8 strategies for it transformation

Leaner, Smarter, More Competitive: How Standardization Fuels Growth

An Oracle White PaperMarch 2010


EXECUTIVE OVERVIEW

Today’s economic climate is forcing business leaders in the financial services industry to assess the competitiveness and profitability of their operations in a risky global business environment:

Internal and external stakeholders are demanding greater transparency into financial performance and aggregated views of market, credit, liquidity and operational risk.

Institutions are redefining business models seeking improved profitability and lower risk.

Customer-centric cross-channel delivery are critical to attracting large deposit accounts and growing fee revenue.

Leaner operations are critical to restoring profitability.

The next wave of competitive differentiation in financial services will come from the ability to adjust to changing business conditions quickly.

Standardization is a proven approach for reducing IT costs and, more importantly, achieving better information, improved productivity, and lower risk while establishing a foundation for future growth. At Oracle, significant cost savings achieved through standardization are funding our growth. Today, our operating cash flow is 3 times greater than 5 years ago due to internal savings achieved through standardized global processes, consolidation and simplification.

Oracle and many of our largest customers—including GE, Cisco, Credit Suisse, Fidelity and Alcoa—have successfully executed a standardization strategy. Based on that


experience, we have developed an eight-point strategy to help customers standardize business processes, consolidate applications and information and simplify infrastructure. The strategy results in better information, more flexibility, and less risk at a lower cost.

Our Transformation Program is a business-driven planning process designed to help customers identify opportunities to rationalize their IT investments and define a strategic roadmap for achieving the benefits.

INTRODUCTION

Today’s economic climate is forcing business leaders in the financial services industry to assess the competitiveness and profitability of their operations in a risky global business environment. Increasingly, leaders are working to capitalize on their information assets to become more competitive while rationalizing IT investments.

As demand for information grows, IT organizations are struggling with how to deliver more information and more applications to more users more reliably and more securely than ever before…on a global scale…and cut costs while they are at it. One IT executive from the financial services industry summarized the challenge to the MIT Sloan Center for Information System Research:

“In the late 90’s, accounts were growing exponentially…we had no time to look internally at rationalization or architecture. We grew our customer base through acquisition. We’d do the barebones, integrate the GL, make sure the networks could talk to each other and move on. Now, market growth has slowed down. All of the sudden, we’re not acquiring, we’re protecting current accounts. That’s when we saw all these legacy problems, the problems of yesterday that we’re dealing with today.”1

Reinventing IT economics is a business imperative. Standardization is a proven approach for reducing IT costs and, more importantly, achieving better information, improved productivity, and lower risk while establishing a foundation for future growth.

1 George Westerman and Robert Walpole, “PFPC: Building an IT Risk Management Competency,” working paper

352, MIT Sloan Center for Information Systems Research, Cambridge, MA, April 2005.


FREE CAPITAL TO INVEST IN STRATEGIC INITIATIVES

Standardization frees capital from costly, inflexible infrastructure so that it can be invested in strategic applications that make your business more competitive and profitable.

IT spending is split between infrastructure and strategic investment. Infrastructure includes hardware, networks, operating systems, databases, e-mail, back-office applications, system maintenance, and so on. Numerous analyst studies have estimated that infrastructure consumes 70 to 80 percent of annual IT spend.

Today, innovative business leaders are working to break from their historical IT spending pattern in two important ways.

1. Reduce spending in real terms and as a percentage of revenue. IT must become more efficient. According to The Hackett Group, world-class performers allocate only 43 percent of their annual IT spend to infrastructure.2

2. Change the mix so that more investment is channeled to strategic initiatives and less to infrastructure. In fact, companies like GE measure the percentage of IT spend on infrastructure versus strategic initiatives and reward IT for decreasing infrastructure spend.

CIOs are being asked to deliver significant savings…all while delivering more information and more applications to more users more reliably and more securely than ever before. This shift requires more than normal budget trimming….it’s a transformation in the way capital is allocated to IT.

2 Wayne Mincey, “World-Class G&A Performance”, The Hacket Group, Executive Briefing, September 2008.


WHERE DOES ALL THE MONEY GO?

Line-of-business executives are justifiably frustrated that, despite growing IT budgets, they lack the timely information they need to run their business. If so much money is spent on infrastructure, where does that money go?

The primary cost drivers are labor and hardware infrastructure according to studies conducted by IDC. Analysis of IT budgets from numerous industries reveals that:

Labor consumes nearly half the cost of running a data center, primarily systems management and technical support.

Hardware such as servers, storage, and networks consume another 28 percent.

Custom application development costs are 15 percent, while software maintenance brings up the rear at less than 10 percent.

