Operation Models (Part 2)

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In the last session we discussed business objectives and operating models of firms

as important components of the design of information capabilities.

In this session we will talk about the technologies

that implement these operating models.

Specifically, we'll talk about a class of technologies called

enterprise resource planning systems.

A unified operating model is implemented through a class of technologies

called enterprise resource planning systems.

A good ERP system is a technological tour de force.

It integrates processes and information flows across company, functional,

geographical, and technical boundaries so

that there is a singular integrated view of important data,

such as customer information or business partner information across the firm.

And how does an ERP achieve data integration and process standardization?

Well, enterprise systems combine all information systems in an organization

into a single integrated software platform that draws on two important features.

First, a centralized database.

A centralized database that is shared

across the units that need to be integrated.

This ensures that all the units

that need to be integrated are acting on the same data.

Therefore, in the purchase to payment process that I described earlier,

soon as procurement raises a purchase order, It enters this information into

a central database that is shared with finance and production.

So as soon as purchasing enters this info, it is accessible to finance and

manufacturing at the same time.

The second important feature of the system is a collection of best practice

business processes and rules within each functional areas, such as HR or

finance, that allow for standardization across units.

Therefore, the system will tell you what is the best practice for purchase to

payment, and make sure that every business unit or product segment that you seek

to standardize follows the sequence of steps in implementing purchase to payment.

And these two features of enterprise systems, data integration and

process standardization, offer the potential of huge benefits.

But the very quality of the systems that makes those benefits possible,

standardization and integration, also present a danger.

In the past companies would first decide how to do business and

then choose a software, often proprietary, that supports their proprietary processes.

When ERP came along that sequence was reversed,

here the technology determines your business processes.

And for this reason, ERP implementations involve significant reorganization and

large scale changes.

It's not just about changing your business processes.

ERP will end up changing your culture, your decision authority,

your power structures, all of that.

For example, let's go back to the old purchase to payment process.

Remember that individual was transferring data in batch across departments.

What happens to him or her in the new regime?

Laid off, redeployed.

If laid off will that impact the morale of your remaining employees?

Yes.

If you come in and tell people their way of operating for

the last two decades has to change, will they be readily accepting of that change?

No.

And if you had to retrain these people,

will all of that play out in the next year?

Or will that happen over longer periods of time?

You get the idea.

ERP involves fundamental changes to your organization and

significant costs that must often be managed over long periods of time.

And you discerned these challenges in the Reliance case as well.

The biggest challenge for Reliance in the technology-led transformation

had little to do with technology.

Rather, it had to do with getting the buy-in of BSCS employees and

changing their attitude towards technology.

Now let's talk a little bit about managing these complex challenges inherent

to ERP implementations.

The Reliance case offers you great insights in this area.

Reliance's successful implementation was an outcome of two factors, who it was as

an organization, that is its competencies, and what it did, that is, its practices.

I'm not going to get into much detail into these,

since you can read these in the case.

However, I will summarize the three important initiatives that are critical to

these kinds of implementations.

First, end user involvement.

To ensure a smooth transition,

Reliance Energy's management decided to involve all business

stakeholders in the IT implementation right from the blueprint stage.

The IT implementation team members were actually end users who understood

the bottlenecks and issues well and hence, could implement IT more effectively.

Second, training.

With the focus on helping employees adapt to and adopt IT systems, the company

executed a multi-pronged plan involving training programs, discussion sessions,

actual demonstrations, exercises, and quantifiable targets for users at

each level of management as an essential step towards managing the change.

Third, incentives.

You will recall the performance benchmarking initiative.

It was called simply, The Best, as described in the case.

The initiative was introduced to foster healthy competition and

reward excellence at a divisional level.

Team and individual level awards were given to best

performers on the new system.

Leading to motivated members working in inspired teams on the new technology.

As important as these practices was also Reliance's attitude toward technology.

This was a company that understood technology and

placed it center stage in strategy and operations.

The CEO was a business leader attuned to the strategic use of technology,

while the CIO had a sound understanding of the business.

The company's overall commitment to IT was reflected in an executive board that

believes strongly in the strategic value of technology.

