CONFIDENTIAL

Managing IT through a CHALLENGING ECONOMY

Microsoft Achieve More event Hong Kong, March 6, 2009

5 KEY IT TRENDS IN THE CURRENT DOWNTURN

IT and corporate finance merge

CIOs and corporate finance collaborate on generating ideas

to use IT assets as a lever to generate cash, including areas in outsourcing management, leasing of assets, and vendor financing

Tension around IT budgets increases

CIOs need to evaluate IT investments for new business

capabilities in a fact-based way in brokering with business units to allocate more precious IT budgets

The last IT projects?

CIOs need to be ready to explain what it would take to

improve the value equation for IT investment when CEOs tend to shut off discretionary projects during the downturn

Regulators demand more from IT

CIOs should enhance relationships with internal legal and

corporate-affair teams and be prepared to seek solutions at manageable cost to meet increasing government and regulatory mandates

The outsourcing and Offshoring landscape shifts

CIOs need to dynamically manage vendor relationships as a

portfolio as the offshoring and outsourcing landscape shifts rapidly with downward pressure on aggregate demand, local government sponsored initiatives, mergers and new entrants

Source: McKinsey analysis 1

DOWNTURN WAS A DISRUPTIVE MOMENT FOR INDUSTRIAL LEADERS

Laggards Leaders After recession

Competitive landscape shift after the downturn in 2000 (IT industry example)

Semiconductors
7% 15%

Percent of companies

73% Laggards

5% Leaders

Before recession

Software
Laggards Leaders After recession 10% 11%

Overall IT industry
Laggards Leaders After recession 11% 11%

System hardware
Laggards Leaders After recession 10% 11%

69% Laggards

10% Leaders

68% Laggards

10% Leaders

69% Laggards

10% Leaders

Before recession

Before recession

Before recession

IT Service
Laggards Leaders After recession 13% 9%

Half of leaders lost their position after a recession

66% Laggards

12% Leaders

Before recession

Note: Before recession ranking based on years 1998 and 1999; after recession ranking on 2004 and 2005 Source: CPAT; Compustat; McKinsey analysis

POST-RECESSION LEADERS EXCELLED IN 3 ASPECTS

Strengthen core business or capture emerging
Initiate strategy transformation opportunities through acquisition

Regain focus via pruning non-core or unprofitable

assets Leadership after downturn Improve business efficiency Drive smart growth

Outsource non-essential manufacturing Streamline product portfolio Improve procurement management Accelerate cash conversion cycle
Source: McKinsey analysis

Focus sales & marketing on high value segments Optimize pricing structure Launch new product offering in high growth areas

IT ROLE WILL BE MORE CHALLENGING IN CURRENT DOWNTURN GIVEN LIKELY FLAT OR REDUCED IT SPENDING
U.S. DATA IT spending typically fell much faster than GDP during past recessions US GDP and IT spending growth Percent change GDP growth (2000 dollars) IT spending growth Recessionary periods 35 30 25 20 15 10 5 0 -5 -10 7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 21 Year 74-75 78-82 GDP IT -6.3 -13.2 -7.5 -12.3 89-91 -3.7 -8.5 01-02 -3.7 -27.0 No change and McKinsey survey shows that ~75% CEOs expect flat or decreased IT operating expenses By how much, if at all, do you expect your organizations IT operating expense will change in 2009? (Percent of respondents, N = 548) Dont know
13

43 Decrease Increase 23

Source: BEA; Economist; 2008 McKinsey Quarterly Survey on information and technology strategy

IT CAN SUPPORT BUSINESS IN CURRENT DOWNTURN BY IMPROVING IT AND BROAD BUSINESS PERFORMANCE AND BY ENABLING BUSINESS TRANSFORMATION
IT efforts Improving IT efficiency and effectiveness Description Build a lean IT infrastructure, processes and operation through a set of initiatives including: Better demand management via value-based service portfolio selection and service level adjustment Integrating and streamlining the operation of IT hardware and software components Consolidating sourcing and fully leveraging skills outsourcing Lean IT operation processes Use IT as a lever to support improvement in efficiency and effectiveness across a variety of business processes and functions, including Developing customer insights and refining pricing discipline Optimizing delivery scheduling and inventory management Enhancing the management and utilization of support staffs Improving decision making, risk and performance management processes