And then there are hidden costs associated with the inability to respond quickly to business opportunities, security breaches, compliance, and system downtime.

To have a transformational impact on IT costs, we need to focus on the primary cost drivers and the reasons those costs consume so much.

Fragmentation is the primary culprit. Over the years, decentralized decision making, acquisitions, different product line organizations, and different sales organizations can result in fragmented information, fragmented business processes, redundant applications, and the infrastructure supporting it all. Integration costs grow exponentially. Gartner and Meta Group studies have shown the average large organization


spends between 35 and 65 percent of their annual IT spend on integration…moving fragmented data around.

It’s expensive to have bad information. You invest in IT because of the potential value of information, but that value is lost when information is fragmented.

Management is unable to get a global view of operations, customers and risk.

Information sharing among employees and with customers and partners is unreliable.

Security and regulatory compliance risk is high.

It’s expensive.

STANDARDIZATION IMPROVES COMPETITIVENESS

Bottom line, standardization results in better information, more flexibility, and less risk at a lower cost.

Standardization is not a new concept. Toyota revolutionized manufacturing with its Lean concepts built on the premise that improved quality and lower costs result from eliminating redundant activities and waste. For IT organizations, standardization is about streamlining business processes, eliminating information silos, and simplifying shared infrastructure to reduce costs and establish a unifying platform for future growth.

IT standardization drives significant business value. In a survey of 103 U.S. and European companies, those with standardized core business processes had higher profitability, faster time-to-market, and greater return from their IT investments relative to their competitors. They have better access to shared customer data, fewer system failures, and 25 percent lower IT costs.3 These findings are substantiated by The Hackett Group, which found that standardization is a common theme in world-class IT organizations.4

They spend 18 percent less on IT.

They require 36 percent fewer IT workers.

They need 29 percent fewer applications.

They have 65 percent fewer software vendors.

3 Jeanne W. Ross, Peter Weill, David C. Robertson, Enterprise Architecture as a Strategy, Harvard Business School

Press, pg. 2.

4 David Ackerman, “Attributes of World Class Companies”, The Hackett Group, Oracle Financial Services Partner

Summit, October 2008.


Ellison’s Law: Ellison’s Law: The value of

information increases exponentially

as fragmentation is reduced.

They finish 91 percent of their projects on time and on budget.

At Oracle, significant cost savings achieved through standardization are funding our acquisition strategy and product innovation. Today, our operating cash flow is 3 times greater than 5 years ago5…largely due to our internal savings achieved by simplifying, consolidating and automating global processes. While the cost savings have been dramatic, standardization at Oracle is really about globalizing our business and using the internet to pursue new opportunities.6

8 STRATEGIES FOR TRANSFORMATION

All organizations have opportunities for standardizing IT, but each organization is unique in the degree of standardization that is appropriate. For example, organizations where business units share common administrative processes, serve the same customers, and collaborate extensively with the same business partners will benefit from greater levels of standardization than a firm with business units that operate independently and share little information. In today’s financial services industry, trends toward integrated financial services, integrated global operations, mergers and acquisitions, business process outsourcing, single face to the customer, and increased transparency are increasing the demand for shared information.

Based on our experience standardizing our own operations and those of many of our largest customers, we have developed an eight-point strategy to help customers standardize IT.

5 Oracle Q3 Earnings Report, March 2008.

6 Larry Ellison, “How We Saved a Billion Dollars”, Oracle Corporation whitepaper, 2000.


Standardize Business Processes – Standardizing business processes and related systems means defining exactly how a process will be executed, regardless of who is performing the process or where it is completed. Process standardization delivers efficiency and predictability across the company.7 Costs are reduced through organizational and infrastructure consolidation.

Consolidate Applications and Data – Fewer applications reduces the number of application environments, database instances, and labor that must be managed and certified.

Standardize Service Platform – Reduce infrastructure complexity by standardizing common application services for process management, user interaction, integration, security, compliance, records management, and business intelligence.

Optimize Infrastructure – Establish a modern computing infrastructure that can be shared across business units globally.

Optimize Workforce – Optimize global application management to improve support and leverage global labor cost structures.

Management Excellence – Optimize business performance to deliver predictable and sustainable execution of strategy through risk-adjusted performance management.

Strategy 1: Consolidate Information

Managers and frontline employees need timely, accurate, and actionable information so they can respond to changing conditions, seize business opportunities, and make smarter decisions. Business performance suffers when they struggle to get the information they need because it is fragmented across disparate systems.

