WHITE P APER

www.idc.com

Hitting the Moving Target of Operational Excellence:

Identifying and Obtaining the Information Needed for
Continued Success
F.508.935.4015

Sponsored by: SAP

Raymond Boggs
May 2007
P.508.872.8200

INTRODUCTION
These are challenging times for firms that have grown to be larger than small
businesses but aren't yet large or Fortune 1000 businesses. Getting access to the
Global Headquarters: 5 Speen Street Framingham, MA 01701 USA

right information has never been more important for CIOs who craft and implement IT
strategy or for senior operating executives who provide strategic direction and are
responsible for a firm's financial success. But with data more readily available than
ever, the key questions are: What do we need to know? How do we go about getting
the information we need?

The changing competitive environment places a premium on efficiency, and

companies that might once have done just fine with legacy approaches to measuring
their processes and performance are finding life increasingly difficult. The rise of
technology use has complicated, not simplified development of effective processes
and measurement. We now have the ability to examine performance in so many ways
and deliver that information through so many different (though sometimes
incompatible) platforms that it is hard to know where to begin.

Of course, internal assessments are only the first step in identifying information
needs. Customer, supplier, and government constituencies are demanding higher
levels of performance. Given the sharper competitive environment domestically and
internationally, the external need for improving information access can be even more
compelling than pressures from within a company.

This white paper presents IDC's framework for implementing operational excellence
(op ex) and helps the reader move toward an effective op ex implementation while
avoiding potential pitfalls. Three critical steps — internal assessment, competitive
benchmarking, and resource prioritization and acquisition — are described to support
development and refinement of successful op ex practices.
CHANGING MIDMARKET PERCEPTIONS OF
TECHNOLOGY
In many respects, the most successful midmarket firms are actually somewhat
dissatisfied with aspects of basic business operations, especially their ability to
identify and obtain critical information. They know that they can do better and that
they must do better if they hope to thrive in the future. These firms regularly look at
technology to help improve performance by delivering the information necessary to
refine effective strategies and identify where and how performance can be improved.

IDC has found that certain technology attitudes and philosophies are associated with
competitive success among midmarket firms. While investments in IT resources can
often be linked to effective operational results, the attitudes rather than the dollar
amount spent set the stage for success. These attitudes can be directly tied to
information management practices that work, which, of course, raises the next
question: How can companies best nurture the attitudes that are associated with IT
and information management effectiveness?

Critical Attitude One: Advanced Technology

Is an Important Competitive Tool

Medium-sized businesses are very comfortable with the idea that advanced
technology can serve as a competitive tool, but faster-growing firms are even more
likely to embrace this view, as Table 1 indicates. The customers and suppliers that
midmarket firms work with have become catalysts for this kind of thinking. Not only
are they measuring your performance against firms similar to your own — your most
immediate and obvious competitors — but they are assessing your performance
against the best practices delivered by major global corporations.

This new competitive perspective, where you are evaluated against the performance
of firms that may not even be in your line of business, is a 21st century phenomenon.
The benchmarks established in one sector soon become the standard for success in
others. This means that it may no longer be sufficient to outperform your immediate
competitors if you are still below what have become accepted standards in other
industries. What seems to work today may not be effective against the new
competitors you will face tomorrow.

As a competitive tool, advanced technology has both defensive and offensive

aspects. For some companies, a minimal level of technology performance is a
prerequisite for survival — the basic table stakes that allow you to stay in business by
reaching out to new customers or effectively serving current customers. For the more
successful firms, though, technology offers something more: a way to differentiate
from the competition, whether through innovative sales and marketing outreach to
prospects or gaining competitive advantage through operating efficiencies or new
ways of doing business, which can be more important for long-term success.