Leveraging IT to drive business improvement

Enabling business transformation via IT

Leverage IT to enable the execution of new business transformation strategy, including Providing tangible operation tools to enable frontline transformation early on Delivering new systems to encode transformative mindset, processes, and capabilities Enabling integrated information and KPI-centric performance system for decision-making and for tracking

Source: McKinsey analysis

10 LEVERS ARE KEYS FOR RAPID IMPROVEMENT IN IT EFFECTIVENESS Illustrated cases in next 2 pages AND EFFECTIVENESS
IT efforts Improving IT efficiency and effectiveness

Savings potential Percent of IT costs*

Ten key levers for IT efficiency & effectiveness

21-48%

Leveraging IT to drive business improvement

Demand management

7-24%

Project portfolio review Value realization audit Service level adjustments Application sunsetting Server consolidation Network optimization Contract consolidation
and renegotiation Optimized skills sourcing

Technology management

6-11%

Enabling business transformation via IT

Sourcing Process improvements

6-9% 2-4% Total savings in the first 12 months

Selective Lean IT Helpdesk optimization

* sample of 30 companies in various industries Source: McKinsey team analysis

A LEADING ASIA FINANCIAL INSTITUTE ADOPTED VALUE-FOCUSED PORTFOLIO MANAGEMENT FOR QUICK IT EFFICIENCY IMPROVEMENT
From traditional approach Keep Rescope/ defer Keep Rescope/ defer

25 20 NBV 15 10 5 0

Size of project spend

IMPACT
The bank reduced 10% of total USD 0.4 billion IT budget, through aligning IT portfolio with business priority, focusing on 42 strategic projects, closing low priority projects.

To value-focused approach 25 20 NBV 15 10 5 0 Size of project spend Hurdle rate Rescop e/ defer Keep

Source: McKinsey analysis

IT CAN ACHIEVE MUCH MORE IMPACT ON BUSINESS PERFORMANCE IMPROVEMENT BEYOND IT EFFICIENCY IMPROVEMENT ITSELF
IT efforts Improving IT efficiency and effectiveness Technology enablement in the business efficiency and effectiveness can provide up to 10x the impact of IT efficiency programs IT impact on run-rate EBIT* (illustrative examples) Percent 15% IT cost reduction Merchandising Leveraging IT to drive business improvement Supply chain Pricing 0.5 1.0-2.0 3.0-4.0 3.0-5.0

and McKinsey survey shows executives consider improving business processes is the highest priority in IT initiatives** Percent of respondents (N = 548) Enabling business transformation via IT Improve effective and efficiency of business processes Improve IT costs Provide managers with information for planning Ensure compliance with regulations
102 42 41 34

* Assumes run rate at 6-18 months (timing to achieve run-rate impact varies across examples) Source: McKinsey experience

** McKinsey 2008 survey

IT CAN CREATE HIGH-POTENTIAL OPPORTUNITIES ACROSS BUSINESS PROCESSES IN VARIOUS INDUSTRIES

Business processes
Research market Design products Prototype and test Respond to inquiries Manage library

New insights gained from data Optimizing business processes and systems

Develop

Engineer

Develop insights into customer segments strengthen pricing discipline to reduce pricing leakage and promote best practices in sales

Market and sell

Develop campaigns

Market to customers

Manage sales

Manufacture* Fulfill and bill

Design for manufacture

Source materials

Schedule operations

Produce

Manage inventory

Process orders

Invoice

Manage logistics

Ship to customer

Streamline supply chain and logistics to improve delivery scheduling and to optimize inventory
Collect

Process returns

Support

Operate contact center

Dispatch field service

Manage problems

Manage selfservice

Improve the management and utilization of field forces and of customer support centers

