"7-Eleven Japan, Eli Lilly, Mohegan Sun, UPS, Vanguard, Carls"
7-Eleven Japan, Eli Lilly, Mohegan Sun, UPS, Vanguard, Carlson 1 REAL WORLD Companies, and Raytheon: The Portfolio Approach to IT Investment CASE Planning and Management W hen the weather is hot, 7-Eleven Japan’s stores in Tokyo have plenty of bento boxes—Japan’s cold boxed meals of rice, pickles, and other foodstuffs—while on cold days there are lots of hot noodles for sale. The stores’ operators always seem to have plenty of what track record of industry-leading financial returns. The convenience-store giant blends its IT investments with a range of assertive IT practices and capabilities: everything from the counselors’ visits that increase the store operators’ IT skills to the “transparency” of an information infrastruc- their customers want; in fact, they order and receive fresh food ture that links 70,000 computers in stores, at headquarters, deliveries three times a day. It is no coincidence that the com- and at supplier sites. pany is the nation’s most profitable retailer. Its 2004 gross mar- Peter Weill and Sinan Aral of the MIT Center for Infor- gins topped 30 percent—six times its 1977 gross margins. mation Systems Research identify four broad classifications of 7-Eleven Japan is, to put it simply, very savvy about us- IT investments that can be managed as a portfolio to optimize ing IT. At least twice a week, every one of its 10,000-plus their business risk and return: transactional, informational, mostly franchised stores gets a visit from a 7-Eleven Japan strategic, and infrastructure. Transactional investments are “counselor”: The counselor works with the store manager or used primarily to cut costs or increase throughput for the franchisee to improve the business, often by using data from same cost (for example, a brokerage firm’s trade processing the store’s information systems to manage and order more system). Informational investments provide information for effectively. purposes such as accounting, reporting, compliance, com- By matching local practices and preferences to IT munication, or analysis. Strategic investments are used to investments, the store can continually introduce and succeed gain competitive advantage by supporting entry into new with new product lines. The typical store adds 70 percent markets or by helping to develop new products, services, or new items for sale each year, a higher rate than that of any business processes. And infrastructure investments are the other retailer in Japan, and this helped double the average shared IT services used by multiple applications (such as store’s daily sales from 1977 to 2004. The store managers servers, networks, laptops, customer databases). Depending regularly receive graphical data showing recent sales, on the service, infrastructure investments are typically aimed weather conditions, and product range information, so they at providing a flexible base for future business initiatives or always know just how many bento boxes to order. reducing long-term IT costs via consolidation. 7-Eleven Japan makes effective IT investments, planning Pharmaceuticals leader Eli Lilly and Company has used and managing them as a “portfolio” of different categories of the portfolio approach since 1999 to categorize its IT invest- investments that continually matches information technol- ments. “We tend to want to have 5 percent of our projects in ogy to its business strategy. But the company’s well-managed strategic areas, 15 percent to 20 percent in the informational IT investments are only part of the story behind its 20-year category, and the remaining percentage split between the infrastructure and transactional,” explains Sheldon Ort, FIGURE 11.1 Lilly’s information officer for business operations. The technique is also engaging business leaders in IT investment decisions at Mohegan Sun, the Connecticut- based casino. CIO Dan Garrow reflects on the experience: “Comparing our strategy against our plans for expenditures in each of the four management objectives for IT invest- ments, we realized there was a disconnect between our long- range plans and our resource allocations, both human and financial. Portfolio thinking helped us bring the day-to-day activities back into alignment with our long-range objectives. Portfolio thinking helps us determine what type of company we are and the level of risk we’re willing to take, particularly around our strategic business efforts.” Each portfolio category of IT investment is linked to dif- ferent types of business value. For example, companies that invest more heavily than their competitors in transactional IT have lower costs. Logistics leader UPS offers a good example: The portfolio approach to IT planning can help The company uses IT to cut business costs and increase pro- companies make better use of IT to support their ductivity. For instance, it provides free package tracking in- business success. formation on its Web site or integrated into its customers’ enterprise resource planning systems. Before online tracking was offered, customer calls to the company’s call center cost Source: Tom Wagner/Corbis. 