The existence of firm-wide IT skills is a reflection of the place IT holds in

the mission statement of the firm.

All of these factors insured the involvement of various business units

in the company's digital transformation and the acceptance and

successful implementation of the ERP initiative at Reliance.

The company also made important changes to its organizational structure.

Instead of being organized in different business units and

functions, such as HR operations etc., the company was now

organized along business processes that cut across business units and functions.

As you see on this slide, each business process was headed by a process owner

who leveraged various business functions and implementing that particular process.

The process owners who managed a gamut of processes

worked closely with process champions who in turn managed and

ensured the implementation of specific processes within a broad process.

For instance, billing to cash was one major process managed by a process owner,

but within this larger process, billing, meter reading,

they were all sub-processes that were managed by process champions.

This led to bottom up integration and greater consolidation

across the organization in adopting business processes.

The digital transformation at Reliance highlights key questions

that you as senior managers, technology leaders, and business leaders

need to address to realize maximum returns from such a transformation.

What are the financial returns to these investments?

You need to adopt a longer-term approach in valuing investments as these.

For example,

many ERP implementations are accompanied by a temporary dip in market value.

You need to have the wherewithal to brace this dip and

manage the required change over a long period of time.

If the fundamental changes to your organization seem very costly and

risky, beyond your capabilities, you need to manage this risk better

by considering various options for implementation.

Pilot, staged implementation, wait and watch.

All of these will help you structure your investment and

manage the allied risk better.

Your course on finance for IT managers will get into some of these issues in much

greater detail than I have alluded to at this point.

And now we'll ask the question, was the implementation worth it at Reliance?

The next couple of slides will tell you totally.

The case talks about diverse impacts ranging from reduction in transmission and

distribution losses to reduction in response time to network outages to

significant improvement in customer service.

For example, prior to the implementation,

the mode of communication to customers was via letters.

This changed to SMS and email.

Many services, such as reminders for

payments, acknowledgement of payments, all of these which did not exist previously,

were now part of customer service offerings.

Automation of complaint reply letters resulted in a decrease in response time

from ten days to four days.

Queue management systems and customer care centers reduced the average wait time

from more than 30 minutes to approximately ten minutes.

Prior to upgrading the IT systems,

a new power connection would take more than 20 days to install.

This was reduced to three to five days

after the implementation of the ERP system.

The company's improved operational efficiency

was manifest in improved margins as well.

You see on this slide that margins which were lagging Tata's significantly

in 2003 increased to beat its closest competitor in 2008.

Margins increased from 5.8% to 14.5% in five years.

In terms of market performance too, Reliance was a winner.

Here I have a simple multiples analysis to illustrate the point.

For instance, the average revenue of the industry in 2008 was INR 36.8 billion.

And the average market capitalization was INR 62.6 billion.

This year's revenue, multiple of 1.7 for this industry.

Multiplying Reliance Energy's revenue by this industry multiple

yields an implied market capitalization of INR 127.7 billion.

You can arrive at similar estimates of implied market capitalization using

other financial performance estimates, such as gross profit, net profit, etc.

These are illustrated to you on the slide as well.

However, Reliance Energy's actual market capitalization for

that year was INR 295.93 billion.

Suggesting that investors valued the stock significantly more than the average firm

in the power sector and had commensurately greater expectations of growth and

profitability from the firm, following this investment.

Overall, the implementation was a resounding success.

The company won various awards for this digital transformation and

was also selected as the preferred partner for various digitization and

re-engineering initiatives of diverse state governments in India.

The case highlights to you how from being a support function that was

de-linked from strategy, IT is now a key strategic partner

that is integrated with business strategy in modern firms.

From just playing a role in automation,

IT became the key to information and innovation across the lines.

ERP or any other large scale technology investment

sits alongside a portfolio of other technology investments in your firm.

It's imperative that you align not just your current IT investment, but

your entire portfolio of IT investments with your business strategy and

operating model.

The next session will close this module with a discussion of the portfolio

approach to managing IT investments and

how you can use it to manage the risks inherent to your IT investments.

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Digital Transformations

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