The New CIO Agenda

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INDUSTRIAL MANUFACTURING The New CIO Agenda

Transforming information technology to strategic effectiveness and efficiency 2 | The New CIO Agenda

Transforming Information Technology Strategic objectives

To deal with growing global competition, manufacturing companies are increasingly adapting digital technologies to network and transform their manufacturing processes. Due to digitalization, ‘factory of the future’ (Industrie 4.0, smart manufacturing) and big data, issues surrounding IT are at the top of the company agendas and are leading to new challenges for CIOs.

For the IT function, a number of strategic objectives have proved to be particularly relevant: Usually, the ‘web of objectives’ we encounter when consider Business support and business creation … ing IT functions comprises some conflicting goals that require … refers to the ultimate goal that IT should serve the careful balancing, for example, between business support and strategic objectives of a business. IT has to keep its cost-effectiveness, or between compliance and flexibility. services and projects aligned with business demands, However, new approaches and trends in transforming and while getting the best out of the market. However, optimizing IT functions open up innovative ways to address it’s not only about optimizing business (e. g. digitally these issues, and allow breakthrough solutions in meeting the re-engineering business processes), sales and prod strategic objectives of the company. ucts and supporting the value chain, it’s also about creating business through new IT services and KPMG has developed a holistic, multidisciplinary approach digitalization. to support companies in industrial manufacturing with their specific requirements, transforming and optimizing their infor mation technology. Cost-effectiveness … In the following, we present this approach in detail and would … pertains to the IT function’s ability to offer its be pleased to discuss this with you personally. ser vices at market prices and contribute to the overall competitiveness of the company. In this respect, benchmarks are available to increase effectiveness in operating, maintaining, enhancing existing applications and services by way of standardization and consolidation, outsourcing and cloud computing.

Flexibility … … refers to the IT function’s ability to adapt to chang ing business requirements. This could be driven, for example, by geographic expansion or the digital transformation of business models. Harald v. Heynitz Gernot Gutjahr Partner Partner Head of Industrial Consulting – Scalability … Manufacturing Information Technology … pertains to the IT function’s ability to adapt to Germany changes in business volume, for example, M&A activities and new products or services.

Compliance … … is achieved if external and internal regulations (e.. g tax and legal) are reflected in IT operations. This strategic objective needs to be treated as a framework condition for optimizing other target dimensions. Not maintaining cyber security and privacy in a hyper connected world could become disruptive and costly.

© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International. The New CIO Agenda | 3

Transforming and Optimizing Information Technology KPMG’s expertise

KPMG’s grid of expertise is uniquely positioned to integrate the multifunctional and multifaceted knowledge and experience required to achieve cost transparency and cost-effectiveness as well as to navigate IT’s journey from technology provider to value-focused business partner.

Business Demand Technology Portfolio Financial Resources Governance, Strategy & Risk & Organization Compliance New Sustained Retained Sourced Change Run

Assurance

e. g. e. g. Assurance Support concili compliance ation of ‘big data’, ‘cloud’ and ‘privacy’ Tax e. g. IT strategy, trans e. g. formation and Tax-compliant and organization market-standard IT cost models Consulting

e. g. e. g. e. g. Identification and de- IT spending analysis Cyber security in velopment of IT skills and IT contract a hyper-connected Transaction & for your future IT negotiation support world Restructuring e. g. IT post-merger integration and Outsourcing IT carve-out support Advisory e. g. e. g. Sourcing strategy IT partnering and outsourcing agree Human ments Resources e. g. Agile, digitally native and viscous HR strategies Law*

e. g. e. g. Legal* aspects IP protection of personnel Financial Risk measures Management

Our Eight-Dimension Approach

KPMG’s approach to transform and optimize information technology addresses eight relevant dimensions. For a benchmark level setup, each dimension requires the application of multifunctional expertise, enriched by our deep industry knowledge.