415 416 ● Module IV / Development Processes UPS about $2 each; sometimes there were two follow-up proposition than what internal IT resources can offer. As a calls to locate the package, for a total of $6 for one inquiry. result, Carlson’s business units use the shared IT services as Now each tracking request costs UPS only a few cents. much as possible, even though use is not mandatory. Similar evidence applies to the other IT asset classes. Raytheon Company illustrates how IT infrastructure Companies such as 7-Eleven Japan that invest more heavily investments can deliver cost savings and provide a platform in informational IT have higher quality and larger margins for business agility, and it shows how business processes and (net profits per dollar of sales). Strategic IT investments help decision-making practices must change accordingly. Rebecca spur innovation and thus position an organization for growth. Rhoads is vice president and CIO at the $21 billion aero- For example, Vanguard.com, the website of the mutual funds space and defense corporation, which has grown significantly firm, has a customized, password-protected portfolio analysis through mergers with the defense operations of Texas tool that offers sophisticated calculations, including com- Instruments, Hughes, General Dynamics, and E-Systems. parisons of investors’ current asset allocations versus long- She explains that the practices guiding Raytheon to a stan- term goals. Investments in IT infrastructure serve multiple dardized technology infrastructure after the mergers were purposes. Some are designed to cut costs through standard- just a first step in generating value from IT: ization and consolidation—data center consolidation, for You will outgrow the governance [IT planning and invest- instance. Others reduce time to market for new business ment management] model that makes you successful. It took initiatives or provide a platform for delivering companywide me a while to figure that out because we had developed a initiatives such as a shared customer database for a single governance model that was so effective—everybody was so point of customer contact. supportive of it. We had buy-in, we had alignment, we were Carlson Companies offers a good example of the value cre- moving forward on it. It was a governance model that helped ated by a shared IT infrastructure. The $20 billion company is us consolidate and shape up the company. So once we reduced a leader in the marketing, hospitality, and travel businesses; its a couple of thousand legacy applications, once we went from most recognized brands include Radisson Hotels & Resorts, 150 payroll systems to one, 28 e-mail systems to one, we T.G.I. Friday’s restaurants, Carlson Marketing Group, Carlson reduced IT spend by over forty percent. Wagonlit Travel, Radisson Seven Seas Cruises, and the Gold That’s what we needed to do over the first three to four Points Reward Network. Although the businesses are run au- years of being the new company, because if you don’t get the tonomously, Carlson has captured cost savings and synergies synergy of the merger, you’re not going to come up for air ever. with a world-class shared services capability, which won the 2004 International Productivity and Quality Council’s award However, Rhoads now believes that following Raytheon’s for the “best mature shared services organization.” IT cost-cutting successes, its IT planning and investment Carlson Shared Services is a division of Carlson set up to focus needs to shift to business agility—to questions of how operate as a business, offering IT and financial services. It is Raytheon might grow and how IT investments could support governed by a board comprising the CIOs and CFOs of the that growth. business units; and its IT organization provides 89 infrastruc- ture services to Carlson’s businesses. The IT unit compares Source: Adapted from Peter Weill and Sinan Aral, “Generating Premium Returns on Your IT Investments,” MIT Sloan Management Review, Winter the prices of its services to those of external vendors, and out- 2006, and NEC Solutions America, “Information Technology Portfolio sources whenever a vendor can offer a better price or quality Management,” necsam.com, 2006. CASE STUDY QUESTIONS REAL WORLD ACTIVITIES 1. What is the portfolio management approach to IT 1. Use the Internet to research the many companies in planning? Use the four classifications of IT investments this case. How are they doing now in terms of business and examples of companies in this case to illustrate your success? See what the business and investment news answer. media say about the status of these companies, as well 2. What are the keys to 7-Eleven Japan’s great success as their own investor reports and press releases. Are compared to other retailers in Japan? How does IT their investments in IT mentioned? How could IT support such success? How could 7-Eleven Japan do portfolio management help improve their present busi- even better? What role would IT play? Defend your ness status? proposal. 2. Break into small groups with your classmates, choosing 3. Compare the IT portfolio investment approaches of Eli one of the businesses owned by the Carlson Companies Lilly, Carlson Companies, and Raytheon. What differ- or Raytheon as a company whose business success you ences in investment approaches and strategies do you will try to improve. What are your suggestions to find? Which approach do you prefer? Why? improve its performance? What role can IT play to support any of your proposed initiatives? Defend your proposals to the rest of the class.