A through-cycle mindset:IT-enabled transformation and leadership

Dr. James Manyika

1

TODAY’S DISCUSSION

The bad news

1The good news

2Example market transition3

Tough, uncertain economy … IT budgets squeezed, yet higher expectations of IT

The Opportunity

2

A PERIOD ALMOST WITHOUT PRECEDENT

Percentage change in

S&P market index by year

1862

1879

1885

1933

1954

1843

1863

1928

1935

1958

1839

1857

1907

1930

1974

2002

1830

1908

1927

1936

1938

1945

19501955

1975

1980

1985

1989

19911995

1997

1825

1828

1831

1837

1841

1854

18731884

1893

1910

1917

1920

19411957

1966

1973

2001

1846

1852

1880

1900

1901

1909

19151922

1924

1925

1942

1943

19511961

1963

1967

1976

1982

1983

1996

1998

1999

2003

1827

1833

1835

1845

1851

1853

18601861

1876

1882

1883

1887

18901903

1913

1914

1929

1932

1934

1939

1940

1946

19531962

1969

1977

1981

1990

2000

1829

1832

1834

1838

1847

1848

18491850

1855

1858

1864

1878

18861892

1897

1898

1904

1905

1918

1919

1921

1926

19441949

1952

1959

1964

1965

19681971

1972

1979

1986

1988

2004

2006

1826

1836

1840

1842

1844

1856

18591865

1866

1867

1868

1869

18701871

1872

1874

1875

1877

1881

1887

1889

1891

18941895

1896

1899

1902

1906

19111912

1916

1923

1947

1948

1956

1960

1970

1978

19841987

1992

1993

1994

20052007

-40-50 6050-30 40-20 30-10 200-10

193720081931

33

Scenario 3: Modest recovery but stalled globalizationModerate recession of one to two years followed by structurally slower global growth

Scenario 4: Long freeze

Recession lasts for more than

five years “Japan-style”

Scenario 1: Relatively quick recoveryPolicy makers succeed; rebound by end of 2009

Scenario 2: Battered, but

resilientProlonged recession

through mid-2010 and sub-

trend growth through 2012

Global credit and capital markets reopen and recover

Global credit and capital markets close down and remain volatile

Severe global recession

Very severe global

recession

TWO KEY UNCERTAINTIES WILL LIKELY DETERMINE PATH (AND SCENARIOS) FOR THE GLOBAL ECONOMY

4

-15

-10

-5

0

5

10

15

20

1970 1980 1990 2000 2007

Year over year change (percent)

GDP -6.3 -7.5 -3.7 -3.7

IT -13.2 -12.3 -8.5 -27.0

Year 1974-75 1978-82 1989-91 2001-02

Based on over 50 contractions over the last 20 years, IT falls 4-7 times as fast as GDP

IT SPEND TYPICALLY FALLS MUCH FASTER THAN GDP DURING RECESSIONS …

Real GDP growth

Overall IT growth

5

What change do you expect in your IT budget for operating expenses and new investments in 2009?

~75% expect flat or decreased IT budgets . . .

1323

Increase

21No change

43Decrease

Don’t know

… AND IT BUDGETS WILL BE SQUEEZED, EVEN THOUGH EXPECTATIONS ARE RISING IT IN DRIVING THE BUSINESS

33

9

32

19

15

20

Current

34

38

Ideal

Transformative role

Supports differen-tiated performance

Improves business

efficiency

Lowest IT cost

. . . yet want IT to take on a more transformative role in the business

Rank of IT capabilities in terms of how important they are for furthering company goals

6

“NEVER LET A GOOD CRISIS GO TO WASTE”

7

TODAY’S DISCUSSION

The bad news

1 Tough, uncertain economy … IT budgets squeezed, yet higher expectations of IT

The good news The opportunity

2 A through-cycle mindset is the hallmark of leaders… IT matters, it is at the core of business transformation, innovation and performance

Example market transition3

8

RECESSIONS CREATE AN OPPORTUNITY FOR BIG CHANGES IN COMPANY LEADERSHIP

TRS (Total Return to Shareholders)1989-1993

…and the impact of “winning” or “losing” on shareholder value is substantial

Leadership changes in recession*1998 – 2002

Recessions lead to a significant reshuffling of industry leaders …

60% of leaders

retained their

leadership position

40% of leaders

were not leaders

prior to recession

Real GDP change(over prior quarter)

And so the cycle goes: recessions happen …and then they come to an end

-25

-20

-15

-10

-5

0

5

10

15

20

25

1900 1920 1940 1960 1980 200060

100

Pre-

recession

leaders

40

100

Post-

recession

leaders

28

67

Leaders Laggards

9

LESSONS FROM LAST RECESSION – LEADERS ADOPT A THROUGH-CYCLE MINDSET AND INVEST FOR THE FUTURE

Post-recession leaders . . . Post-recession laggards . . .

