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Digital TransformationHow to disrupt yourself without rocking the

boat

Ken van Ierlant

E.U & THE NETHERLANDS ARE STALLING OUT WHEN IT COMESTO INNOVATION

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?

ALL ‘COMMODITY’ BUSINESSES FACE THE CHALLENGE OF INCREASING C/I RATIOS…ING EXPERIENCED A STRONG INCLINE IN THEIR COST/INCOME RATIO IN 2012. MR. HOMMEN CEO SAID 60% OF OUR CLIENTS HAS GONE MOBILE IN 6 MONTHS LEAVING € 1,5 BILLION IN INVESTMENTS IDLE

63,40%

75,70%

40%

45%

50%

55%

60%

65%

70%

75%

80%

4Q11 1Q12 2Q12 3Q12 4Q12

Underlying cost/income ratio (in %)

Cost/income ratio excl. market impacts & CVA/DVA

Cost/income ratio

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BigDutchCompaniesarebeingsandwiched

REGULATION DIGITAL

Flatrevenues Layoffs Executiveturnover Bigregulatory fines

... CONVENTIONAL RESPONSE, PROTECTING THE TOP-LINE IS NO LONGER POSSIBLE WHEN DISRUPTIVE MARKET CHANGE OCCURS... AND CONVENTIONAL (TIME AND CAPEX INTENSIVE!) TRANSFORMATION APPROACHES WON’T WORK ANYMORE DUE TO REQUIRED SPEED AND FINANCIAL CONSTRAINTS

Time

Today

Capex

Cost base

Revenue base

Cash flow

Company X manages a Legacy profit pool

A classic transformation program is announced, absorbing cash and resources

Disruptive market change occurs

... but financing capacity to fund the transformation is limited or absent

Price increases help boost short term profits ...

... while efficiency measures drive under-investment in the business ...

So the legacy profit pool evaporates rapidly and financial distress is close ...

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StrategyBusinessModelling

DirectorshipInnovation

EconomicmodelBalanceSheetReengineering

C/IratioimprovementIncentiveStructureReallignment

OperatingmodelITtransformation

PeopleBuilding

Risk&controlAgileOrganizationDesign

PredictiveRiskManagementCultureofIntegrity

Culture&DNA

THE DIGITAL VALUE CHAIN TRANSFORMATION EMPHASIZES ON A STEP CHANGE JOURNEY TO FREE UP WORKING CAPITAL BY REDUCING COSTS AND INCREASING REVENUE BY MAKINGTHE WHOLE MODEL FIT FOR THE DIGITAL CUSTOMER JOURNEY…

WHILE MORE AND MORE BUSINESSES ARE EXPERIENCING DISRUPTIVE MARKET CHANGES, CREATING THE NEED TO MOVE TO AN AGILE E2E BUSINESS MODEL, @ LEAN & FLEXIBLE COST STRUCTURES ...

Traditional operating models have high fixed costs and are asset heavy

New operating models are agile, and geared towards rapid adaptation ...Business model

Revenues

Cost structure

Assets

Transaction based Transaction based Subscription based

High fixed costs Flexible costs Flexible costs

HeavyTangibles

Intangibles Poor

Light

Rich (data!)

Averse

Rich (data!)

Customer propositionPurchase &Ownership

PurchaseOwn / Rent

Subscription &Usage “as a service”

“Ownership” “Usage”

DisruptionDisruptiondisrupts the disruptor

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Case study

Integrated customer journey designCustomer lifetime management

Data analytics & machine learningProduct development / R&D

“Vertical” (industry specific) SaaS

THE NEW “DIGITAL PROOF” OPERATING MODELS ARE GEARED TOWARDS HOMOGENOUS CUSTOMER INTERACTION ACROSS OMNI CHANNELS, RATHER THEN ORGANISATIONAL SILOES ...

Traditional operating models have high fixed costs and are asset heavy

New operating models are agile, and geared towards rapid adaptation ...Operating model

Stor

e

Con

tact

cen

ter

Web

App

Siloed functional departments

Siloed IT on premise (=capex!)

Sales & marketing organized per channel

Market / Customer

Master data managementIaas / PaaS / SaaS

ERP as a service

CRM as a service

Stor

e

Web

App

Cus

tom

er c

onta

ct c

ente

r

Func

tiona

l dep

artm

ents

Homogenous UX(physical + online)across channels

KPI’s aligned across channel

Opex lean & capex averse!

KPI”s per channel

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... ENABLED BY FULL REPLACEMENT OF OPERATIONAL AND IT LEGACY, BASED ON IT “AS A SERVICE”, I.E. CAPEX AVERSE. WITH THE MAJORITY OF PLAYERS BEING AMERICAN, IT INFURIATES THE DISCUSSION AROUND THE U.S. PATRIOT ACT

u From siloed IT legacy…. u .... to adoption of IT “as a Service”

Time

Com

plex

ity

Big Data

Social Media

• Static / siloed digital presence• Scattered landscape of legacy IT• Siloed customer databases• Capexed and outsourced IT• Much shadow IT

• Master customer data model• Real-time analytics & data mining• Straight-through transaction processing• Opex-driven IaaS/PaaS/SaaS-based front- and back office

technology architecture

Enabling Technology

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The advantages of SaaS• Reduces the financial risk of investing

upfront in IT projects• Improves cost structure• Allows IT to scale as needed• Reduces the cost structure and makes it

more flexible• Enables focus on the core and value

added business processes• Allows for rapid adaptation to new

functional requirements because new functionality can easily be opted-in and works smoothly with the entire stack