Several years ago, fragmented information limited Oracle’s ability to operate globally. Information was fragmented across disparate systems within line-of-business and geographic silos. When our CEO wanted to know how many people worked for Oracle, we would dispatch a project team to figure it out. We did not have a single source of truth. Data was fragmented 7 Jeanne W. Ross, Peter Weill, David C. Robertson, Enterprise Architecture as a Strategy, Harvard Business School

Press, pg. 27.


across redundant HR, Financial and other systems around the world. Multiple sales systems with conflicting views of customers made sales forecasting a time consuming, labor-intensive effort and created service disconnects. Redundant systems meant bad information and high costs.8

To complicate matters, business users created data marts in an attempt to obtain the reliable information they needed. They spent a great deal of time and money cleansing, transforming, and synchronizing data from redundant data sources, resulting in thousands of data marts that further fragment data and added labor and infrastructure costs. Still, managers were working with conflicting, unreliable data.

The fragmentation problem is not isolated to transactional information. Documents, e-mail, Web content, and other digital assets are spread across redundant servers, adding more costs.

Fragmentation drives up the cost of protecting sensitive information and complying with regulatory requirements. Security policies must be enforced across multiple data sources and auditing data governance is expensive. Regulatory compliance requires that information be reconciled across disparate, potentially conflicting data sources.

Our Strategy – A Single Source of Truth

In our experience at Oracle, we were able to achieve significant productivity improvements and costs savings when we consolidated information into a single source of truth. We believe that all information that enables a global view of operations, supports collaboration among employees and with business partners, and is critical to regulatory compliance should be consolidated. This includes customers, employees, products, financials, projects, payments, and any other digital asset that needs to be protected and shared across the enterprise.

There are circumstances when information cannot be physically consolidated. In these situations, a Data Services Architecture can be implemented to standardize information in a central data store, synchronize it with source systems, and publish data services to applications that need to consume information from a single source of truth. These services can

8 Larry Ellison, “How We Saved a Billion Dollars”, Oracle Corporation whitepaper, 2000.


”Businesses that use a formal, enterprise-wide strategy for Global Data

Synchronization will realize 30% lower IT costs in integration and data reconciliation

at the department level through the rationalization of traditionally separate and

distinct IT projects.”

be application services, analytics services, web services, etc… For example, when Cisco executed their successful acquisition strategy, they created a single source of truth for operational information by consolidating ERP systems. Customer data, however, remained fragmented across front-office systems. Recognizing that front-office standardization is a long-term goal, they implemented a Customer Data Hub to standardize and synchronize front-office information. In this way, they had a 360-degree view of customers they could rely on for reporting purposes and, over time, standardize front-office applications to use the data hub as the single source of truth.

Consolidating information results in better information, better collaboration, reduced risk and lower costs.

Strategy 2: Standardize Corporate Services

Standardizing business processes drives efficiency, improves visibility, and eliminates redundant systems and infrastructure. When business processes are fragmented by operational silos, stakeholders lack end-to-end visibility into enterprise performance and collaboration between business units and partners is difficult.

In our experience at Oracle, we operated as independent lines-of-business run by general managers who were empowered to implement the corporate systems that best met their needs. Process differences led to different systems, conflicting information, and redundant costs. Different processes, inconsistent controls and records retention, and independent reporting environments made compliance a nightmare.

Our Strategy – Lean Business Operations

While the degree of standardization varies between firms, most in financial services can benefit from standardizing processes and systems for corporate administration. This includes financial management, human capital management, procurement, project management, and planning and budgeting. According to The Hackett Group, standardized processes and systems are critical to world-class efficiency and effectiveness.9 They have:

50 to 60 percent lower financial management costs due to better automation with fewer errors and they allocate a greater share of their spend to planning and analysis.




16 to 49 percent lower HR costs with fewer managers and greater spend on talent management.

30 to 49 percent lower procurement costs with a greater share of spend allocated to planning, analysis, and supplier management.

Standardization of corporate administration at Oracle resulted in global shared services supported by common global systems that saved an estimated $2 billion annually. Service levels improved with fewer exceptions, fewer errors, and faster processing time. For example, standardizing our global Procure-to -Pay process reduced our transaction costs from $150 per transaction to approximately $30 during a period when our employee count grew significantly.

While the cost savings have been significant at Oracle, they do not tell the whole story.

The biggest payoff has been the speed with which acquisitions can be quickly assimilated into the global picture. When we acquire a company, they are immediately migrated to our global shared services to eliminate redundancy and allow their employees to quickly assimilate into the larger Oracle organization. In 2008, BEA operations were integrated into Oracle global processes in just two months.

Standardization reduced compliance risk. Oracle was one of the first companies to comply with Sarbanes-Oxley Act 2002 because of the confidence we had in our global operational systems.

Standard processes enable us to quickly adjust to change and disseminate best practices worldwide.

