Ron Kifer is a renaissance CIO. At a time when most CIOs are talking about going beyond keeping the day-to-day IT ops running to align IT with business goals, Kifer is one of the few who has actually done so — and that too in not one, but in multiple organizations. His most recent win has been at Applied Materials, a $9.2 billion nanomanufacturing technology company.
Kifer has been at Applied Materials for less than a year, and his achievements list runs long and his "before and after" transformation list looks impressive.
Before: 17 independent IT groups, 90% of IT spend on "running" day-to-day ops, wrong mix of core and contextual competencies, contractor staff-augmentation model, U.S. centric geographical footprint, order-taking perception of IT.
After: Governance and budget consolidated under CIO, 30% shift in spend from "run" to "build," core and contextual competencies redefined, managed services for context IT, consolidation of IT infrastructure, IT strategic leadership of business transformation.
And the end result? IT at Applied Materials is no longer just an "order taker;" it is a "business enabler." And the success of the IT group has put the CIO and his team in the driver's seat for modeling change for other functional groups of the company.
"We started out as nothing but order takers and then set up an enterprise managed services model. That gave us dramatic cost reductions to be able to fund other transformation activities that the company was doing," says Kifer.
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Ron Kifer, CIO, Applied Materials
How did Kifer manage such a transformation in just ten months? Leveraging global resources and outsourcing through a managed-services model was only one way. Other strategic pieces leading up to it were equally important.
We spoke to Kifer at length to find out what he did right and analyzed key takeaways for aspiring renaissance CIOs.
Before and After: Governance, Budget, Outsourcing Kifer arrived at Applied Materials as the transformational guru who would turn the company's IT around from an order taker to a business enabler. But, first he had to "fix" a few problems.
Problem 1: Dispersed IT
He had inherited an organization that had 17 independent IT units, each empowered to make unilateral decisions on service providers, technology and IT spend. The decentralization (which was a result of the company having grown through a series of mergers and acquisitions, and the acquired companies not integrating with the corporate systems) also meant that the company had disparate legacy environments that did not talk to the newer systems.
Kifer consolidated these into one central IT, giving him a single-window visibility into IT spend and governance. His reasoning was simple: You can have budget control over a unit only if it reports to you.
He also worked toward building a strong governance team. He brought in IT leadership from companies such as Kraft, Dell, Logcalis and DHL — their collective experience contributing to the speed with which transformation was achieved at Applied Materials.
Problem 2: IT an Order Taker
The IT center that was bequeathed to him was a also cost center, not expected to add value beyond sustenance and maintenance — 90% of the central IT budget was focused on keeping the day-to-day machinery running.
Kifer reduced this to 60%, freeing up 40% of the company's IT spend to invest in business-enabling changes. This required identifying context or commodity IT activities, such as helpdesk, system administration and data-center operations, and moving them to two service providers in a managed-services model.
IT at Applied Materials is no longer a commodity. Its IT staff is engaged in doing work that adds value to the company's core business.
Success in isolating context IT functions was replicated in other functional areas of the company — HR and finance BPO. And the single-point of contact for all provider negotiations and contract-relationship management was consolidated under the CIO's office. This can be seen as true reward for renaissance work.
Kifer achieved what American CIOs are actively grappling with. Fifty-three percent of CIOs surveyed ranked the business alignment of IT as their top priority in a recent study conducted by Harvey Nash and KPMG. Everyday activities of managing project deadlines (42%), security (40%), managing staff turnover (35%) and effective system integration (33%) too featured as top priorities, implying that CIOs now consider "transforming IT" as equally important as delivering stable production services.
Problem 3: Over 20 External IT Providers
Another of his inheritances that Kifer "fixed" was the staff-augmentation model of outsourcing that the company's IT units were using. Between themselves the IT groups had 1,200 people, 700 of which came in from over 20 external providers on a staff-augmentation model. This meant that resources from third-party service providers were brought into Applied Materials — they worked on a lower rate, but were directed by the company's legacy IT processes.
The staff-augmentation outsourcing model, CIOs are beginning to realize, is not the most effective one. Its touted advantage of having the service provider's qualified, and less expensive, staff work in the customer's organization, and not from a remote location, is now being found to be a disadvantage. This is because once the staff comes in, they are put to work along the customer's existing processes, and don't get the value of the service provider's more mature processes that they would have honed by doing repeated work in that area.
Kifer shifted Applied Materials' IT staffing to the managed-services model with two offshore service providers — Wipro and Satyam (both are Global Services 100 companies). Satyam has been given the applications and engineering side of the work, while Wipro the infrastructure side. BPO work, too, is divided between the two.
