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Turn Time Into Money: Faster Growth Through Digital Reuse

May 9, 2013 • Business Process, INNOVATION, OPERATION, STRATEGY & MANAGEMENT, TECHNOLOGY

Today’s technologically savvy firms have created an internal digital reuse culture that significantly reduces time-to-market without any extra costs. However, reuse remains an underutilized strategy in most companies because it requires a high level of organization, discipline and enterprise-wide exchange. This article explores how you can overcome these challenges by cultivating the three C’s: commitment, capabilities and communication.

During the recent global financial crisis, the Lubricants division of CEPSA, Spain’s second largest oil company, realized that it needed to change, and change fast. The division sells lubricants for industrial production in 55 gallon barrels. The one size dominated the company’s sales, yet in the face of the crisis, customers were asking for the product in various smaller sizes that the company did not support. The Lubricants Division could change its packaging line to support smaller sizes, but its systems were geared toward selling the product in a single size.

Reorienting the production line and systems was time critical as customers’ needs were changing rapidly. Leaders considered adding features to their system or installing new systems. That would take months – about the same amount of time it would take customers to switch to other suppliers. The Lubricants division found an answer in weeks, by reusing systems deployed by its sister retailing division. Was the solution perfect? No. Did it provide a solution that Lubricants needed now? Absolutely. Reusing existing digital assets was significantly faster than other alternatives and CEPSA was able to neutralize a rapidly emerging business threat.

Unfortunately too often time costs money, particularly when it comes to issues of time to market. Poor experiences condition executives to believe that realizing new capabilities quickly is costly and risky. That’s often true when everything you build is new. Digitally savvy executives recognize that apparently new problems are likely to have been solved in other areas of the business, at least in part. That recognition creates opportunities to deliver more capability in less time through reuse rather than new development. Nowhere are the opportunities for reuse as great as they are for an organization’s digital assets such as business processes, services, products, and data.1 Why? Although you’ll spend some time and resources customizing the asset to the situation, the cost to copy a typical digital asset where you already own the rights is virtually zero.2

Reuse can sound like a ‘hand-me-down’ strategy when you can’t imagine how clothes not tailor-made for you will work. Far from it, we have recently completed a study of digital reuse (see About the Study) and the impacts are spectacular. We defined digital reuse as the use of existing business process, technologies, systems, and data to solve new business issues. Most of us now buy clothes off the rack as it’s faster and cheaper even if the items needs some minor adjustment – just imagine an enterprise-wide rack of digital assets to use and add to.

In our study of more than 1500 firms in 77 countries we found that firms achieving above average levels of digital reuse:

Have higher revenue growth and margins (see Figure 1). The results here are stunning, with firms achieving above average reuse having over 12% more growth and 4% greater margin than below average reusers.
Allocate more of their IT budget to growth and innovation investments. The average firm in our study spends 33% of its IT budget on new business initiatives with the rest going to run existing systems. High reuse organizations report increasing the new business initiative budget by 15 – 25% without an increase in the overall IT budget. Some leading firms like BMW and USAA have been able to reduce their run spend to 50%, freeing up the rest for new business initiatives.
Have CIOs who better “meet business expectations,” which helps drive confidence and trust in the entire IT unit, enabling IT people to participate early in the strategy process. Among the contributions IT people can make early in the strategy process is to identify ways to achieve business goals faster and cheaper via reuse. 

 

Figure1a

 

Digital reuse helps firms achieve profitable growth by streamlining the current operations and reducing time-to-market for new products or geographies. Firms that effectively reuse their digital resources can focus on what’s new in a business initiative and take advantage of what already works well.3

Digital reuse helps firms achieve profitable growth by streamlining the current operations and reducing time-to-market for new products or geographies.

For example, Woolworths’ Australia’s #1 food retailer with revenues of USD58.2B, has achieved 2.7% revenue growth (year-on-year) over the past 5 years. For new initiatives Woolworths’ digital reuse is currently 60-70% across business processes, data and technology providing cost savings and efficiency. Woolworths launched Thomas Dux, a premier grocery chain, in record time and relatively low cost, by reusing the core systems from the Supermarkets division. Dan Beecham, Woolworth’s CIO reflected on the learning: “After establishing a reuse capability and culture across Woolworths’ we helped the Thomas Dux leadership reuse Supermarket’s systems and launch the new retail format in record time.”

We found that digitally savvy executive teams know how to place a value on time-to-market and avoid the cost and complexity of repeatedly building the same solution for different divisions or situations.