Service levels have improved with fewer back-office staff. This enables us to focus more of our talent on our core business of building software and servicing our customers.

Strategy 3: Standardize Front Office

Customer relationships are your most important asset and delivering a differentiated experience is the key to competitiveness. Fragmented processes and information in the front office are not only costly, but create service disconnects that directly impact sales and customer retention.


“Through an increasing analytical

capability, banks must change their focus

away from customer volume to customer

value. This will only be possible when

banks understand the actual value of each

relationship as well as have the means to

act on this information and design

personalized relationships to maximize

benefit to customer and bank.”

Datamonitor

Today’s financial services customer is demanding and willing to move their assets to firms that provide a consistently superior experience; they have greater knowledge of the marketplace, they expect better information about products and services, they expect more visibility into your operations, and they expect to interact with your firm at anytime, anyplace through any channel. Front-office standardization produces a consistent customer experience across channels and turns information into an asset that differentiates the customer experience.

Customers who have standardized the front office report impressive results.

8 percent increase in revenue

18 percent improvement in customer retention

25 percent gain in front-office employee productivity

18 percent improvement in customer satisfaction

Our Strategy – Customer Insight

A consistent customer experience begins with a 360-degree view of customers that enables front-line employees to share information across line-of-business, product, and channel silos. But sharing information is not enough to create differentiation. Differentiation is created when front-line employees have insight that enables them to:

Understand customer and product profitability

Recognize customer buying patterns and preferences

Personalize the customer experience

Recommend the right products to the right customers at the right time

Target Profitable Customers - Not all customers are equal. Profitable growth requires firms to have a laser focus on selling profitable products to profitable customers in the most cost effective way. Bank of the West, a leading retail banker, manages profitability by analyzing the cost of service by product and customer and modeling the impact of different product mixes according to customer demographics. The analysis produces profitable growth by enabling front-line employees to recommend the right product mix to the right customers and provides a benchmark for developing and marketing new products.


“In today's rapidly changing and competitive

business environment, it's essential that we

have our resources allocated to the best

market opportunities."

Vice Chairman – FinanceBank of the West

Personalize the Customer Experience - Customer insight enables firms to present relevant offers based on their knowledge of customer characteristics and behavior. A prominent insurance provider leverages their customer insight to differentiate customer service on the Internet. Advanced analytics are used to present customers with more relevant policy alternatives, up sell options and pricing. More personalized service increased revenue by converting more browsers to buyers, and increasing the number and value of policies sold.

Earn Customer Loyalty through Proactive Service – Customer loyalty is the key to profitable growth. There is a direct correlation between customer loyalty and wallet share. The more products a customer buys, the more loyal they are to the brand. Studies have shown the cost of replacing a customer is significantly more than the cost of selling to an existing one. Losing profitable customers with wallet share hurts profitability. Building loyal customers is a combination of understanding customer buying patterns and preferences, proactively managing the customer relationship, and presenting relevant offers at the right time across all channels. TIAA-CREF leverages their customer insight to:

Improve productivity by analyzing key contact center metrics such as first-call resolution rates, average call handle times, transfer rates, revenue per agent, and cost per contact.

Personalize customer interaction by understanding individual investor needs so that agents can recommend services that help them achieve their individual retirement goals.

Identify potential problems proactively, spot opportunities, and resolve anomalies before they become problems.

Our Strategy – Optimize Marketing ROI

Brand value is destroyed and money wasted by ineffective marketing. Today’s financial services customer demands a richer, more relevant dialogue about the products and services they buy. Studies show that traditional direct marketing is ineffective with response rates that average less than 3 percent. Customer retention is directly impacted by irrelevant marketing messages. Consumers see over 3,000 (direct and indirect) marketing messages each day, and over 60 percent


“Looking in the rearview mirror gives us a good

view of what’s happened, but increasingly we’re

interested in predicting what’s ahead so we can

anticipate events and take action. When you

can connect marketing, service and sales you

start to see relationships that weren’t obvious

before.”

Vice PresidentTIA-CREF

cite “over-solicitation” as a key reason for defecting to another firm.

Closed-loop marketing formalizes marketing processes so that campaigns are more targeted and results are measurable.

Corporate and branch marketing are better aligned and optimized.

Communications are coordinated across channels with collaborative execution between branches and relationship managers.

Campaign results are measured against investment to provide an ROI on marketing spend.

Nykredit, one of Denmark’s leading financial institutions, instituted closed-loop marketing, resulting in faster campaign execution, better response rates, and better coordination of marketing efforts across all customer touch points.

Oracle marketing has become more targeted and saved money by moving to an internet-driven model. All lead generation efforts are consolidated and focused on digital delivery through email, internet seminars, online customer references, and online collateral. iSeminars saved $25 million annually and the cost per sales lead has decreased from $350 to $2.

