Company profile and business context

Philips was founded in Eindhoven (Netherlands) in 1891 by Frederik and Gerard Philips to "manufacture incandescent lamps and other electrical products."Still headquartered in the Netherlands, Philips posted 2012 sales of EUR 24.8 billion and employs approximately 118,000 people and operates in more than 100 countries.Philips of is a highly diversified health and wellness company, delivering products and services across three main groups: Healthcare, Consumer Lifestyle and Lighting.The company has received product design and corporate sustainability awards throughout the years and one stated goal that currently motivates much of their resource allocation decisions is to improve the lives of 3 billion people a year by 2025.

Remaining a market leader in so many areas while staying in tune with customer demands and minimizing operating expenses was complex. Philips CEO Frans van Houten declared, "Lifestyle entertainment is a good business but its portfolio is rapidly changing. Sales of traditional products are going down, and we are working hard to bring out new products."While at the same time profits were exceeding some analysts' estimates based upon cost-cutting measures.Philips leadership recognized that keeping up with rapid change in such diverse market spaces requires an agile organization with information systems that enable business objectives and not constrain business change, capacity, or continuity. In other words, to have an agile business operating model required an agile IT operating model.

Past IT Governance and Sourcing

Prior to 2010 IT governance and sourcing followed an operating model typical of other large, diversified companies.Business units provided their input to IT staff throughout the company regarding what they needed in terms of information systems requirements. Project management professionals guided the design, development, and deployment efforts to address local concerns.When systems implementation delays occurred business units escalated complaints up the IT chain of command - and the most influential executives championed their particular projects to completion. When conflicts for IT resources occurred business seniority would at times trump business strategy.Some business units expressed concerns regarding how IT-related costs were allocated.Rates for IT services were not standardized across the company and some leaders felt that IT resources were not aligned precisely enough to emerging business priorities.Since IT costs were not transparent, IT executives at Philips were not well-positioned to defend their resource allocation decisions against such complaints.

In terms of managing IT projects, many projects lacked a formal business plan detailing the benefits and costs for implementation and ongoing support. Therefore, prioritizing resources and timelines across projects was challenging.This challenge was amplified by changes in regulations, competitive conditions, and consumer values.Not only was Philips facing a dynamic environment in terms of keeping societies healthy and happy, the criteria for personal "healthy" and lifestyle "happy" seemed to be changing also.Extensive requirements gathering for IT projects resulted in not only longer implementation waits times for business units, but also increased the likelihood of project failure due to changing demands and scope creep.

A diversity of solution approaches also produced complexity in the IT architecture.IT professionals were divided across business units and differed in their IT solution approaches depending upon which of the three business groups (Healthcare, Lifestyle, or Lighting) they serviced. This included different ways of outsourcing IT design and development.In some instances outsourcing contracts were structured in a way that external service providers did not "share the pain or gain" of project performance.Differences in IT service delivery resulted in IT architecture standards differing throughout the enterprise.This complicated IT support, and made the role of many IT professionals at Philips feel more like EMTs (emergency medical technicians) than enablers of strategic objectives.

The negative impact to business outcomes was more severe.As a result of this approach to IT governance direct and opportunities costs were high - IT projects that should have been terminated were allowed to continue, and projects that should have funded and prioritized were not. This approach to IT decision-making and accountability did not bode well for maximizing the potential of two trends on which Philips was planning to capitalize - open innovation and user-centric innovation. Open innovation represents a trend toward crowdsourcing ideation for new product development.Not only did Philips need information systems to more effectively and efficiently engage entities with which they traditionally interacted like research institutes and universities. They also need an IT architecture that would help them better engage "the crowd" throughefforts like Open Innovation hackathons and the SimplyInnovate programwhere Philips research and development professionals receive ideas from the public, investigate the possibility of bringing those ideas to market, and responding back to the would-be inventor - all within six weeks.User-centric innovation represents a trend to make use of big data made available through the Internet of things.Given the multitude of devices Philips has in use globally, being in a position to collect, use, and maintain data from those devices would assist Philips in not only designing superior devices, but also position Philips to better understand their customers.

Recognizing that this old approach to IT-related decision-making and accountability was not sustainable given these diverse and dynamic market forces, a new approach to IT governance and sourcing was initiated in 2011.

Accelerate!

The new approach was titled "Accelerate!" and is a comprehensive multi-year change and performance improvement program designed to transform Philips across the enterprise and enable a culture of entrepreneurial decision-making and strategically-aligned accountability.Accelerate also sought to achieve multiple business objectives including simplifying business operations, tightening customer focus, and increasing the speed and excellence of both open and organic innovation.On the business side, the initiative aimed to make an agile, entrepreneurial and innovative company that delivered high-impact, locally relevant solutions to customers. At the same time, cost efficiency needed to be at least in line with that of their competitors. On the IT side, Philips IT governance would now be more strategic - with IT enablement "woven into the fabric of the business."

