Swedish Match

SWEDISH MATCH

Technology Business Management (TBM) TBM AWARDS CASE STUDY is a methodology, ©2015 Technology Business Management Council. All Rights Reserved community and category of software for data- driven management of the business of IT.

Swedish Match

TBM @ Swedish Match

To accelerate a business and IT transformation, Swedish Match uses TBM principles to focus business conversations on the outputs of IT services and how they drive shareholder value. Shifting from a mostly regional outsourcing model to a central shared services function, the Group IT organization has been able to reduce run costs by one third and increase discretionary spend 20-fold.

Program Owner • CIO

Related Initiatives • Shared services transformation

TBM Solutions • Cost transparency • Bill of IT Areas of Analysis • Services • Applications Outcomes • One-third reduction in run costs • 20-fold increase in discretionary spend

Swedish Match Corporate Overview

Swedish Match manufactures smokeless tobacco products (under its Red Man brand), machine-made cigars, matches, lighters, razors, batteries, light bulbs and tooth picks. Its products are sold in more than 100 countries.

Industry Food, Beverage & Tobacco

Headquarters Stockholm, Sweden

Revenue $1.62B

Employees 4395

From Inputs to Outputs: How Swedish Match IT Increased Discretionary Spend 20-Fold

Challenge: Competition Drives Transformation Swedish Match traces its corporate roots back 100 years, to the merger of a tobacco monopoly created by the Swedish state years ago and a match manufacturing company. After a century of acquisitions, divestitures (including a brief stint with Volvo as part-owner), this former monopoly faces a changing landscape with more global competitors and shrinking profit margins. As part of an organic growth strategy to deliver on its vision of “a world without cigarettes”, the traditionally slow-moving culture wants to rapidly create market leverage by exploiting technology, such as enabling a direct sales model in Scandinavia.

To accelerate this business strategy, new IT leadership was brought in to transform what had been mostly regional IT outsourcing arrangements into a central shared IT services function. In 2010 the company tapped Johan Wirf, former head of IT strategy and transformation for Sweden at Accenture, to be its new CIO for Group IT. Wirf brought an influx of new talent to IT in order to create the new group. Together, they would need answer fundamental questions with the business: What services do we provide to the business? How do we operate them? What should the service portfolio be to generate more shareholder value?

From Inputs to Outputs: Shaping the Business Conversation A cornerstone of Wirf’s strategy is to keep the business conversation focused on outputs: what IT’s services are doing to create shareholder value, and avoid distractions about inputs: the technical ingredients that make up service operation and cost. “If you look at any company, generically, you would first probably talk about what they deliver,” Wirf observes. “In IT, you don't. You talk about inputs. How could you have a relevant discussion if you talk about inputs?” Wirf’s focus on outputs with the business needed to be complemented by an understanding on what inputs would most effectively deliver the outputs. To manage the financial part of that equation Wirf tapped former Accenture colleague Tobias Altehed as acting CFO of Group IT. Altehed adds, “We would like to talk to the business about the value that IT services provide to the customers of those services, rather than talk about what is going into them. We focus on what you can do with the services, the quality they have, rather than too many details about their cost, if they're driven by licenses or internal personnel or vendor contracts.”

Shaping the Service Portfolio: a Framework for Shareholder Value Wirf and his team used a framework for the shareholder value of IT services outputs to restructure the service portfolio with the business. It would be a lens for making key decisions on which strategic and needed long-term investment plans where there were gaps in need of new services, and which existing services could be consolidated or retired. “Many business functions are blessed with the simplicity that their margins equals the shareholder value,” notes Wirf. Recognizing that IT is typically not set up to price its services above cost to

generate profit, the shareholder value framework (not necessarily hard measurement) helped shape business conversations on how to value the services in Group IT’s portfolio. “For example, with application services, value can be based on the cost of alternative ways of performing the application’s function, such as through manual labor or another provider,” Altehed explains. The resulting service portfolio is broken down into Developmental Services (projects to create or enhance services), Application Services (including ERP, BI, and CRM), Operational Services (managed workplace and collaboration) and Engagement & Governance (time from senior architects to develop roadmaps with business). Group IT functions as a service provider and broker to the business by presenting its own portfolio along with advice on tech trends, IT industry trends and SWOT analysis. “IT is providing strategic choices to the business,” Altehed says. “The business selects choices and prioritizes them, then they find budget, then they revise the choices. This is not the usual way which is budget first, now fit within the budget.”

Optimizing Inputs for More Outputs Wirf’s team also managed a financial transformation to dramatically increase funding for innovation while reducing operating costs more than 30%. Two key parts of this strategy: develop a consumption-based funding model based on service pricing to manage business demand, and develop a cost model to manage cost efficiency of inputs to those services. “From our perspective, the role of IT CFO is all about controlling the inputs,” says Altehed. If we have control of the inputs, we also have control of the outputs.”