 

Reuse Takes Different Forms
Now is the time to focus on digital reuse because firms have reached a tipping point — the business world is becoming increasingly digital and firms now have sufficient digital assets to make reuse practical and productive. When each new situation requires a new solution, rather than reusing at least part of an existing one, a company is more apt to build a digital spaghetti of enterprise-wide and local systems that are difficult to change, easily broken and costly to operate.

Digital reuse comes in many forms. Here are two brief examples of different approaches: shared services and company-wide strategy.

Procter and Gamble is a 175-year old global consumer goods company with 2012 revenues of $83.7B generating a net profit margin of 15.5% (compared to the industry median of 10.4%). A source of this industry leading performance is Global Business Services (GBS), one of the 4 pillars of P&G’s organizational structure. GBS, led by CIO Filippo Passerini, provides more than 170 shared services and solutions to the more than 300 P&G brands globally. Procter & Gamble’s global shared services organization blends business process and IT to provide a base of services for the firm’s marketing units. The shared services range from travel services and office moves to demand planning systems, payroll, on-boarding an employee and new product visualization. Shared services help P&G develop economies of scale and reduce time to market for new products and services. Using their shared services P&G was able to absorb the acquisition of Gillette in only fifteen months achieving synergy savings of over $1.2B. Now GBS is leading the digital transformation of P&G — pushing beyond shared services to digitize the company end to end.

OMV, the $44.1B Austrian oil company has saved 10-15% of operating costs and reduced cycle times by 25% via digital reuse. OMV’s digital reuse strategy is to find synergies with already existing applications and move applications developed for a specific business unit into the common applications division where the needs are common. For example, the company redeployed a Global Information System used in oil exploration to its retail operations to improve supply chain performance. Figure 2 illustrates OMV’s reuse levels of technology, data, and process; all are significantly higher than the average levels of digital reuse in our study.4

 

Figure2a

 

So why don’t all firms immediately increase their digital reuse? Because it’s hard! Not technically hard, but hard from political, cultural and structural points of view. Managers have to incorporate time-to-market and reuse thinking into innovating, investing, creating and exploiting their digital assets. They need the discipline and incentives to ask if the problem has been solved before. If it has been, then there must be the leadership and governance to compel reuse of those existing solutions. And they have to put the resources and time saved towards innovation. These are the management practices that generate the benefits of reuse.

 

How Good are Firms World-Wide at Digital Reuse?
The differences in the levels of reuse across firms are huge with the top third of firms reusing at nearly three times the level of the bottom third (Figure 3 highlights these differences). Reuse doesn’t just happen naturally. Because of the big differences in levels of reuse across firms when a firm gets reuse right, it becomes a source of competitive advantage.5

 

Figure3a

 

Technology reuse, such as installing standardized networks and servers, is the easiest to achieve and has the least impact.6 Reusing information and business processes are more challenging, but deliver the greatest bottom line impact.6 This is where we see good management practices having the greatest impact on growth and margins. The key insight is that in all industries there is opportunity for a firm to contribute to outperforming their competitors by improving digital reuse.

Successful reuse relies on setting a shared strategy, creating a culture of reuse and implementing a set of common practices. Reuse starts top down or in a particular function or geography, and then the best firms involve everyone, at all levels.

Increasing Digital Reuse

Successful reuse relies on setting a shared strategy, creating a culture of reuse and implementing a set of common practices. Reuse starts top down or in a particular function or geography, and then the best firms involve everyone, at all levels. Firms tackle digital reuse in different ways but there are three critical and mutually reinforcing elements – the three C’s:

Commitment – create a culture of reuse with top-down and bottom-up discipline supported by financial models
Capabilities – design a governance model and practices that encourage and support reuse
Communication – of the financial arrangements, metrics, incentives and feedback that convey and reinforce the value of reuse