2 #206593 ©2007 IDC

 T ABLE 1

Agreement with Attitude Statement: Advanced Technology Is an Important

Competitive Tool for Us (% of Respondents)
Fast-Growing Midmarket Fastest-Growing Midmarket
Firms (10%+ Annual Firms (20%+ Annual
Total Midmarket Firms Revenue Growth) Revenue Growth)
1 — Strongly disagree 0.9 0.5 0.5
2 4.6 2.6 6.0
3 7.2 11.1 8.0
4 — Neutral 27.0 23.4 22.1
5 21.9 20.1 19.2
6 22.4 22.7 23.4
7 — Strongly agree 16.1 19.7 20.9
6 or 7 38.5 42.4 44.3
Mean 4.96 5.07 5.07
n (midsize firms) = 418 148 60
Source: IDC, 2007

Critical Attitude Two: Firms Invest in

Technology to Manage Costs and Be More
Efficient

It's natural and inevitable for technology spending to be considered a cost that needs
minimizing. But among more successful and forward-looking firms, technology is typically
viewed as a resource to be nurtured and invested in to improve efficiency. As Table 2
indicates, firms that have been growing more rapidly tend to have higher levels of
agreement with the "technology as investment" attitude than midmarket firms in general.

T ABLE 2

Agreement with Attitude Statement: We Invest in Technology to Manage Costs

and Be More Efficient (% of Respondents)
Fast-Growing Midmarket Fastest-Growing Midmarket
Firms (10%+ Annual Firms (20%+ Annual
Total Midmarket Firms Revenue Growth) Revenue Growth)
1— Strongly disagree 0.7 0.8 0.5
2 1.5 2.3 3.7
3 7.4 6.9 6.2
4 — Neutral 21.1 16.1 23.5
5 26.9 26.4 12.7
6 28.1 32.4 32.3
7 — Strongly agree 14.3 15.1 21.2
6 or 7 42.4 47.5 53.5
Mean 5.13 5.23 5.26
n (midsize firms) = 418 148 60

Source: IDC, 2007

©2007 IDC #206593 3

Manufacturing firms understand intuitively this idea of technology as investment
because analysis of capital equipment investment is part of daily life. For professional
services firms, though, this kind of thinking represents a fundamental change in basic
business practices and can pose a challenge to the technology staff advocating
investments that general management may consider excessive (at least those that
aren't yet at the stage where they can track project investments and returns in detail).

The key, of course, is to frame the analysis not by near-term savings (though this is
appealing) but by long-term growth implications. While some might see op ex
investments as a way to manage and thereby reduce costs, this outlook misses the
real upside for major revenue growth associated with enhanced employee access to
critical information. But of course, such enhancements are associated with direct and
indirect costs.

In effect, you must balance the need to be more efficient internally with the need to
grow the business profitably. Too much emphasis on either side of the scale can
create problems. IDC has found that there is an instructive change in investment
dynamics within companies as they grow: Revenue expansion is more typically the
focus of smaller firms, while midsize firms are also interested in revenue growth and
internal efficiency. The larger a company becomes, the greater the opportunity for
operational improvement by putting in place the right practices and policies and by
getting the right information to the right people.

ACCESS TO TECHNOLOGY RESOURCES:

P ART OF THE SOLUTION OR P ART OF THE
PROBLEM?
The growing complexity of technology environments can actually outpace the ability
of management to develop and implement the tools needed to track and guide
performance. This is especially true given the way most firms assemble IT resources
on what seems an ad hoc, almost improvisational, basis. If a company has grown
through acquisition, the IT infrastructure is likely to be even more diverse. And when
combined with regular turnover in IT staff and consequent loss of institutional
memory, the result can seem unfocused at best and counterproductive at worst.

Local Network as Central Information and

Operational Resource

There is growing use of local area networks (LANs) in midmarket firms, with an
increasing number of servers and network applications as well as more storage
capabilities and remote access for those outside the office, all driven by changing
business requirements. IT environments are becoming more complex, but in the end,
the LAN has emerged as the corporate central nervous system, facilitating
communications, supporting business activities, and serving as the shared
institutional information source in midsize firms.

4 #206593 ©2007 IDC

As Figure 1 shows, smaller firms tend to have simpler network environments, in
keeping with their more modest needs, although those needs are increasing. Small
businesses typically don't have server-based LANs until they grow to 20 employees,
and even then, they average only between two and four servers per company.