1. Strategy and organization 2. Governance, risk and compliance Ensuring effective target setting Ensuring compliance with regulations and governance and reducing cyber risks to acceptable IT Strategy levels • Develop IT strategies that drive growth and business Cyber security, IT compliance AND governance objectives • Support in maintaining cyber security and privacy • Enable emerging digital business models through • Protect and control electronic records and critical an IT strategy, across sales (e. g. digital channels), information assets production (e. g. robotics and 3-D print) and services • Improve and identify access management to prevent (e. g. field force) data leakage • Develop the strategy foundations for application, • Analyze security incidents, derive lessons learned infrastructure, sourcing and lean IT and prepare for legal action Organization • Understand and improve business resiliency processes • Create an organization and a governance model that and technology to reduce the risk of unintended underpins the IT strategy business disruption • Support the IT strategy execution by designing the Reconciling ‘big data’, ‘cloud’ and privacy right target operating models, decision-making • Support in reconciling opportunities and challenges processes, incentives and KPIs – and drive the trans as they expand their big data and cloud programs to formation of HR optimize the benefits and address issues related to global privacy, security and compliance Protecting intellectual property • Support in the management, protection and leveraging of IP assets as well as in the enforcement of IP rights Ensuring legal AND tax compliance

3. New business demand 4. Sustained business demand Ensuring business alignment and Ensuring efficient delivery business creation Demand gathering and reporting Renew enterprise architecture • Support IT to efficiently allocate resources – beyond • Support digital business model transformation any functional, divisional or regional silo mentality • Support the improvement of business and operational • Increase transparency by implementing single intake processes (e. g. automate and integrate domain- for all demand to gain a holistic picture of the total segmented processes into ‘one’ fully digitized end- demand to-end process) Optimized project requests and approvals • Renew IT architecture (e. g. a merger or acquisition • Facilitate reviews to support decision-making process or the replacement of a core system) (continue, defer or cancel) and create transparency Implement demand and portfolio management around the investment decision process • Implement better practice demand and portfolio Optimized agility management, creating a fast track for the critical • Support the organization, process and software business requirements development framework changes that decrease time Delivering project assurance to market and increase agility and pro-activity • Support the delivery of critical IT projects in time and within budget, accelerating time to market for new business requirements • Implement proven methodology to ensure that organizations capture the maximum business benefits and value

KPMG is uniquely positioned to fulfill this requirement with shown below. For a full-scale IT transformation program, its balanced approach and its global network of cross- KPMG’s cross-functional approach aligns and seamlessly functional experts. An example of how we can help is integrates our response to the challenges outlined.

5. Internal (captive) technology 6. External (sourced) technology portfolio portfolio Transparency of technology portfolio Location and sourcing advisory including application of total cost ownership (TCO) • Benchmark the IT cost baseline and analyze and and infrastructure portfolios identify cost savings, reduce up-front capital expense • Best practice model for technology portfolio manage- • Analyze the ‘right level’ of central vs. divisional or ment processes, creating transparency and optimizing regional services investment • Advise on the shift of workloads from captive to shared • Consult on the information flow required to make the services or outsourced services, from onshore to right decisions to enhance portfolio value nearshore or offshore, from internal servers to cloud Application portfolio rationalization infrastructure • Analyze existing IT applications, with an eye on end- Multi-provider governance to-end business processes • Optimize complex, multi-provider outsourcing • Support ‘the right level’ of IT standardization and contracts and governance processes based on better practices Vendor rationalization • Design an optimal ‘one.ERP’ strategy to bring • Support vendor consolidation, with a smaller number together data, processes and IT of strategic partners • Advise on the retirement of low-value or redundant Tax optimization applications to realize savings • Tax-efficient setup for locations and sourcing Infrastructure consolidation License optimization • Analyze IT infrastructure in detail to identify cost- • Identify and negotiate the most cost-efficient license saving opportunities model and/or oversee client licenses as a managed • Support the shift of workloads from dedicated to service virtual devices

7. Financial resources 8. Financial resources Reducing costs for running it Ensuring transparency for changing IT Financial resource transparency can Scenario-based planning be achieved by implementing the following: • Scenario-based planning tools to visualize available • Ensure transparency for running IT resources and ongoing budget constraints • Leverage service catalog • Automated budgeting and forecasting capability • (Transfer tax-compliant) service cost models • Simulate the impact of alternative strategies or growth • Reduce unit costs rates on IT costs and demand • Leverage consumption tracking Benchmarking • Showback/Chargeback • Support IT unit cost models and service cost models • Rolling budgets and forecasts and establish a baseline for costs • Cost-reduction target setting and measurement of progress against those targets • Prepare for and execute meaningful benchmarks