Our Strategy – Aggressively Build Direct Channels

Market leaders are increasingly turning to internet and mobile channels to attract and service customers. For example, Jibun Bank, a joint venture between leading Japanese information and communications company KDDI and Bank of Tokyo-Mitsubishi UFJ, is the world’s first bank to use the mobile phone as the primary access channel. Its customers use mobile phones to open new accounts and use a variety of services including Japanese currency deposits, cashless payments, loans, and credit card and fund transfers.

Similarly, Australian bank NAB launched Ubank, a branchless direct bank to attract new retail customers while operating independently from its other retail brands. UBank has been cited as an example of effective use of nontraditional marketing and has earned customer satisfaction levels that are amongst the highest of any institution in Australia.


Our Strategy – Integrate and Optimize Channels

Customers interact through a variety of channels today—branch offices, call centers, Web sites, mobile devices, and business partners. Channels are often information silos and service disconnects result when information obtained through one channel is not readily available to other channels. Shared information across channels enables customers to be guided to the most optimal channel for their request. Transactional requests can be directed to lower-cost channels and higher-value interactions to more personal channels.

Integrated customer channels have made PNC Financial Services Group a model for customer service in retail banking. With a fully integrated view of customers across 1,100 branches, the Web site, and banking contact centers, PNC has demonstrated impressive results:10

19% increase in new deposit customers,

21% increase in customer retention,

9% increase in customer satisfaction, and

17% improvement in problem resolution time.

Optimized channels mean better service, fewer people, and lower costs. At Oracle, standardizing the front office produced significant cost savings because the bulk of our operating costs are directly related to sales and service. Over a three year period, customer self-service increased the number of support interactions by 200 percent, but call center volumes decreased dramatically as almost 80 percent of that activity moved to self-service. We reduced our cost per request by 60 percent and, most importantly, cut the time to resolve a customer problem by 41 percent.

Strategy 4: Modernize Core Processes

Legacy applications and infrastructure is a significant barrier for any large financial services firm. These systems are critical to business operations, but tied to expensive, inflexible infrastructure and an aging employee population that supports them.

Our Strategy – Modernize Applications

To address this growing problem, Oracle has teamed with our business partners to provide a program for transitioning legacy

10 “How PNC Bank Put ‘Personal’ Back in Banking”, Steve Pizzo, 2003


applications from costly infrastructure to lower-cost standards-based platforms. Through our Application Modernization initiative, customers work with specialists to identify modernization candidates and identify a migration strategy that best meets the business need.

SOA Enablement – Service-enable legacy applications to interoperate with modern SOA applications.

Rehosting – Migrate the legacy application to a lower-cost infrastructure.

Application Replacement – Replace legacy custom systems with commercial applications.

Automated Migration – Migrate unique applications that cannot be replaced by a commercial application using automated tools.

Rearchitect – Rebuild unique applications on the new platform.

Oracle’s application and solution portfolio for Banking, Insurance and Healthcare Payers provide a variety of options that help reduce the cost, time and risk of modernizing core applications.

Samsung Life Insurance used a combination of these strategies to eliminate $20.8 million annually while establishing a standards-based platform for their next generation systems.

Strategy 5: Standardize Service Delivery Platform

Every application requires a common set of capabilities: process management, user interaction, integration, security, controls enforcement and auditing, records retention, and analytics. Traditionally, these capabilities have been part of each application, resulting in organizations supporting a myriad of tools to manage and certify. Each time a component changes (software change or upgrade), the infrastructure must be recertified as well. Each point of integration is a potential security breach. The more complex the infrastructure, the more costly and resource consuming the problem becomes.

Our Strategy – Reduce the Number of Moving Parts

In a modern, services-oriented architecture, the capabilities that are common across applications are exposed as services that can be shared by applications. These services are engineered to work together so that they can reduce the


number of components that have to be continually integrated, managed, and tested. Fewer parts mean lower management costs, lower training and support costs, and a more reliable and secure infrastructure.

Credit Suisse found that their complex software infrastructure was costly to maintain and prohibited them from responding quickly to business requirements. Java Application Platform is the backbone for integrating several hundred applications across their global banking business, including DirectNet online banking which handles over 20 million transactions each year. By standardizing their application platform, Credit Suisse cut costs, improved flexibility and delivers applications to the business faster:

They reduced developers by one-third because applications use standard components.

They deliver applications to the business two times faster with fewer resources.

They deploy system changes globally (e.g. security updates) in days instead of months.