Back-office functions
Finance HR Risk Legal Facilities IT Performance management

Sharpen awareness of risk exposure Improve decision making and performance management processes

* Applicable to companies with manufacturing operations Source:McKinsey analysis

A TELECOMMUNICATION COMPANY IMPROVED SALES PERFORMANCE THROUGH IT-ENABLED INTEGRATED INFORMATION SERVICES
Key initiatives Inexpensive links to bring data together

Linked contracts, sales, customer,

and order information across business units to provide an integrated view of business information Automated links between sales performance and compensation

Identify opportunities across all value drivers

IMPACT The telco company was able to reduce their pricing leakage and increase revenue on new contracts by 3-5%, improving margins by 15-20+%, in a 6-12 month period

Deployed data analysis tools to

Identify revenue gaps based on issues resulting from poor sales practices with discounting and policies

Pilot and rollout changes

Developed a set of dashboards to

track performance across the sales organization

Source: McKinsey analysis

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IT IS CRUCIAL TO ENABLE BUSINESS TRANSFORMATION

IT efforts Improving IT efficiency and effectiveness Business transformation is ranked as a top target in building IT capabilities, in order to further company goals Percentage of respondents ranking No. 1 (N = 548)

Transformative role Leveraging IT to drive business improvement Supports differentiated performance

15 34
20

Improves business efficiency

32

38

Enabling business transformation via IT

Lowest IT cost

33

19 9

Current

Ideal

Source: McKinsey Quarterly Survey on information and technology strategy, Oct 2008

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IT CAN DRIVE OVERALL BUSINESS TRANSFORMATION

IT efforts Improving IT efficiency and effectiveness

IT role in support business transformation

Key levers

Delivering tangible
operational changes for frontline personnel early on in a business transformation process Leveraging IT to drive business improvement

Simple temporary tools targeting

core business values Rapid prototyping with clear benefits

Enabling personnel to foster

new mindsets, capabilities, and behavior

Systems to embed new processes

and rules Integrated and transparent information Reporting and workflow automation Knowledge sharing and community exchange platform

Enabling business transformation via IT

Empowering management to
lead through the provision of relevant information

Augmented MIS for managing and

tracking KPI Analysis and reporting capability for tracking key initiatives

Source: McKinsey analysis

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A JAPAN-BASED GLOBAL BANK ENABLED NEW OPERATING MODELS VIA IMPLEMENTING NEW IT ARCHITECTURE AND SYSTEMS
Key initiatives New operating model

New operating model enabling

New pricing model Refined customer segmentations Improved multi-channel management Enhanced sales process

IMPACT
The bank expects to rollout new operational model within 18 months, improving its EBITA by over 0.5% with USD 100 Billions net incomes

New IT architecture

Streamlined functionalities based

on business domain definitions

Standardized and simplified

interfaces across tiers

Leveraging existing components

and packaged software Develop and rollout new system

Prioritization by business value

creation and time Piloting at small BUs Parallel rollout with operating model

Source: McKinsey analysis

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5 KEY IT TRENDS FOR CIOS TO CONSIDER IN THE CURRENT DOWNTURN

IT and corporate finance merge

CIOs and corporate finance collaborate on generating ideas

to use IT assets as a lever to generate cash, including areas in outsourcing management, leasing of assets, and vendor financing

Tension around IT budgets increases

CIOs need to evaluate IT investments for new business

capabilities in a fact-based way in brokering with business units to allocate more precious IT budgets

The last IT projects?

CIOs need to be ready to explain what it would take to

improve the value equation for IT investment when CEOs tend to shut off discretionary projects during the downturn

Regulators demand more from IT

CIOs should enhance relationships with internal legal and

corporate-affair teams and be prepared to seek solutions at manageable cost to meet increasing government and regulatory mandates

The outsourcing and Offshoring landscape shifts

CIOs need to dynamically manage vendor relationships as a

portfolio as the offshoring and outsourcing landscape shifts rapidly with downward pressure on aggregate demand, local government sponsored initiatives, mergers and new entrants

Source:

McKinsey analysis
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