SaaS

PaaS

IaaS

Apps

... THE CONVENTIONAL PAVLOV RESPONSE; INVESTING HEAVILY IN ON PREMISE IT OR CONVENTIONAL OUTSOURCING, INDEPENDENT FROM DISRUPTIVE MARKET CHANGES ACTUALLY INCREASES THE C/I RATIO WHILE MAKING THE IT VULNERABLE TO CYBER BREACHES

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• Supply-based value proposition• Linear customer journeys• Limited range revenue models• Static pricing & rebate structures

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• Static /siloed digital presence• Scattered landscape of legacy IT• Siloed (customer) databases• Capexed and outsourced IT

• Siloed operating model• Classical E2E supply chain• Diverse functional departments• Capex & working capital rich

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2

Revenues

Costs

Capital base

C/I ratio

RoIC

Customer Experience

Target Operating

Model

Enabling technology

Traditional business response has a negative effect on the C/I ratio and RoIC

Source: PwC analysis, Forrester Research

Medium and long term effects

The risk of data breaches increases as well as the financial and reputational impact

46% of the security incidents were related to loss or theft.

15% of the security incidents were caused by internal abuse of information and rights.

12% of the incidents were caused by “unintended” actions which resulted in uncovering of confidential information.

75% of the higher management expect reputational damage because of data breaches

The EU is developing new legislation in order to increase the protection of personal information; the key points of the concept privacy regulation EU are:• 2%-5% or 100 million euro of the world wide revenue in case of

regulatory offence• Appoint an employee for data protection compulsory when

dealing with data of more than 5000 people per year

Source: PwC analysis, IBM cost of data breach study

DIGITAL VALUE CHAIN TRANSFORMATION: TAKING IT IN THE CLOUD END-TO-END, CAN ENHANCE CLIENTS COST LEADERSHIP WHILE BEING MORE AGILE TO ADAPT TO CHANGES

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Build an extra layer on the current IT infrastructure (High Capex and Opex)

Take the IT engine in the cloud end-to-end: Capex-reverse and pay-per-use (No Capex, Low

linear Opex)Illustration of expansion of legacy IT systems over time

Time

Com

plex

ity

Legacy IT systems hamper future growth as…

…concerns on compliance to regulations are increasingly present

…these systems are band-aided together and guarantee business silos

…maintenance and staffing costs are high and growing, leading to high and inflexible cost base

…limited functionality limits innovation and growth as lack of agility makes it impossible to meet demands of tomorrow’s client

Proprietary IT Cloud computing

- 80%

Capex• Capital invested in

hardware, software and infrastructure

Opex• Technical-, Functional- and

Application management• Development of new

applications• Inefficiency supply chainShadow IT (Capex/Opex)

Non-ITIT

Illustration of cost reduction by taking the IT in the cloud

The advantages of SaaS

• Reduces the financial risk of investing upfront in IT projects

• Improves cost structure• Allows IT to scale as needed• Enables focus on the core and value

added business processes• Allows for rapid adaptation to new

functional requirements because new functionality can easily be opted-in and works smoothly with the entire stack

FRO

M TO

High Capex, High Opex

No Capex, Low Opex

Take the IT engine in the cloud: Capex-reverseand pay-per-use

This results in a lower C/I ratio

SaaS

PaaS

IaaS

Apps

Redesign the on premise spaghetti to linguini in the cloud (High Opex)

…different vendors need to be checked with respect to compliance

…these systems still need tailored solutions to connect infrastructures of different vendors

…implementation and maintenance costs remain high, not reducing the cost base significantly

…limited functionality across vendors limits innovation and growth

SaaS

PaaS

IaaS

Apps

Implementing point solutions in the cloud does not lead to significant cost reduction and enhanced functionality as …

Illustration of taking IT infrastructure in the cloud with point solutions

DIGITAL VALUE CHANGE TRANSFORMATION AIMS AT RE-IMAGINING & TRANSFORMING BUSINESS ALONG A PROFITABLE PATHSILICON VALLEY LESSONS LEARNED: ONE NEEDS TO START EARLIER THEN ONE THINKS IS NEEDED

Time

Today ??

Capex

Cost base

Revenue base

Cash flow

Program reduces costs by significant change of operating model

Managed migration of revenue base

Operating model is capexaverseProtecting the

profit pool

Digital is a disruptor Businessre-imagined!

Digitization as a source of innovation and sustainable business transformation

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Medium and long term effect: Higher revenue base, lower costs and asset

light.

Transition period (short term effects)

Business 4.0

THE 4.0 DIGITAL ENTERPRISE IS CHARACTERIZED BY HAVING A LARGE VALUE COMPARED TO ITS ASSETS, REFERRED TO AS DIGITAL INTANGIBLE ASSETS (DIA) CREATED BY DATA.

WHAT WILL YOUR DIA (DIGITAL INTANGIBLE ASSETS) BE AFTER THE DIGITAL TRANSFORMATION?

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Good data management creates a large DIA and value…

813

40

90

Facebook Uber LinkedinAirbnb

Estimated net value of data-driven companies in billion USD

Source: PwC analysis

…the digital transformation, moving Capex to Opex and pay-per-use enables proper data management creating value and a high DIA

How much will your DIA be worth?