Strategy 6: Deploy Cloud Infrastructure

Server hardware may be the most underutilized asset an organization owns. Hardware costs are approximately 30 percent of the average IT budget and support costs, downtime, and underutilization are significant hidden costs. Studies show that the average server is 30 percent utilized at best. And IT is buying more.

Our Strategy – Deploy Highly Scalable Cloud Infrastructure

The benefits of Cloud Computing receive much media attention today. Cloud Computing is defined as on-demand access to a shared pool of computing resources over the Internet.

We have been helping customers deploy reliable, low-cost computing grids for many years. Today, Oracle customers can provision a public cloud using Amazon’s Elastic Cloud Computing environment or host a secure private cloud to share infrastructure within their own organization. In either case, share resources provide high service levels at a much lower cost.

Lower Acquisition and Support Costs – HP and Dell have shown that the acquisition and support costs of Intel


“Our route to standardization was not

just a technological challenge. Even

after we had started introducing J2EE

some years ago, we had to re-invent

the wheel each time we embarked on

a new project.”

Head of WebTtechnologiesCredit Suisse

servers running Linux are approximately 40 percent lower than comparable Unix servers.

Better Asset Utilization – Servers are utilized much better because applications are virtualized from underlying infrastructure and workload is spread across resources.

More Reliable – Downtime costs are lower because the cloud does not have a single point of failure.

Lower Fixed Costs – Capacity can be added or removed quickly without affecting the availability of the applications running in the cloud. As a result, the fixed cost of a large server can become more variable by enabling capacity to be added or removed in smaller increments.

Reduce Storage Costs – Leveraging lower-cost tiered storage and compression can reduce storage costs.

Lower Management Costs – Automated management tools enable the cloud to be managed centrally as a single computer and reduce labor costs.

Green – An important byproduct of a grid is the reduction of space and energy usage. At Oracle, cloud technology has been important in helping us double data center performance, while consuming a third of the power.11

Mainstay Partners, an independent firm that specializes in quantifying ROI for IT investments, found the average ROI on these investments at companies like Chicago Board of Trade and Fidelity to be 150 percent.12

Strategy 7: Leverage Cloud Services

Cloud Services are an opportunity to reduce costs and redeploy IT personnel to more strategic projects. Within the next five years, Gartner predicts that early technology adopters will forgo capital expenditures and instead purchase 40 percent of their IT infrastructures as a service.

Increasingly, “the cloud” is viewed as a change agent for driving the transformation to standard processes and common systems. According to an IDC survey of senior executives, 36

11 Oracle OpenWorld, 2006.

12 Timothy Guyre and Amir Hartman, “Aggregate ROI Study Results - Making Enterprise Grid Computing a Reality

with Oracle 10g Software”, Mainstay Partners ROI Realization Series, December 2004.


percent said reducing costs was a primary driver behind the decision to outsource. However, when evaluating an outsourcing provider, only 13.9 percent said that their goal was to find the lowest cost solution on the market. Of much higher importance was finding a provider that offered “transformational services” that will help drive growth and innovation.13

Our Strategy – Cloud Services

Cloud Services make economic sense. According to an independent study conducted by IDC, customers of Oracle Cloud Services average 404% ROI over 5 years and 60% realize payback within 12 months.14 There are multiple alternatives that enable customers to structure a cloud services agreement that best meets their business situation.

Shared Cloud – A multi-tenant service in which several companies subscribe to a common infrastructure. Shared Cloud is best for situations that require a no-nonsense application that is fast to deploy, inexpensive to run, and requires no internal IT resources to support it.

Private Cloud – A hosted application and infrastructure that is not shared with other companies. The business operates within its own environment where application and infrastructure upkeep is outsourced so that IT resources are freed up to work on other projects.

On Premise Private Cloud – A hybrid approach that accommodates large organizations with many business units, diverse user base, and multiple geographies. A firm may outsource IT operations for satellite locations, but house its core applications and infrastructure internally in a corporate data center. The outsourcing provider manages the applications and infrastructure with a combination of onsite and remote personnel. Using an On Premise strategy, Oracle helped Alcoa reduce the cost of managing applications and infrastructure 44 percent and freed their employees to focus on more strategic projects.

Strategy 8: Management Excellence

Management Excellence is the ability to deliver predictable and sustainable execution of strategy through risk-adjusted

13 Peppers & Rogers Group, “No More Limits”, 2007.

14 IDC, “B u i ld i ng a Super i o r S o f twar e Ownersh ip Exper ience Throug h S o f twar e as a Ser vi c e”, Amy Konary, 2005


performance management. According to The Hackett Group, financial performance at firms with world-class performance management is 240 percent greater than the industry average.15 As organizations improve operating performance through standardized processes and systems, management can focus on optimizing business performance rather than just transactional processes.