A Improved overall cash conversion cycle by more than twice as much vs. laggards

Improved overall cash conversion cycle much less than leaders

C

B

Made headcount cuts in the second half of the recession … minimal changes to cost architecture

Made headcount cuts immediatelyAND made bigger sustainable changes to cost architecture

Grew their Sales in actual dollars when sales declined

Reduced their Sales in actual dollarswhen sales declined

E

D

Continued to retain non-core assetsDivested non-core assets earlier

Used stronger cash flows to acquire Did not acquire other companies due to weak cash positions and sizable acquisitions made prior to the recession

GMaintained a leverage level relative to equity stable throughout the recession

Had to increase a leverage level relative to equity

Manage working capital

Cut costs faster, sustainably, and invest

Focus on Post recession leadership

Manage capital structure

F Invested in transformations for competitive leadership & “next practice”

Few transformational initiatives visible

10

76

73Asia-Pacific

65

69Europe

66

70North America

80

69

Developing

markets*

69

70Total

59A multiyear road map,

as opposed to annual planning

59Opportunities to leverage

emerging technology

56Technology-driven

business innovation

45IT capabilities of competitors

73Collaboration between IT

and business operations

64Close integration of IT strategy

with business strategy

IT MATTERS - IT CAPABILITIES ARE A MAJOR COMPETITIVE LEVER THOUGH COMPANIES ARE NOT TAKING FULL ADVANTAGE

Percent of respondents

Execs agree IT capabilities in the top 3 competitive levers …

… yet several issues not fully considered when developing IT strategy to get impact

Company Industry

11

• Customers in the value chain/ New

customer experiences

• Co-creation

• Everyone an employee

• Value from Communities

• Value from interactions

• Globalized supply chains

• New business models/

Everything as a service

• Mining the tail

• Analytics/Extreme inference

• Data-driven management

• Green

•

•

IT IS AT THE CENTER OF MARKET TRANSITIONS LIKELY TO DRIVE BUSINESS TRANSFORMATION AND INNOVATION

Technology-enabled business trends

• Web X.0

• UC/Telepresence . . .

• XaaS

• Cloud computing

• Virtualization

• End point proliferation,

Internet of everything

• Mobile computing

• Open source

• Smart Grids

• Immersive interfaces

• Semantic web

•

•

Technology trends

Collaboration

12

TODAY’S DISCUSSION

The good news The opportunity

2Example market transition3 Collaboration: the next wave of productivity, innovation, unlocking cost savings and revenue growth … but new mindsets required

The bad news

1 Tough, uncertain economy … IT budgets squeezed, yet higher expectations of IT

A through-cycle mindset is the hallmark of leaders… IT matters, it is at the core of business transformation, innovation and performance

13

Composition of economies – by country (percentage of workforce)

15

44

25

41

41

44

31

38

33

32

Collaboration

Transaction

Production

41U.S.

25China

37Germany

26India

26Brazil

54

62

26

65

32

21

48

50

14Textiles

17Construction

26Computer and

electronic product

manufacturing

35Retail banking

45Retail trade 5

WORK INVOLVING HUMAN COLLABORATION HAS GROWN SUBSTANTIALLY, ESPECIALLY IN ADVANCED ECONOMIES

Sample industries – U.S.Percent

14

TRANSFORMING HUMAN INTERACTION AND COLLABORATION MATTERS … AND IS NOW POSSIBLE

Little investment in productivity to date

>3X Multiple of productivity gains

in last decade from

production and transactions

vs. collaboration

2.5X Multiple of IT investment in

transactions vs. collaboration

Potential for innovation, differentiation

16 million

Community of collaborators,

contributing product reviews

9X Performance differential from

better managing collaboration

(top-line and EBIDTA)

500 Mt CO2 abatement potential by

adopting collaboration tools

Emergence and adoption of enabling technologies

ANDUse-case and business impact

best practices emerging

Lots of expensive people involved

$2.5Tr Cost of collaboration in US

70% Share of new jobs created in

US involving collaboration

55-75% % higher wages for

collaboration workers

18 - 60+% Share in construction -> share

in I-Banking, Prof. services

15

COLLABORATION: THE NEXT S-CURVE IN PRODUCTIVITY, INNOVATION AND COMPETITIVE ADVANTAGE?

Time

Productivity

Collaboration

3 Inter-company

Transactions

2Intra-company, cross-functional

1 Intra-company, within function

Today

16

NUMEROUS EXAMPLES EMERGING OF BUSINESS BENEFIT AND INNOVATION FROM TRANSFORMING COLLABORATION

Case examplesSample applications

Inter-Company

Intra-company, cross-function

Intra-Company, intra-function

Person to person, community to community

Customers

Social networks

Knowledge

Rich media

Talent pools

Suppliers

Coordination

Decisions

Expertise

Knowledge

Customer and Talent engagement

Innovation

Productivity

Agility

Green

Insight/Expertise

17

GETTING COLLABORATION RIGHT IS CRITICAL

18

NEW MINDSETS REQUIRED TO CAPITALIZE ON THE COLLABORATION OPPORTUNITY

Traditional IT (“It’s about systems”)

New mindsets (“It’s about people”)

Understanding the business

Arena of impact

Policy approach

Technology deployment

Decision making

Economics of impact

Automated mechanized transaction processes

Formal structures, departments, functions, and

hardwired processes

Enforce enterprise standards

Planned rollouts based on road maps

Top-down efficiency and consistency oriented

Labor-capital tradeoffs, IT productivity/ROI

efficiency, throughput

How work gets done, how people innovate, what business problems matter

Communities of work, social networks, intra/inter-company, customers, ecosystems

Proliferate the most adopted enabling technologies

Experiment, scale, and deploy based on usage and adoption

User-centric, usage and effectiveness oriented

Labor and capital, total factor productivity, effectiveness, and outcomes