Rising economic uncertainty, following hot on the heels of the COVID pandemic, is leaving many organisations facing unprecedented pressures. Unsurprisingly, many senior executives are looking more closely than ever at how new technologies can open up fresh opportunities and lead to reduced operating costs.
In parallel, IT, like all other areas within the enterprise, is itself facing tough cost pressures. This is leading many CIOs to wrestle with the challenge of how to deliver transformation while still keeping the lights on 24/7.
Get the basics right first
‘Digital transformation’ is a much over used phrase. It’s really just the most recent stage of a continual technological development since the 1960s, of new ways of creating value for the business.
In reality, things are more complex today because you have to work with the systems already in place. Legacy systems are frequently a major source of cost and complexity, and it can be a huge challenge balancing the needs of supporting legacy systems with the competing needs of funding the future.
Decisions around funding transformation initiatives should be based on facts and data. A good starting place is:
- What are others doing in this space?
- Have you fully optimised in all areas?
- How much should you spend on transformation?
You should be acutely aware of the cost of complexity. Technological complexity can be insidious: sometimes you consciously introduce innovative technologies as part of a defined strategy, but all too often complexity escalates slowly and unnoticed, with new services and platforms being introduced while the older services and platforms they supposedly replace are never fully retired. Complexity drives costs up, and needless complexity drives costs up unnecessarily.
You don’t want to build your new future on foundations of sand; if you have overly complex architecture, you don’t want to build further unnecessary complexity, making it even more expensive to run. Being able to quantify the impact of complexity in financial terms allows you to make better decisions.
How much of your budget should you allocate to transformation?
There are three broad buckets in every budget:
- Running the business (day to day operations)
- Growing the business (enhancing what’s already working)
- Transforming the business (the truly innovative stuff that takes you into new areas)
The proportions in each bucket depend on two things: industry sector (for example financial services generally spend significantly more on IT than manufacturing) and appetite for change
Organisations broadly fall into one of four categories when it comes to appetite for change:
- Early adopters (who will spend more on transforming the business)
- Fast followers (who will spend on proven technologies and solutions)
- Majority (who will spend when they see their competitors moving in a given direction)
- Laggards (who spend as little as possible and nothing on innovation)
Although the exact proportions are unique to an organisation, we do have some averages from working with a diverse range of clients. We’ve found that if you take all industries, and all categories of companies; typically they will allocate their budgets in the following way;
- Run – 65%
- Grow – 25%
- Transform – 10%
Of course, what’s innovative today may simply be a cost of business tomorrow (just look at the introduction of store loyalty cards). Over time, innovative initiatives slide down the value chain as everyone else plays catch-up, until today’s innovation becomes tomorrow’s must have essential.
The importance of quantifying the different sources of value that IT delivers to the organisation
The current economic climate directly fuels the corporate tension between funding new digital initiatives and the necessity of cost controls. For CIOs, the ability to demonstrate they’re maximising the value delivered from the current IT spend is an essential component of their own credibility with the CEO and CFO. Unfortunately, that’s not always a straightforward task.
IT delivers value to the organisation through the services it delivers, and different types of services deliver different types of value. You can think of the different types of value using the same run/grow/transform concept mentioned above:
Run is all about doing things efficiently. Services in this category need to be reliable and meet availability needs, but there is no additional value to be created in over engineering these services (nobody buys your product because you have an amazing HR system!).
Grow is about enhancing business services, and value here is created through things like additional automation and improved business processes. Investing in grow initiatives should result in some form of bottom-line improvement in the business. If it doesn’t, it’s not a grow initiative.
Transform is the place where truly innovative work is done. Here value is created by doing things your competitors aren’t: new channels to consumers, new business solutions that offer a potential paradigm shift in the marketplace, or other activities that offer the prospect of a major advancement over your competition. Innovation is, by definition, doing something that hasn’t been done before, and so by its very nature it’s riskier compared to run and grow activities. As a result, even the most ardent of early adopters tend to spend relatively cautiously in this space.
So how do you fund digital transformation?
We always start by looking at whether you’re spending the right amount on running and growing the business.
There’s no value in over engineering the basics, so how much are you spending on run and grow? You’re aiming for cost efficient, effective, but not over engineered.
Almost all your competitors will have very similar run and grow capabilities – it’s typically the innovation that distinguishes you from them – and so we can use our benchmark and market data resources to compare our clients to their competitors and also to other similar organisations using the same types of technology. Using gap analysis we can identify where they could optimise, and we can also quantify how much they could save which is then candidate money for injection into the transformation part of the budget.
So you get a bigger value return on the pounds spent.
For example, one of our clients (a large UK company) found themselves in a situation where their running costs were just huge, and out of all proportion to competitors in their industry. They’d taken poor decisions in the past around the way they’d implemented software, and the software company in question had a very complex way of charging for software in virtualised environments, which hadn’t been fully understood by our client. As a result, they were paying many, many times more than they would have been paying if they’d gone about it in a smarter way, and a huge amount of money was being wasted every year. While the remediation work itself required investment, it paid for itself within the year and resulted in significant savings in all future years.
Through helping them understand why they did it in that way, and how much they could save if they did it in a smarter way, we helped them right size their budget and free up money to invest in transformation.
Gauging the transform budget is more complex and requires a different approach. It will depend on a number of factors, including the degree of innovation (have others been there before?), the underlying technologies involved (do you have experience of them already, or are they new to you?) and the speed of the transformation (are you an experienced Agile shop and do you have the capabilities required already available?).
All of these factors can be calibrated, and for many there will also be comparators available. By triangulating these factors – plus a few others – we can provide a range of likely costs for this area of the budget.
By comparing the likely transformation spend to the potential savings available through optimisation of the run and grow segments, the delta can be quantified and then considered against the potential benefits as part of a formal business case.
Having a fact-based business case built on hard market data is a powerful lever for enacting positive change, and when that’s allied to a detailed optimisation case that illustrates the value delivered by current investments, it positions the IT organisation well for substantive discussions with the CFO and CEO.