A recent Economist Intelligence Unit (EIU) study found that disparate information presents one of the primary hurdles to effective performance management.

Management lacks visibility into all stakeholder expectations.

Planning and budgeting is lengthy and labor intensive.

Analysis of business scenarios and the impact of planning variables across the enterprise is difficult.

Monitoring and analysis requires extensive, error-prone data manipulation.

Comparison of strategic plans to operational results in order to identify causal relationships in a timely manner is difficult. Problems may not be detected until it is too late.

Too often, performance management is a financial exercise that ignores other operational information that is increasingly an important part of stakeholder reporting.

The flexibility to respond quickly to business change has become a strategic imperative. According to research at the Anderson School of Management at the University of California, Los Angeles,16 performance gains often begin with exploiting a change in the environment and riding that change with quickness and skill.

Our Strategy – Standardize Business Planning and Performance Management

In most organizations today, business planning and performance processes are siloed by line-of-business. Processes and information for strategy formulation, budgeting and reporting are disconnected. It’s difficult to get an enterprise view of risk. Performance metrics are not predictive of business performance and not actionable.



16 “Strategy's Strategist: An Interview with Richard Rumel,” Dan P. Lovallo and Lenny T. Mendonca, McKinsey

Quarterly, 2007.


Management Excellence requires a performance management platform that integrates enterprise information:

Connect Business Planning Processes – align strategic plans to operational plans across financial, operational, customer and risk dimensions.

Model Business Performance - analyze business scenarios to identify the most attractive market opportunities and to quickly assess the impact of business change on profitability, liquidity and capital.

Risk-Adjusted Performance - embed risk into performance management processes to proactively manage the impact of uncertainty on the achievement of organizational objectives.

Early Warning System – enable users to collaboratively monitor leading indicators, understand causal relationships and take corrective action.

Fifth Third Bancorp standardized financial planning and forecasting processes across lines of business to better understand revenue and margin drivers. A time-consuming, error-prone planning process consisting of 1,200 different spreadsheet templates was replaced with a single integrated planning system that enables them to forecast down to the line-of-business level and modify it quickly as business conditions change.


At Marsh McClennon, standardized financial planning across corporate parent and operating companies integrates corporate income statement, balance sheet and cash flows with operating companies. The consolidated hierarchy allows them to perform scenario analysis to model sensitivities based on planning assumptions.

Our Strategy – Predict Business Performance

As financial services firms redefine their business models and capital investment strategies, they have many different strategic options. Should they innovate and grow organically or grow through acquisition? Which activities should they outsource and which are best kept in-house? And when it comes time to downsize, should they divest a business unit or reduce capacity throughout the business? These questions cannot be answered by calculating the return on an investment; they must be aligned to the market.

Performance leaders are using predictive modeling to select investment alternatives that produce the highest RAROC (risk-adjusted return on capital). Through scenario analysis, management can reduce the risk inherent in decisions about their product portfolio, outsourcing strategy, partners and channels, mergers and acquisitions and financing strategy.

Old Mutual, a leading international financial services group based in South Africa, uses predictive modeling to understand the projected impact of investment and divestiture scenarios on their 3-year business plan. When analyzing strategic expansion into new markets (i.e. market entry plans into Asia Pacific) they needed a consistent method to quickly analyze investment scenarios that produced auditable results in IFRS and EEV (European Embedded Value) formats.

Credit Suisse standardized M&A models to simulate full income statement, balance sheet and cash flow for the combined companies before and after a deal structure has been created.

Our Strategy – Plan for Reality with Rolling Forecasts

Businesses that unify their enterprise performance management can better assess the impact of change and take corrective action faster. Traditionally, planning and budgeting has been an annual financial exercise. Today, it’s critical that financial planning be integrated with operational planning so


that stakeholder resources are balanced to market needs on an ongoing basis.

Responding quickly to business change requires that performance be measured against reality. The 2009 financial crisis was a hard lesson in how quickly planning assumptions can change. Performance leaders are adopting rolling forecasts to gauge their performance. Every change in the market or internal resource leads to a new operational forecast and financial prognosis. Variance analysis is no longer based on the budget but becomes a relative comparison between the organization and the rest of the market.17

ING Direct standardized global planning systems to give them better visibility into worldwide business plans. They reduced the time to create the worldwide plan by 50% and can quickly model the impact of business scenario changes.

Our Strategy – Risk-Adjusted Performance Management

Proper identification and management of risk and capital will determine not only a financial institution’s survival, but its long term success. A comprehensive risk management approach embeds risk into performance management processes to proactively manage the impact of uncertainty on the achievement of organizational objectives.