And as Applied Materials was able to take advantage of the more mature processes, tools and metrics of its service providers, it was able to get significantly higher service
levels at 30%"35% lower cost than in its previous staff-augmentation staffing model. Equally important, it freed up internal resources to work on the company's core competencies.
"In staff augmentation you take competent resources from an outsourced service provider, treat them as internal employees and place them in your own dysfunctional processes. You don't get the value of the maturity of the outsourced provider — their metrics, their tools, and the fact that they have honed their ability to deliver processes," says Kifer. "All that you get is an individual laborer that works within your own organization as an internal employee —you just get that person at a lower rate."
CIOs are increasingly looking to managed services — the demand for managed services has increased 33% between 2001 and 2006, according to neoIT. Managed services is a competitive option because it allows the customer company to benefit from the provider's relationship with other customers: The costs are lower because of shared infrastructure with other customers, and there is access to the provider's mature processes achieved by working with other customers.
Also, giving full responsibility for service-level agreements to the service providers frees up the customer company to focus on its core competencies.
Speedy Selection: Bypassing the RFP
The typical time that an organization takes to outsource from start to finish is anywhere between six to 18 months — this includes due diligence at the customer company's end to strategize on what services to outsource and what to keep in-house, finding the right service provider and transitioning the work.
Kifer managed to squeeze this time into just over eight weeks. He did this by bypassing the Request for Proposal (RFP) process. Guided by the belief that basic IT services have become a commodity, Kifer believes that an RFP process is redundant when sourcing such services. The skill set and capabilities of the top tier providers are well established, so spending time on RFPs and extended provider evaluations, he believes, is a waste of time.
"We did not do an RFP. We prioritized five vendors according to our strategic fit, and chose two," he says.
Kifer and his team engaged in intensive discussions with each of the five short-listed providers, and at any point where they lost confidence in one of the providers, they moved on to the next one on their priority list. "We completed the exercise in eight weeks. And we didn't have to go any deep into prioritization beyond the top three," he adds.
Prep Work
Kifer's prep work toward an IT transformation began even before he joined the organization in May 2006. It involved actively negotiating with the CEO during the interview stage for a consolidation of global IT budgets and governance under the CIO and forming a new IT leadership team. It also involved getting a commitment to a strong CEO sponsorship of the transformation and elevating the CIO position to peer level.
Kifer kept salary and benefits discussions secondary, believing that management will gladly pay more once you demonstrate delivery.
That could not be the only reason to keep salary discussions secondary. CIOs, in general, have little reason to quibble about salary. "CIOs are satisfied with compensation," reveal the findings of a recent Harvey Nash CIO survey. Seventy percent of CIOs surveyed reported a salary in excess of $125,000, and more than 85% reported receiving performance bonuses.
Yet, these upfront negotiations meant that Kifer did not have to spend huge amounts of time dealing with gaining management buy-in, and could dive into work as soon as he got in. This, however, is not a luxury that existing CIOs enjoy — they have to negotiate, fight, plead for change.
Dual versus Multisourcing |
| Applied Materials consolidated its 20 service providers into two. It sends all its outsourced services — IT or BPO to either Wipro and Satyam. At a time when companies are consciously opting for the multisourcing model (the best examples being the 2006 deal by General Motors and the 2005 one by ABN Amro Bank), this is an anomaly. The company's strategy is to drive for lower prices by maximizing the volume of work that it gives to its two providers. "Outsourcing in IT and BPO has evolved to the point that there are now four to five organizations that have commensurate ability to do this work. Work is more commoditized, and you don't have to go out and look for a best in class service provider to get appropriate support service," says Kifer. In a story on commoditization of services that Global Services did in April last year, we spoke to several CIOs, sourcing managers and analysts and arrived at the same conclusion: IT and BPO services are getting commoditized. Some candidates for commoditization that we had identified were: Data entry, IT helpdesk support, desktop support, infrastructure management, application maintenance, employee-data management, benefits and payroll management, general accounting, accounts receivables and payables, purchasing, customer service, telemarketing and medical transcription. (The story on commoditization is titled Driving Down Prices, and you can read it at globalservicesmedia.com) Multisourcing also brings with it a practical problem — that of managing multiple relationships (in the case of Applied Materials, this was with 20 providers!), and contending with finger pointing if things go amiss. This is a costly and complex task, requiring writing complex service-level and operating-level agreements, and putting in place a dedicated team to managing these relationships. The governance cost of a single-sourcing deal is typically between three percent to11% of the total cost of the deal, it varies between 15%"50%, depending on complexity, in the case of multisourcing. |
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