This year, consolidation and standardisation remain critical to cutting costs and to keeping them low, both essential to proving IT’s value. We can also see that professional reputations have been rebuilt as companies are that much closer to transforming business processes than in June 2005. Shared services are becoming a reality. Just about every enterprise company we talked to is standardising, particularly on SAP. And as always with SAP, it is no pain, no gain.
Bus and train operator FirstGroup is typical. The business has had a fantastic year, according to Darin Brumby, group IT director. It won important new rail franchises and is now the largest rail operator in the UK, carrying around 250 million passengers each year. He says: “The pace of change has been very fast this year. We have won more new rail and bus business, so have been juggling these additions as well as handling our larger strategic plan,” says Brumby. “We have had to adjust a few things to our infrastructure plan, and although it is behind the original schedule, we are making great progress.”
A path to fit the business
It is carrying out a SAP unification programme. “We use SAP for many parts of the business – engineering, maintenance, finance, HR and payroll – so we are laying a path that fits the business,” says Brumby. “We are looking at shared services, common business processes and systems rationalisation, which will all lead to improvements in service.”
Similarly at Rolls-Royce, Jonathan Mitchell, CIO and director of business process improvement, says the company has consolidated its operations, improved its product lifecycles, reduced its cost base and is beginning to see the benefits.
At the operations level, Rolls-Royce has begun a massive 18-month SAP implementation programme. “The integration of SAP into the energy division of the company has been very successful, and it is now a standard template,” says Mitchell.
“We are looking at moving all our processes and operations into a single standard. MRP, HR and financials are all moving into the shared services model.” The global convergence programme will begin at the end of 2006 and is due to be completed by the third quarter of 2007.
“It will go out unit by unit and is a very large programme running into tens of millions of pounds. We are looking for the business benefits and a large number of factors independently affect this. It should release significant manufacturing capacity, and planning should allow the supply chain to free up.”
As with many organisations, this is all about business process improvements and IT is an integral enabler.
Mitchell again: “We are always thinking ‘process improvement’. We are using SAP in areas that were different and now there is a lack of customised systems. We are very vanilla and processes are standardised, which makes upgrades far easier. The standard way for us is SAP, and we are in the final stages of achieving this. The implementation will be done well because it is process not technology-based.”
The mergers and acquisitions gamble
A second strong theme this year is that of mergers and acquisitions (M&As) and as anyone involved in the messy business will testify, they are a gamble.
The main drivers of share prices are earnings, dividends and M&A activity. Recently there’s been an earnings bonanza, especially by oil and mining companies. Their dividends were
up sharply, by around six per cent. At the same time, there has been a frenzy of M&A activity in the FTSE 250, with the 100 not far behind. Most City analysts expect that to continue throughout 2006. Talk drives sentiment but even the sobersides at JP Morgan reckon that M&A activity in 2006 will total more than £532 billion and when it comes to CIOs, the M&A effect goes way beyond their personal investment portfolios.
According to a McKinsey study, 66 per cent of all deals result in zero per cent growth for the first three years post-merger. That is a serious threat to anyone’s career and regardless of the deal rationale, IT is a fundamental part of the changes that happen during and after a merger.
Convincing the City
A business generally has about 100 days’ grace post M&A before the vultures start circling. After that, the newly swelled company needs to convince the City, customers and its own employees that it is business as usual – only bigger and better than before.
Clearly, technology is key to making this happen. The faster companies can link up their business processes, the faster they can start working as one entity and set about generating more revenue. The problem for many CIOs is that, in many cases, IT is only consulted late in the day or not at all.
It appears that too much is left until after the decision is made but IT should be part of the pre-deal M&A negotiating team, says Ross Macallister, associate partner, head of IT governance and management at Atos Consulting.
“The IT director needs to be involved early on, even pre-deal origination. Where we see problems is if the IT director isn’t involved – that means there’s a lack of understanding over IT’s impact on shareholder value,” says Macallister. Realistically, if a deal stacks up from a financial and business perspective, it is unlikely to be scrapped just because the CIO raises an objection. But having an understanding of the IT challenges can certainly affect the price offered for a company.
Equally when M&As are handled well, the rewards are high. Take ntl. It agreed a merger with Telewest in March to create the UK’s largest residential broadband communications company.
A month later, it reached a takeover agreement with Virgin Mobile for £962.4 million, creating the first UK provider of a four-way offering: cable TV, internet, fixed and mobile phone services. It has also agreed an exclusive 30-year licence for the Virgin brand, which it believes will help attract and retain customers in a notoriously fickle market.
Although merging the operations of all three companies and preparing to cross-sell their services next year will be difficult, the process is already underway. CIO Howard Watson is well placed to consolidate the systems and platforms, having already built one organisation at Telewest from 35 companies.