To provide a more structured approach to meeting business needs, the demands for information system resources were divided up into three categories - strategic, tactical and operational.Strategic demand reflected the highest degree of change - business transformation.Tactical demand reflected new business requirements for changes, enhancements and roll-outs.Operational demand reflected day-to-day requirements for standard, existing IT services (end user devices, collaboration tools etc.) and issue/incident resolution.

To meet these demands a new IT operating model was initiated that broke out the role of IT professionals at Philips into four categories: IT Portfolio management, IT architecture, IT Delivery, and IT Operations.

IT Portfolio Management Group

IT Portfolio management resources guided enterprise-wide and strategic IT initiatives.To improve the allocation of IT resources, IT portfolio management prioritized projects across the company based upon business case justification, business unit readiness to execute the change, and IT unit readiness to execute the change.Project funding was halted if the risk-adjusted return on investment was not high enough, the IT resources were not ready, or the business unit resources were not ready.This approach presented "input" and "output" challenges. On the one hand project management and decision support systems had to be put in place and routinely updated in order to provide business units the access they needed to the total cost of ownership for IT services. On the other hand it also meant that pet projects supported by individual business executives no longer survived since accountability was significantly increased.By implementing portfolio management, two important and typically controversial issues were addressed.First, decommissioning of legacy systems that no longer provided sufficient value in relationship to their total cost of ownership. Second, since visibility of the total cost of ownership for IT resources improved, costs could now be allocated on a consumption basis.The more a business program needed IT resources the more they paid.Business units could also elect different levels of IT operations service (gold, silver, and bronze levels) based upon what they perceived were their needs for ongoing system and service quality.

IT Architecture group

IT architecture resources were responsible for identifying and managing "reusable" IT components for business platforms and enabling platforms.Business platforms addressed particular needs of end-to-end processes at Philips. These processes were Idea-to-Market, Market-to-Order, and Order-to-Cash.Enabling platforms were more general IT components that addressed requirements like data integration (including with external partners and customers), data visualization, information security, collaboration, and connectedness.

The IT architecture itself (technology components) at Philips was vast and varied.It included ERP (Enterprise Resource Planning), SCM (Supply Chain Management), PLM (Product Lifecycle Management), and CRM (Customer Relationship Management) systems.For example, the CRM system needs to be configured at the local level and implementations were occurring (on average) more than one market per month.In addition, mobile applications deployments were becoming increasingly popular as employees needed decision-support information in the field. Even knowledge repositories for solution and project lessons learned were being built and maintained through Microsoft SharePoint portals.

As new IT components were needed, the IT architecture professionals would determine whether to buy-or-build (i.e., how to acquire) and guide the contracting process for new IT architecture components. CIO of Philips Healthcare, Steve Olive indicated that sourcing is a significant piece of the new IT Operating Model. Major ongoing IT service contracts with providers like Cognizant and Wipro have resulted in decreased costs and more targeted deployment of Philips resources as outsourced tasks addressed more general IT .These contracts used an output-based pricing model.IT outsourcing now positioned Philips to increase operating leverage (variable cost structure), drive structural savings, and free up internal resources to create higher value business capabilities. Commenting on one provider's role in enabling the Accelerate initiative, Jeroen Tas, Global Chief Information Officer at Philips stated outsourcing, "will allow us to leverage its extensive consulting, domain, and technology capabilities for the business transformation program."

IT Delivery Group

IT Delivery resources managed the implementation of solutions to address tactical demands (i.e., software development and project management). Using agile project management methods (in particular the scrum approach), IT Delivery resources executed faster-paced projects, while maintaining control over scope and systems quality.Separate project initiation, execution, and closure documents were all part of an overall effort to improve the quality of project management at Philips. Part of this approach aimed at reducing the requirements gathering cycle by prototyping (sandboxing) and putting configuration capabilities in place in order to glean more precise business needs overtime (instead of attempting to anticipate long term business needs and take extensive time to build larger scale systems).To speed project cycles and simplify the IT architecture, software application coding reuse was growing in importance.Overtime, the IT Delivery resources expected to custom-build solutions less and less frequently.This while "new development" increased in relation to overall importance.New end-to-end projects were estimated to scale up to cover over 40% of sales (up from around 20% in 2012).Lastly, IT Delivery resources were also available (dedicated) to provide production support as a second-line-of-defense if IT Operations were not able to address a particular problem.

IT Operations Group

IT Operations provided for the robust availability and performance of the full range of information systems in ongoing use at Philips.Extensive service level agreements (SLAs) were created and updated for different types of servicing - including Help Desk, device deployment, collaboration tool deployment).The performance criteria in the SLAs were in part driven by corporate standards for service excellence, and in part driven by the service level paid for by the business unit (gold, silver, bronze).