In contrast, use of server-based LANs is more the rule than the exception in midsize
firms, with roughly four out of five firms making use of servers from all form factors,
with rackmounted systems the most popular. (Desktops are most widely cited by
small businesses.) The diverse nature of midmarket servers is not the challenge.
Rather, the number of servers is the issue: Midsize firms own an average of 12.3
servers, and 20-plus servers is the norm as firms grow beyond 250 employees. It's no
surprise that managing IT infrastructure and the challenge of storage and data
retrieval are much more serious issues for IT management in midsize companies than
for their colleagues in smaller firms.

FIGURE 1

Share of SMBs with Server-Based LANs by Number of

Employees

Under 5 29.2

5–9 36.7

10–19 52.8

20–49 64.8

50–99 75.7

100–249 78.2

250–499 82.0

500–999 79.3

0 20 40 60 80 100
(%)

n = 1,032
Source: IDC, 2007

©2007 IDC #206593 5

IT Staff Profile in SMBs: Resources and
Responsibilities Grow with Company Size

As IT environments grow more complex, the need for support staff to keep things up
and running becomes ever more compelling. Figure 2 shows the share of SMBs with
full-time IT staff in place by company size. Most smaller firms with under 50
employees don't have dedicated IT staff, but the majority of firms with 50 or more
employees do. The share increases rapidly to 75% of firms with 100–249 employees
and over 90% of firms approaching 1,000 employees. Of course, the number of IT
staffers within those firms also grows with company size, with two or three in small
businesses. Among midsize firms, though, IT department size grows dramatically,
roughly doubling with each size category, from 7 in firms with 100–249, to 13 in firms
with 250–499, to 29 in firms with 500–999 employees.

FIGURE 2

Share of SMBs with Full-Time IT Staff by Number of Employees

Under 10 4.2

10–19 11.2

20–49 28.8

50–99 55.5

100–249 74.8

250–499 84.6

500–999 93.3

0 20 40 60 80 100
(%)

n = 1,032
Source: IDC, 2007

Firms in industries such as manufacturing, transportation, warehousing, and

communications tend to have above-average numbers of IT staff, in keeping with
higher IT investments and more advanced infrastructure. Along with larger staff
comes greater technical specialization, with PC and networking specialists most
common, but storage and security specialists also show up with greater frequency.

Paradoxically, the higher level of IT support does not necessarily translate into more
comprehensive coverage. Even while IT staffs expand significantly with the size of
midmarket firms, the average number of PC seats supported per IT employee
remains fairly constant at 20–40. This means that the availability of IT staff to work on
major project development or to establish a foundation for long-term planning is

6 #206593 ©2007 IDC

simply absent. No wonder midsize firms find themselves investing more and more in
technology but making less and less progress in mastering their current information
needs and preparing to meet future needs. It's hard to establish a comprehensive
framework for technology implementation when key staff are stretched thin keeping
the current infrastructure operational.

THREE CRITICAL STEPS ON THE P ATH TO

OPERATIONAL EXCELLENCE
Tracking and evaluating the latest technology are challenging tasks, but the most
critical initial steps in moving toward true operational excellence involve stepping
back, assessing the current environment objectively, and identifying the most critical
information needs moving forward. This process involves an internal audit to
determine key performance indicators, and it also involves looking outside the
company for other examples of best practices. While this intervening step may seem
less useful (and more difficult), it actually is a way of "future-proofing" conclusions
against changing customer or supplier requirements.

Step One: Look Internally at Current and

Future Information Needs

This may seem to be the easiest step to take, because it is completely internal to your
company, but it can pose a real challenge because of its sensitive political nature.
The key is to assemble important internal constituencies to identify the critical
information needs that will be essential in taking the company to the next level of
development. While it's tempting to draw from familiar faces in operating departments
with whom you've worked closely in the past, your challenge is to solicit help from
people who are the most knowledgeable and who have the greatest influence in their
respective areas.