At Telewest, where Watson was managing director of networks and IT, he focused on delivering capability to the business through a programme of consolidation of Telewest’s business support systems (BSS) and providing a single customer care system. This will continue at the merged organisation.
He says of the current situation: “We now have to balance the needs of the merged business with continuing to provide the single customer system for an additional three million customers. We will begin to implement the project this year and aim to complete it by the third quarter of 2007. We will also implement a single Oracle ERP system covering finance, HR and procurement.” The BSS are the organisation’s interface with the customer, handling all activities based on customer care and billing. Having a single system will reduce ntl’s costs and training needs. It intends that customer support representatives will spend 80 per cent of their time thinking about the customer and only 20 per cent on the systems they need to ‘drive’. “The company’s strategy is to grow from our existing cost base, and IT is critical in this,” says Howard.
Global infrastructure outsourcing
Outsourcing is the third strong trend to emerge from this year’s profiles and there a number of drivers.
More and more organisations are simply not maintaining comprehensive in-house IT. Domestic demand is rising, there is an inexorable rise in offshore outsourcing and demand for software as a service is flourishing.
At FirstGroup, Brumby cites several rationale for outsourcing, including reducing overall IT maintenance costs from 60 per cent of budget down to 40 per cent; and turning around project execution so that projects are completed on time and to budget. Critical to maintaining those targets, he says, is the five-year infrastructure deal, worth £46.9m, agreed with BT and HP last December. The deal includes the company’s global network, a refresh of its servers and desktops, thin client architecture, and a service desk for the global organisation.
Some CIOs see these changes as threats, others see major career opportunities for them to move into highly strategic management and board level roles where they are dealing with the CEO and shaping business strategy.
For his part, Brumby says it represents a huge cultural change for the organisation, and is based on a very strong business case, which will allow FirstGroup to concentrate on shared services and its applications roadmap.
"“We are looking at shared services, common business processes and systems rationalisation, which will all lead to improvements in service”"
Darin Brumby, group IT director, FirstGroup
The fourth estate
The media rarely allows facts to get in the way of a good story and nowhere is this more true than in its treatment of the public sector’s investment and use of IT.
To be fair to the fourth estate, it’s difficult to say anything positive about some central government initiatives, particularly when it comes to the NHS, the UK’s sacred cow.
This year the NHS has been under a constant media spotlight. Hugely increased funnelling of resources from central government seems to be achieving no visible improvement – although GPs have benefited personally from extremely generous contractual rewrites.
At the same time, a £250m deficit for the 2005 financial year is forcing many trusts to seek savings through job cuts and one of the few success stories in ICT, the NHS Direct call centre service, was hit badly, with hundreds of posts being lost nationally. The total deficit for the 2005 financial year could be three times higher when fully calculated.
Meanwhile, there is the Connecting for Health project. There are mixed achievements around this most visible thing, budgeted to cost £6.2bn although recent estimates suggest £20bn and counting. Some sources say £31bn will be nearer the mark. An unseemly scuffle broke out in April between one of the prime suppliers of new systems, Accenture, and a health specialist firm called iSoft, with the former blaming the latter for delays that mean the £2bn electronic patient record system will be even later than a rescheduled date.
When, if, it goes live, it will provide 50m NHS patients with an electronic record and link 30,000 GPs with 300 hospitals. It is said to be the world’s largest civil computer project. Richard Granger, director general of NHS IT, blames the current chaos partly on suppliers but also on the health service itself. He says: “On some occasions a solution that has proved extremely popular, successful and easy to implement in one part of the country has had extreme difficulties in another part. 2006 is going to be about getting under the lid of some of those variabilities.”
Delays and rising costs
UK taxpayers are appalled by the delays and escalating costs. The electronic records system, a fabulous idea, is a classic example of how not to do IT. The GP end users have not been forced to buy the IT and without that buy-in, the project will not be successful.
The public sector is one area where user buy-in can be mandated but the government, for blatantly political reasons, chooses not to do so. Instead of mandating it and penalising those who do not buy in, it funds expensive PR and marketing campaigns at the taxpayers’ expense to win over the increasingly sceptical GP community.
This is generating jobs for useless mouths and has all the hallmarks of muddled thinking; of implementing new processes without linking them automatically to the old ones. This is activity without conclusion and Granger can expect his fair share of media attention over the next 12 months.
The NHS is not alone in discrediting IT investment and management. Two of the biggest UK government departments – the former Inland Revenue and the erstwhile Customs & Excise – merged to form one ministry, Her Majesty’s Revenue & Customs (HMRC). This was all a part of the government’s commitment to achieve cost savings, and deliver joined-up government via economies of scale and the de-duplication of effort that drives similarly ambitious mergers in the corporate world.