Service Cost, Time & Pricing Model Understanding service costs is essential to managing services prices so that they properly fund IT, enable business relationship managers to answer customer questions, and create the right market efficiencies by relating units of chosen consumption to cost drivers. A key decision made up front about the pricing model was not to burden it with depreciation from capital investment. “We pushed depreciation out to the business units,” Wirf says. “Spend is where you can influence, depreciation is in the past.” “Our model consists of hours and money,” Wirf says. And combining those two with what gives us, for instance, the price of a service that we would like to charge to our customers. So we can say, "This service will cost you X million Krona for the next year.” With more than 50% of service costs coming from staff labor, a key input to service cost model is Group IT’s time-tracking system which everyone is required to use. By accounting for time, older services that might otherwise be assumed to be less expensive can be priced according to the extra maintenance they may require. “Low software license costs would seem to favor an outdated technology but in practice they can render more problems, more incidents, more maintenance hours,” said Wirf. “You don’t want to inadvertently offer discounts to the business on services that cost you more to deliver.” Among the questions Swedish Match answers with their cost model during annual planning: “What are the actual cost drivers for this service? How do we use that knowledge to determine what pricing model we use to charge our customers? We could also break it down in another direction talking about

the different technical components going into that service. Which of them are driving the increase or decrease in in service prices? Is it the infrastructure components with the databases, or the storage or the servers? Or is it the application layer with licenses that goes in there?”

Outgrowing Spreadsheets and Databases When they joined Swedish Match several years ago, there was no TBM Council. But with their backgrounds as IT strategy and transformation consultants, both Wirf and Altehed were already familiar with TBM concepts of using data on service cost and quality to drive decisions for business value. They made their service costing and pricing methodology central to their transformation, which eventually drove their homegrown tools to their natural limits. Says Wirf, “We thought that once we had thought out the methodology, we would be done. We built something on our own, to code the logic that we had thought out, but there are limitations to all technologies, and we ran into them, hard. That was not something that I expected.”

“Our model was quite advanced for its time. It used the best practices we could find out there. But it evolved to something that became unmanageable,” adds Altehed. The cost and pricing model was built using spreadsheets connected to an Access database. A four-week project to add application and asset data made it clear that the homegrown approach could not be sustained. Among the challenges they encountered: Delayed answers. “It could take weeks just to model one report,” Wirf remembers. “So the lead time in finding out answers to questions was not acceptable.” Difficult to find answers. “It was a bit difficult to drill down, and find out the figures and the answers that you wanted,” Altehed says. Multi-user conflicts. “Spreadsheets are not very good to work with in a distributed environment,” Altehed explains. “So one user at a time, it was possible to manipulate things in that spreadsheet, or it was possible to put in everyone's input into that spreadsheet.” Trust. “Spreadsheets are flexible, which can be good and bad,” Altehed says. “If people make mistakes or use different approaches that create discrepancies in reports, then the business cannot rely on them, and now there are debates about the costs instead of how to use the services for shareholder value.” Lost institutional knowledge. “After the one-off exercise to build the model, people left the company or their positions and knowledge about the inner workings was lost,” Altehed explains. Black box model: Added Wirf, “There was no transparency about the business logic of how costs were allocated. The logic got lost in the code.”

Looking for a Tool, Finding an Industry Wirf and Altehed examined the market for a solution. Their challenge was to preserve and build upon their approach and choices in their consumption-based financing model in a way that would be faster, more flexible, more trustworthy and more efficient to maintain. “So we were not out looking for a new best practice on how to work,” Altehed recounts. “We were out looking for a tool replacement. But what we found was a company that had started to form a community and industry around it.”

“We found that the industry being built up around Apptio is a great strength for its solution,” adds Altehed. “It reinforces that the Swedish Match way of working with services and consumption-based funding of those services is something that is spreading. It's moving away from something that is niche to something that's more best-practice. “One of the benefits we see with Apptio is that we can push out reports that multiple users can access at the same time, and drill down and slice to find the answer they need or understand services better,” Altehed says. “And we can control who can see what detail. For instance, we want the internal IT people to be able to break things down into spent hours and see how that is going up or down, but we do not want the business side to break it down into spent hours, because then we will run into that conversation that we do not want to have. We want them to be able to focus on the service cost and the service value.” After relying on largely ad hoc reports to answer questions as they arose, Wirf and Altehed now use Apptio to drive a predictable cadence and format for most reports. This means that time, energy and patience trying to understand what a report is meant to show is spent discussing what that quarter’s movements mean for the business. “Apptio is now an operationally critical system,” Wirf concludes. “To me, as CIO, I would say that technology business management is very fundamental. You can't be successful without it. I would even call it life-or-death.”

Transformation Results Operationalizing TBM for continuous improvement is key to achieving and demonstrating success with Wirf’s commitment to the company to “improve net efficiency by 2% each year from here until the end of time”. While early in their automation phase with Apptio, Wirf and Altehed have made impressive strides in their transformation with TBM methodologies. “Before I started the run-piece of the IT budget was 95%, with just 5% discretionary spend,” recalls Wirf. “Since our transformation began we have seen a reduction in the run spend of one third, and a 20-fold increase in discretionary spend which we’re using to build competitiveness and to innovate. In fact, we had our first patent filing this summer.”

Advice for Those Starting Their TBM Journeys In addition to focusing on service outputs with the business, Wirf and Altehed offer this advice for those beginning or considering their own TBM journey. Build around questions. “It’s important to have the outputs of your TBM program in your mind,” recommends Altehed. “What questions do you need to answer on a regular basis? What analysis do you need or want to do on a regular basis? By combining the answers to those questions with your structure, you will find a good model that you could work with that is sustainable for a long time.” Automate. “Use software to get the data, crunch the numbers, push out reports, run the process,” Wirf advises. “You need your team to spend their time on the analysis and commentaries that drior. Maecenas vestibulum mollis