The Challenge of Digital Transformation

Dimensions of digital transformation Target state in industrial manufacturing More than ever, companies are faced with radical change, quick technological development and highly demanding • Digitalization in industrial manufacturing firms is customers. In order to adapt to these changes and deliver the new industrial revolution. superior value to their customers, firms are required to • Originally, the industrial revolution meant that adjust their businesses on several dimensions: business machines replaced muscle power, digital trans model and processes, customer orientation, innovation formation however goes far beyond anything skills and competitive dynamics. currently available in the industrial manufacturing industry (Industrie 4.0): Current state • Machines start to think and communicate with other machines and production lines. Evolution instead of revolution • They act as autonomous systems. • Only 35 % of the manufacturing companies have already • They are perfectly connected, not only with other initialized or undertaken business model adjustments entities within the firm, but also external stake on one or more levels. holders, such as suppliers and customers. • Less than 40 % of the firms have production processes in place that are completely or at least mainly digitalized and connected. Five key drivers of successful digital transformation Distance instead of closeness • Only 38 % of the manufacturing firms have initiated Digital ecosystem measures that make use of the increasing internet usage of customers. Digital business model Adaption instead of innovation • Only 35 % of the industrial manufacturing firms have taken measures in order to improve their innovation skills. Secure dealing with data as basis for a trusting client relationship Short-sighted instead of visionary • Industrial manufacturing firms may miss chances to grow and expand markets as they analyze their competitive Ability to create value from (big) data environment and threats not in the whole extent.

Source: KPMG Study Survival of the Smartest 2.0; 2015; Germany Digital corporate DNA

Our approach From a holistic point of view

1. Quick scans to assess the maturity level of the IT Our team function and identify group-wide IT transformation and Our experienced task force encompasses specialists and optimization potential experts from areas such as IT Transformation and Optimiza- 2. Definition of key design principles aligned with corporate tion, Strategy & Operations, Strategic Sourcing & Procure- strategy and IT governance of best practices, overall ment, Tax, Assurance Services, Technology Enablement, program setup Risk & Compliance, People & Change, Outsourcing 3. Baselining and benchmarking to identify areas of poten- Advisory, Corporate Finance, Sustainability Services and tial and design the initial benefits case Law*. With respect to your specific challenges, they 4. Sourcing and servicing levers modeling and split design ensure that activity 5. Comprehensive target operating model blueprint: • widely recognized experts, governance, services, sourcing and location, processes, • proven-in-practice tools and methods as well as people, technology • benchmark data 6. Validation through pilot approach; pilot implementation units are selected to reflect group complexity are available through our global KPMG network. 7. Detailed implementation planning 8. Group-wide rollout with comprehensive change

management support * Legal services are provided by KPMG Rechtsanwaltsgesellschaft mbH.

Case Study From fragmented IT into cloud-scale

Initial situation • Strong growth in key new markets such as China, South America and Eastern Europe has brought about new acquisitions.

• While these acquisitions have brought global market share to 15 percent, IT complexity has grown.

• Synergies between companies were stifled by legacy IT systems, which limited effective interaction with customers, stifling more consistent portfolio planning and holding back integration of the value chain. KPMG added value • Advice on the delivery model, considering in-house vs. cloud- Analysis and design based offerings vs. outsourced – • Transformation support – from the ground and combinations of those. up, covering infrastructure, applications • Increased visibility into the and business processes. strengths and weaknesses of servicesf o both traditional service • Road map planning for the digital trans providers and cloud providers for formation – from understanding the a faster, more cost-effective baseline, building business cases for decision-making process. change, aligning stakeholders, evaluating options and providing guidance through • Better understanding of cloud solution selection, negotiation with service providers and how out- transformation external partners and the sourcing providers are utilizing transition process. cloud technologies.

Implementation • Dramatically faster provisioning of infrastructure environments.

• Significant reduction in physical server count and management time required, reducing cost and freeing up funds for the transformation of applications and business processes.

• Accelerated deployment of a private cloud IT infrastructure layer, enabling the introduction of globally consistent customer relationship management and product life-cycle management.

KPMG AG Wirtschaftsprüfungsgesellschaft

Harald v. Heynitz Daniela Amadori Partner Manager Head of Industrial Industrial Manufacturing Manufacturing Germany Germany T +49 89 9282-1156 T +49 89 9282-1201 damadori@kpmg.com [email protected] www.kpmg.de

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Our services are provided subject to our verification whether a provision of the specific services is permissible in the individual case.

© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Germany. The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International.