Commitment describes a top-down, bottom-up and enterprise-wide dedication to digital reuse. Reuse requires a different way of thinking that values time to market as part of the cost, value, and risk investment equation. That thinking starts with simply asking the question “where have we solved this type of problem before?” The commitment of business unit leaders is particularly important. Often, business unit leaders see corporate reuse efforts as a move toward global solutions, thus impinging on their autonomy and slowing down local responsiveness. That attitude keeps many organizations from realizing the potential of digital reuse. However, in savvy firms, business unit leaders, through repeated success, recognize that digital reuse provides a significant head start to achieving the results they want faster and with less risk.
Capabilities needed to increase digital reuse include governance, finance and technology models. Governance is the framework of decision rights and accountability that encourage desirable behavior like reuse.7 Governance mechanisms – e.g. committees, reuse gates on the project approval process etc., help build capabilities and increase reuse.Intel, the world’s largest semiconductor company with $53.3B in revenues, developed a service catalogue, classifying their digital resources by maturity. Anything that went into the service catalogue had a guaranty that Intel IT would support it. Some of the digital assets that were candidates for reuse, however, were not as mature. Instead of leaving these assets out of the catalogue, Intel created a four-tier categorization scheme (bronze, silver, gold, platinum) so that employees would have knowledge about the assets they were reusing. Bronze-level assets are approved for reuse; platinum-level assets are approved, fully tested, supported and a shared service. Providing this level of information made reuse a more compelling value proposition to the business units, and resulted in over $100M in savings over a 4-year period.Communication includes the financial arrangements, metrics and feedback that convey the importance and extent of digital reuse. Providing transparency in these areas is very important to supporting reuse (i.e. making clear that typically the cost of reuse is lower and time required is shorter). Explicit financial incentives for reuse signal the dedication of the firm’s leadership to reuse. And acceptance of the financial arrangements by the business unit leadership indicates an understanding that these arrangements work to benefit all.“Who pays for use?” is a common question and roadblock that separates leaders from the rest of the pack. Firms have tried investment and cost allocation models that account for reuse potential. All of the cases we investigated abandoned these models as they ultimately worked against digital reuse by adding overhead and focusing on who pays.  In most successful firms we studied, companies created an arrangement where the first user pays for the development of the application and additional users deploy the application for free paying only ongoing operations costs. This model sets up a big incentive to take something that is already available, working, faster and less costly even if it’s only a 90% fit.Firms high in digital reuse measure their progress. Many of the firms we studied relied on simple metrics to indicate reuse performance and benefits such as cost savings and speed of deployment. The Board of CEPSA has extended the metrics to include internal benchmarking among business units. Business units have to compare themselves to the best performer in the group and report to the process improvement board.CEPSA: A Leader in Digital ReuseCEPSA, now a subsidiary of IPIC, illustrates how the three C’s work together to achieve high reuse and high financial performance. CEPSA, with 7 business units and 76 operating companies, is active in both domestic and international markets and had 2012 revenues of $28.3B.

Achieving high levels of reuse did not happen overnight at CEPSA. In 2003, the company began offering the business units a shared service capability. A successful shared services organization built confidence that it was able to support the business everywhere. They consolidated infrastructure and services, implementing a common catalogue for all business and digital services that could produce synergies.

After demonstrating the power of reuse, enterprise commitment to reuse began in earnest in 2006 with the creation of a Board process improvement committee. The committee meets regularly to discuss best practices, monitor process improvement projects and track business value using ROI and productivity metrics. This Board committee drives reuse at CEPSA. For instance, the operating companies have to compare themselves to the best performer in the group and report to the Board.

CEPSA senior management dealt with political issues such as who pays and who benefits by explicitly recognizing the operating company who pays for and implements a process improvement as an innovator and leader. Then any company in the group can take that solution, pay no development costs, and benefit the whole company with faster times to market and lower cost.

CEPSA created additional capabilities, beyond the shared services organization, that work together to achieve digital reuse levels that are 28% higher than average:

• Virtual Communities of Practice: Groups of people who work together, exchange experiences, and share knowledge. They are a powerful tool for organizational learning and play an important role in promoting a reuse culture, encouraging collaboration between members who are dispersed across remote locations.
• Portfolio management: A formal governance process where demands are prioritized. Project proposals that can reuse existing solutions and project proposals across businesses that have common requirements are actively identified.
• Service catalogue: CEPSA has both a business process catalogue and an IT service catalogue. Every time a request for a new business process or IT project comes from a business unit, IT looks at the process catalogue.Communication about reuse is a daily job at CEPSA with a focus on metrics and describing successful examples. Reuse at CEPSA has delivered lower costs and faster development. CEPSA’s percentage of IT spending to total revenues is 0.3% which is significantly better than the industry average of 0.8%. But for many executives at CEPSA the big benefit in reuse is faster time to market.

When the IT group realized that many of the 76 operating companies were interested in getting better information about their customers they designed a customer relationship management system with a common core that was then implemented with local configuration for each business unit’s different needs. For the first business unit, Marine Fuels, the configuration took 7 person months and reused only 10% of existing capabilities. By the fifth business unit, LPG, 80% of system was reused and took only 4 person months to complete. The IT group summarized this on one page and uses this compelling document to communicate their success.

 

Turning Time Into Money: A Manifesto for Digital Reuse

Leading companies have demonstrated that digital reuse turns time into money. Here are some of the approaches that have worked well to strengthen the three C’s:

 

Commitment: Top-performing firms specify who makes the decisions about reuse and which metrics are important in evaluating those decisions so that managers and groups can be compared.

