterogeneous applications and application complexity, in addition to the difficulties of achieving core process functionality, are but a few of the myriad problems such organizations face.

However, technology outsourcing offers a tremendous opportunity to improve cost efficiencies. A US$10-billion company might begin by identifying savings in any number of places: reducing headcount, rationalizing software and hardware use and purchases, or restructuring applica-tions and enabling core-process functionality.

By applying all ten levers of the IBM Full Economy Model for SAP, a US$10-billion organization, after project expenditures, can generate approximately US$90 million in IT savings by:

  • Making hardware and software accessible on demand
  • Reducing and consolidating applications
  • Tailoring SAP implementations to enable core strategic projects
  • Facilitating activities such as software scaling, help desk access, and network consolidation by taking advantage of a utility management infrastructure.

In addition, the average US$10-billion company can often achieve savings of over US$1.2 billion through non-core business process transformation. Ultimately, significant savings can be realized no matter how many Full Economy Model for SAP levers are implemented. The key remaining questions become where and when to begin transforming a business’s core competency functionality, and how to best address those non-core operations to generate cost reduction and gain efficiencies.

More about IBM Business Consulting Services and the IBM Full Economy Model for SAP

John Blackburn

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