Like the electronic records system, it makes a lot of sense but the payback remains to be seen. Leaked staff surveys suggest low morale and resentment and on the systems side, it took until March – 11 months after the creation of the merged HMRC – to fold into one the two separate, then parallel, outsourcing contracts. The problems are ongoing: HMRC is trying to clear up errors affecting 1.6m incapacity benefits accounts caused by IT problems dating back eight years; the tax credits blunder saw £4bn being overpaid to claimants and a subsequent furore when the government tried to reclaim £1.5bn; errors in processing tax returns mean that up to 500,000 people may have received the wrong tax bill; and 30,000 taxpayers received incorrect penalty notices, even though they had filed on time.
High profile cock-ups in central government deflect attention from public sector success stories. One such is The Metropolitan Police Service (MPS), which has just rolled out one of the largest mobile applications in Europe.
About 1,500 patrol cars are now equipped with in-car data terminals that let uniformed staff have instant remote access to the Police National Computer and computer aided despatch databases. The new system also offers GPS in-car mapping, Quick Address for address checks, even a text messaging service. Being a frontline police service, the onus is to “deliver to the police the accurate information they need to do their job when and where they need it,” says its head of IT Ailsa Beaton.
Successful change management
Beaton, who sits on the Met’s management board, runs a 2,500 strong team within the Met that develops and delivers ICT solutions for its 31,000 uniformed staff, 13,600 police staff, 400 traffic wardens and 2,000 Police Community Support Officers. An ongoing target is delivering the force’s largest ever organisational change management programme, driven by Beaton, who joined the Met in 2000 from a stint as CIO of ICL.
"“On some occasions a solution that has proved extremely popular, successful and easy to implement in one part of the country has had extreme difficulties in another part. 2006 is going to be about getting under the lid of some of those variabilities”"
Richard Granger, director general, NHS IT
In 2005 she was named one of the British Computer Society’s IT Directors of the Year. She and others are doing what we said would be a major task for CIOs during 2006; they are restoring reputations by providing highly effective and innovative IT services to their shareholders.
In 2005 there was a defensiveness across many sectors about IT generally and the role of the CIO specifically. This year, with the exception of those flawed central government initiatives, there is a sense that IT has got itself back on track; that the role of CIO is one worth doing.
Nowhere is this clearer than at BA. Despite high profile industrial action caused by mismanagement of outsourced catering contracts and the unrelenting macro economic pressures of escalating oil prices, BA’s Paul Coby continues to deliver the goods at the national flag carrier. We return to BA time and again as an example of how intelligent IT investment and management can contribute to the turnaround of an almost bankrupt business; and how innovative technology is now in the commercial mainstream of that airline.
“Our business plan for the year ahead shows how central technology is now. Technology is driving the whole commercial side of the business,” says Coby.
BA wants to increase its online sales, now at about 22 per cent worldwide, and make 80 per cent of its check-ins online or in self-service kiosks by March 2008. Coby reckons that around six million passengers are regularly booking through ba.com, up from four million a year ago, and a third of all passengers use ba.com before travelling.
“Increasing the number of users is what matters,” he says. “100 per cent has to be the goal. We have 98 per cent of our staff using our intranet now. This is all making technology a mainstream part of the business. There are alternatives where necessary, but many are using the technology and liking it. It is a simple way to do business.”
This year BA’s IT team will also focus increasingly on systems for Terminal Five (T5) at Heathrow. Coby says: “It is on schedule and we have eight mega milestones to reach as targets over the next year. But devices are deployed, connections are being integrated and 2007 will be a testing year. The airline is moving onto the T5 systems, so they run for a year ready to operate at the new terminal when it opens in 2008. This is the year we put the IT infrastructure and systems in place to manage our T5 people and passengers,” says Coby.
Restoring confidence in the CIO
One of the most fundamental challenges facing CIOs in June 2006 is recruiting the right people and keeping them. It emerged strongly as the number one concern in the MIS UK annual survey – CIOs Top 10 Concerns: 2006 – and it has significant ramifications for the next 12 months and beyond.
Extensive change management programmes that are transforming business and restoring the standing of CIOs and IT investment require the wholesale reorganisation of business processes and people. Equally, it is becoming increasingly difficult to find and keep people with skills to implement transformational programmes.
The wellpool of talent is shrinking for several reasons, including the growth in outsourcing, and as the IT market has picked up considerably, big bucks alone won’t persuade the best people to stay.
Last year we said rehabilitation of IT and investment in IT was going to be the critical challenge for CIOs. It’s clear from this year’s profiles that many have stepped up to the mark, met that challenge and are delivering innovative value to business.
And the CIO challenges for 2006/07, There are several, not least managing better the dialogue with the CEO and CFO. More critical, however, are the leadership and management skills to avert or deal with a skills shortage that could easily jeopardise many achievements of the past 12 months.