To partner IT resources with business units, multidisciplinary teams were formed for all three types of demand and involved c-suite business executives, market sector and functional (core business processes) leadership, and line management.Multiple steering committees were established in alignment with the types of demand.The Strategic IT Steering committee addressed strategic demand efforts with IT Portfolio Management, IT Architecture and IT Delivery.The IT Steering committees addressed tactical demand efforts with IT Architecture and IT Delivery.The operation level did not have a steering committee per se, but multi-disciplinary teams also existed for this type of demand.A key distinction with the new approach was the introduction of business process owners (BPOs).The BPOs were business unit leaders who were charged with overseeing business and IT outcomes for their respective end-to-end process (Idea-to-Market, Market-to-Order, and Order-to-Cash).

The results across the enterprise suggest the Accelerate effort produced as expected.Though not all benefits were directly attributable to IT operating model changes, it was commonly viewed at Philips that IT-enablement was critical to the successes of the overall Accelerate effort.Olive described IT as"advancing digital capabilities as our beacon or North Star."

In support of their product-related goals, freeing up resources from other efforts, Philips reinforced its commitment to innovation by increasing health-related research & development from EUR 1.6 billion (7.1% of sales) in 2011 to EUR 1.8 billion (7.3% of total sales) in 2012. In support of customer-related goals, Philips intensified its focus on addressing local issues and touched the lives of 1.7 billion people in 2012.The company was recognized externally as well for their branding and sustainability efforts. They were named a "Supersector leader" in the Dow Jones Sustainability Index for the second consecutive year and in the annual Interbrand ranking of the Top 100 global brands their brand valuation reached a record performance level.For operations-related goals, Philips achieved a noticeable improvement in employee engagement (based upon internal surveys) from 2009 to 2012.Their cost reduction efforts - aimed specifically at reducing overhead and support costs - delivered (ahead of targets) a cumulative savings of EUR 471 million in 2012.This outcome was coupled with sales growth and higher productivity of non-manufacturing resources.

Succeeding in the Transformation Economy

However, social, economic, and technological change would put pressure once again on the IT operating model for Philips.As part of market analysis involving social and technological advancement, Philips leadership identified global forces affecting macro-economic trends for how businesses would be successful in the future.The current and unfolding economy-type, knowledge economy, required companies to use social technology to better engage customers - providing them a voice in product design and development efforts.In addition, more effectively and efficiently engaging other stakeholders (beyond investors) became more critical.For example, in 2008 Philips began publishing a more integrated annual report that aligned with "triple bottom line" metrics of profit (financial), people (social), and planet (environmental) performance indicators.

Philips believed that the next type of economy would be seen as a "transformation economy" where global companies would need to leverage cooperation at local levels, across the value chain, to effectively and efficiently solve local and global problems. To be competitive, companies would be forced to communicate, coordinate and cooperate internally and externally like never before.Whereas information systems in the knowledge economy would help enhance Philips' ability to maximize participation, in the transformation economy information systems would have to help enhance Philips' ability to maximize problem solving.Therefore, IT governance and sourcing needed to not only be responsive to more localized needs, it also needed to be efficient in applying lessons learned from a solution in one business unit or region to problems faced in other units or regions.In addition, the transformation economy would demand more coordination across the value chain - including external resources.External service providers were already viewed as key players in delivering IT solutions,but aligning incentives between Philips and its business partners would be even more critical in the future as competitive advantage would no longer be reserved to company-versus-company but business network-versus-business network.

How is the IT Operating Model positioning Philips to be successful in the "transformation economy" where collaboration across business partners, customers, and local communities becomes even more critical?IT governance internally seemed to be achieving the goals expected by senior leaders.How might IT governance and sourcing need to change at Philips in order to better orchestrate the prioritization, design, delivery, and support of IT-enabled transformation going forward?

Olive reflected while looking ahead, "Business strategies are no longer 10-year outlooks; they are comprised of much shorter, overlapping cycles based on rapidly changing trends and determined by tremendous real-time data. Sales metrics once assessed annually, then quarterly, then monthly, then weekly are now hourly.This reduction also applies to geographic data. We thrive on data, bring it on! We're able to avoid 'objects' coming at us in the marketplace and also capitalize on innovation for continuous improvements in business performance that ultimately allow us to expand reach and improve the health and well-being of people globally."

Case Questions:

1.Describe the new IT Governance approach since Accelerate implementation.Include both project management and portfolio management decision-making and accountability.

4.Explain what changes in IT governance and sourcing might be required going forward in order to address the communication, coordination, and cooperation challenges posed by the "Transformation Economy."