Govern at the level of the enterprise you want to reuse with mechanisms that encourage/mandate reuse (e.g. executive committees, project methodology with a reuse gate).
Create financial models that encourage reuse such as offering lower unit costs for services targeted for reuse. Many shared-services organizations offer lower costs for reused services than new services.

Capability: Top-performing firms create units and processes that make reuse easier to achieve.

Broker reuse with an enterprise-wide unit whose role is to create and match demand and supply. For many firms shared services play the broker role, connecting operations, process, data, and products.
Start with technology reuse in the largest business unit and move enterprise-wide with approaches such as virtualization, cloud, and consolidation. Standards are not enough—you must build a culture of reuse to achieve sustainable results.
Consolidate both data and reusable code into accessible forms and places (e.g. data warehouse, SOA).
Communications: Top-performing firms expicitly communicate the value of reuse throughout the firm.
Share reuse results widely through dashboards, information panels, case studies, and regular reviews and updates.
Measure reuse and the resulting performance improvements. For instance, Intel catalogue its service costs and achieved an average savings of 40% the first time a digital service is reused. Use the measures to compare reuse levels across areas and encourage the laggards to catch up with the leaders.If you have a reuse program, nurture and grow it by focusing on the C’s. As we are coming out of the recent financial crisis, it is time to prepare for the next couple of decades of growth. Firms have a big digital opportunity: virtually every interaction will become digital and reuse is a key discipline for thriving in the digitized world. If you don’t have a digital reuse program, start today – it will pay off!

 

Screen-shot-2014-04-09-at-11.08.09

 

About the Authors
Dr. Stephanie L. Woerner
(Research Scientist, MIT Sloan CISR, MIT Sloan School of Management) studies how companies manage organizational change caused by the digitization of the economy.  Her research centers on enterprise digitization and the associated governance and strategy implications. Two current studies include i. the amount, allocation and impact of enterprise-wide digital investments and ii. how digitization is influencing the shape of next-generation enterprise.

Dr. Peter Weill (Chairman, MIT Sloan CISR and Senior Research Scientist, MIT Sloan School of Management) researches the role, value, and governance of digitization. He is a popular presenter to executive audiences and has published widely including award winning books, case studies and journal articles. His work has appeared in Harvard Business Review, Sloan Management Review and The Wall Street Journal. Peter has co-authored five books published by the Harvard Business School Press including his latest book “IT Savvy: What top executives must know to go from pain to gain”. In 2008, Ziff-Davis and eWEEK.com recognized Peter as #24 of the “Top 100 Most Influential People in IT” and the highest ranking academic.

Dr. Mark McDonald (Group Vice President, Fellow, Gartner Executive Programs) is the head of research in Gartner Executive Programs and currently working on issues related to digital technology social media, the business use of advanced technologies and management innovation.  He has authored several books including: “The Digital Edge: exploiting information and technology” (October 2012), “The Social Organization” (2011) and “The eProcess Edge” (2000). His work appears regularly in the Wall Street Journal, Financial Times, Computerworld, CIO Magazine and other publications.  His blog on Gartner.com was named in 2012 as one of the top 100 most influential in the Huffington Post.  Mark also teaches at Oxford University, UK, Columbia University of New York in its IKNS program and at the University of Wisconsin Business School.

References
1. We are broadening the definition of reuse to include all digital assets. Reuse in the field of software development has been a concern for decades.
2. See other discussions of the benefits of information technology reuse in, for example, D. M. Upton and B. R. Staats, “Radically Simple IT,” Harvard Business Review, 86(3), 118-124, 2008 and E. Benni, K.  Hartar, J. Laartz, and A. Scherdin, “Reusing IT Components in Mobile-Telecom Companies,” McKinsey on IT, Fall 2003.
3. These findings mirror those in product development. Modularity increases ability to adapt and reduces cost to experiment.  See C. Y. Baldwin and K. B. Clark, Design Rules: The power of modularity, The MIT Press, 2000.
4. See P. Weill, S.L. Woerner, and M. McDonald, “Top Performing Firms are More Effective at Digital Reuse,” MIT Sloan School of Management CISR Research Briefing, vol. X, no. 10, October 2010 for a more detailed description of OMV.
5. The benefits of reuse extend beyond cost reduction and time-to-market.  Many organizations and governments have IT reuse and recycle plans–a “green” strategy–to reduce carbon emissions and increase resource productivity.
6. For the benefits of enterprise architecture see J. W. Ross, P. Weill, and D. C. Robertson, Enterprise Architecture as Strategy: Creating a Foundation for Business Execution, Harvard Business School Press, 2006.
7. “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results”, P. Weill & J. Ross, Harvard Business School Press, 2004.

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