Financial services firms manage a variety of risks; strategic, market, credit, liquidity, underwriting, operational and regulatory. Over the past decade, the cost of risk management and compliance activities has grown rapidly. Like traditional performance management, risk and compliance functions have evolved independently, leading to multiple organizations, risk universes, testing methodologies and technologies. According to a PricewaterhouseCoopers study, the cost of compliance is escalating by 16% annually.18

Increasing compliance requirements and costs are forcing firms to re-think their approach. The Institute of International Finance recommended in a July 2008 report, “A comprehensive, firm-wide approach to risk management should be implemented by all firms. Such an approach should allow the firm to identify and manage all risks across business

17 “Mangement Excellence: How Tomorrow’s Leaders Will Get Ahead”, An Oracle Thought Leadership White Paper, September 200818 Financial Services Finance Executives Forum Survey, PricewaterhouseCoopers, 2007


“Risk reporting gets overwhelming for the

Board. By focusing on the wrong

problem, hundreds of millions of dollars

can be lost elsewhere”

Risk Management Association

lines and provide communication mechanisms so that the Board, senior management, business lines and control functions can effectively exchange information about risk.”19

Risk-adjusted performance management requires a standard disciplined risk management process that proactively identifies risk exposure and monitors risk mitigation activities for all categories of risk:

Align risks with corporate objectives and set tolerance levels.

Model risk exposure to understand risk drivers and associated probabilities.

Determine mitigation strategy using cost/impact analysis.

Manage the risk lifecycle of audits and remediation plans.

Automate internal control enforcement.

Respond to risk events.

Aggregate and report enterprise risk portfolio to internal and external stakeholders.

The ability to proactively model risk exposure and conduct stress testing is fundamental to risk-adjusted performance management.

Risk-Adjusted Return on Capital - Measure the risks of interest rates changes, unemployment rate changes, currency changes or loss ratio changes on total Economic Capital.

19 “Managing Risk in Perilous Times: Practical Steps to Accelerate Recovery”, Economist Intelligence Unit, 2009


Market Risk – Simulate interest rate swaps, hedges and other derivatives that mitigate interest and currency risks.

Liquidity Risk - Model hedging and funding strategies based on daily liquidity gap reporting.

Credit Risk - Model credit scenarios for underwriting and portfolio management and create debt covenants based on internal economic capital metrics.

Capital Adequacy - Stress test capital reserve requirements to assess the impact of historical and hypothetical market conditions.

Target Capital Structure - Maintain debt/total capital ratios during forecasted time periods.

Our Strategy – Early Warning System

Speed is of the essence. Information needs to be immediate and accurate so that front-line employees and management can deal with changing circumstances that pose risks. Operations need to be monitored closely, starting with cash flow, but including any operation that is linked to a cost or revenue driver. Performance indicators should be linked through end-to-end business processes so that the value chain is managed. Each department reporting upwards is inadequate; horizontal process reporting provides cost control and operational grip.

An Early Warning System enables stakeholders in a business process to collaboratively monitor leading indicators, understand causal relationships and take corrective action. Corrective action can range from immediate tactical responses, such as changing a customers’ credit status, to adjusting the business plan or even reevaluating the strategy, depending on the magnitude of the impact.

Charles Schwab deployed an early warning system to over 1,700 customer facing financial consultants. Through better visibility into sales processes, 5%-9% of analytic alerts result in new opportunities and better collaboration saves approximately 2,400 hours/week.

TIAA-CREF deployed an early warning system for over 1,600 agents in their national call center. They improved productivity within the call center by analyzing key contact center metrics such as first-call resolution rates, average call


handle times, transfer rates, revenue per agent, and cost per contact. More importantly, the system is improving customer satisfaction by enabling them to see potential problems proactively.

DEFINE YOUR STRATEGIC ROADMAP

The 8 Strategies for Transformation presented in this paper are a framework designed to help our customers identify opportunities to become leaner, smarter and more competitive. We work with many of the world’s largest corporations to define a Strategic Roadmap that helps them to better leverage their Oracle investments and achieve Operational and Management Excellence.

A Strategic Roadmap is a business-driven planning process designed to identify business improvement opportunities and define a practical plan for achieving the benefits. Working collaboratively with Oracle specialists, stakeholders develop a roadmap that:

Maximizes the value of Oracle and other investments, Leverages Oracle experience and best practices, Identifies short-term and long-term projects, and Estimates the business benefits.

CONCLUSION

To learn more about the benefits of a Strategic Roadmap, contact your Oracle representative to schedule an exploratory meeting.


More Competitive, Lower Cost: How Standardization Fuels Growth

November 2008

Author: Kirk Lowery

Oracle Corporation

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