The "diagnostic" process can be difficult and uncomfortable for some, so a more
general survey of staff to gather anonymous concerns and forward-looking
suggestions can be an effective starting point. In the tradition of brainstorming ideas,
try to be as inclusive as possible and avoid trying to come up with solutions at this
point. The objective is to look with "fresh eyes" at your current ability to meet the
information needs of key groups, not just repeat the conclusions of past assessments.

Step Two: Look Externally Through External

Benchmarking and Competitive Assessment

This is a natural extension of step one, especially if some of the internal opinions
shared came from staff who had worked for competitors, customers, or suppliers. In
essence, you want to gather insight on what other companies are doing that can be
helpful in your own evaluation of current and anticipated information needs, both
internal and external.

©2007 IDC #206593 7

Basic benchmarking involves an assessment of the following two sets of competitors
— one is obvious; the other is not:

1. The "comparables" are firms similar to yours in industry or geography to ensure

that you are hitting the mark in all the fundamental areas. They are your obvious
competitors, firms you may (or should) know well. Some may be easy to get
information from through personal contacts; others may be more difficult and
require you to learn from customers or other third parties. You may even want to
"mystery shop" to see how prospects or customers are treated when it comes to
information support.

2. The "best practices" companies in your industry (or related industries) set the
standard for excellence in the eyes of customers, suppliers, or employees. They
are less obvious and not necessarily even competitors, but they do establish
performance expectations among your customers and prospects. Some may be
major multinationals that have resources you could not hope to match — yet you
will be held to performance standards that they establish. If your local bank can
provide account status information online or through a quick phone inquiry, your
customers (or your own sales staff) may wonder why you can't do the same.

Benchmarking should be done with constructive goals in mind rather than to build a
sense of inadequacy (avoid the "I told you so" temptations). List the critical
competitive strengths of the most admired companies in your industry, but also list
their weaknesses or those areas where your company offers better performance. This
balancing-of-the-ledger exercise is especially important at the committee level
because not every department in your firm may be aware of the very real strengths
and high performance delivered by other members of the team. Special strengths can
be in areas such as customer relationship building, flexibility, personalization, and so
forth. The goal is to see where improvements could be made while also identifying
(and underscoring) key competitive advantages that can be emphasized and
nurtured.

Step Three: Assembling the Resources and

Establishing the Processes for Effective
Information Delivery

This is the therapeutic stage that builds on the understanding of needs from the first
two steps to help identify the most effective approach to operational excellence. With
information goals in mind, companies should reach a natural consensus regarding the
source and nature of critical information needed for success. From this point, an
advisory committee assembled for this purpose can identify who can benefit from
what types of information. Because this is likely to be an area for considerable
debate, it's helpful to associate users with a "relative need" metric to objectively
assess who would be/should be the primary recipient of different information on a
five-point scale of importance based on job needs. This approach will identify the
"nice to have, but not essential" users who can contribute to, but who shouldn't
sidetrack, the process.

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Depending on the nature of your organization, you will need to factor in political
considerations in different ways — ensuring that key decision makers receive the
information they want in order to garner their support, even if the actual need for this
information may seem less critical. Note that this is separate from the technology
discussion, which is much more the province of IT management. But it sets the critical
parameters for success in moving forward with the delivery of the right information to
the right people in your organization to ensure continuing success.

CHALLENGES & OPPORTUNITIES

The following are risks — some are readily apparent; others are not — in the process
outlined earlier:

1. Potential disruption. As with any change in an IT environment or operating

structure, especially one with business practice implications, there will likely be
growing pains as obsolete practices are updated. New procedures are likely to
distress some staff until activities and new reports become familiar. Communication
and training will be especially important, as will continuing contact between affected
staff and the colleagues that represented their interests during the discussion stages.

2. Need for senior management support. High-level support for improvements in

information access associated with operational excellence is a critical prerequisite,
but initial buy-in (and funding) isn't enough. Senior management support needs to
be ongoing and visible — not just occasional verbal acknowledgement but also
active participation to ensure progress. Shifting relationships and responsibilities
that may be part of an operational excellence initiative will have potential
organizational implications within a company. Senior management involvement in
the process will ensure sensitivity to these issues and help minimize potential
resistance to change. Of course, change advocates will also need to be sensitive to
(and not frustrated by) what might be perceived as one step backward for every
five steps forward in a successful implementation.

3. Need for continuing assessment and refinement. Most of all, general

management as well as IT management will need to commit to a continuing
process of self-assessment and technology enhancement. This can be a
daunting prospect to a company that has just made major investments in
technology and process reengineering. In reality, though, this kind of revolution
must be a continuing process. Evaluating and addressing needs once and never
again will not be a formula for success. In some respects, adopting such an
approach can be almost as risky as not engaging in the process in the first place.

4. Risk of paralysis by analysis. A comprehensive assessment of key business

operations and related information needs can be truly daunting in scope. While a
rigorous business review can yield invaluable insights about where operations
and information flows can be improved, there is also the danger of more analysis
than action. Setting priorities and taking incremental action quickly to get critical
information in the right hands are key steps to success. A staged approach to
focus initially on high-impact projects is much more valuable (and politically more
effective) than assembling a major reengineering that might take years to
implement. It is much better to identify and address the most obvious and high-
impact information issues to start with.

©2007 IDC #206593 9

SUMMARY & RECOMMENDATIONS
Formal examinations of information needs are not typically conducted in larger
companies, never mind in midsize companies. An organization builds around the
decision processes that helped it thrive. The challenge is that without conscious and
regular supervision, information gaps develop and the organization is not as strong or
healthy as it might be. There was an old saying regarding a large European
electronics firm: "If we only knew what we know…" The implication is that the
information assets exist, if only they could be found. The challenge is to be sure that
this same statement doesn't hold true for your firm and that the right steps are taken
to ensure that this situation doesn't occur.

As complicated and comprehensive as the development of an effective operational

excellence initiative can be, it is important to recognize that it builds logically and
incrementally on existing resources and information flow. In many respects, the
approach can be seen as incremental to current activities, designed to leverage
existing investments and practices. (This, in fact, might be the message to emphasize
to worried employees.)

But of course the approach is actually revolutionary, designed not only to provide a
fresh look at meeting organizational information needs but also to assess whether
perceived needs are really appropriate. Just because information has moved in your
company in a certain way to certain people does not mean the practice needs to
continue. As with any move to automating processes, the realization that something
does not need to be done can be as big a source of cost savings as the
implementation of an activity done with greater efficiency. IDC believes there is
something of a "Trojan horse opportunity" for both business and IT management to
begin with an incremental enhancement view of current practices but, if appropriate,
assemble the justification and resources for major change in processes.

The importance of "buy-in," or having equity in the process by which information

priorities are set, cannot be overemphasized. A new set of information resources and
enhanced practices — however well crafted — that emerge without consultation with
key users will face serious handicaps. In many respects, the process by which
priorities are set will be as important as the priorities themselves. It will be important
to include all constituents, internal and external, in the planning process. Employees,
both onsite and remote, as well as customers and suppliers, can all play important
roles and should be aware that they have equity in the decisions being made. As
noted earlier, it will be important to identify and empower internal advocates in each
group of potential users. If appropriate, advocates can include even channel partners,
although the selection has to be done with special care.

Of course, we have been outlining the most comprehensive and, potentially, the
most beneficial approaches toward operational excellence. Smaller-scale or less
ambitious efforts can work on a departmental basis, but the ability to leverage
changes in IT infrastructure will be lost. For this reason, the challenge associated
with senior management support can serve as the last word. The legitimacy provided
by management participation in the process is invaluable in generating support for
the planning process and the successful implementation of new solutions. It can be
the key to success on one hand, and the recipe for disappointment if absent.

10 #206593 ©2007 IDC

Of course, the quest for operational excellence is really a process rather than a
destination; companies continue to have needs even after the implementation phase.
For midmarket companies considering how their own efforts toward operational
excellence can be supported, the best advice might be: "You're doing it now. Do it
better. Do it continually."

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Copyright 2007 IDC. Reproduction without written permission is completely forbidden.

©2007 IDC #206593 11