Collaboration between business units key to IT cost-optimisation in 2017
In 2016, digitalisation is no longer a trend, but a core competency. As we head into 2017 knee-deep in the digital business era, Chief Information Officers (CIOs) in Australia have to identify how best to exploit technology to maximise the efficacy and efficiency of business processes, decrease operational costs, improve customer experience, grow revenue, and create additional revenue streams -- all the while staying within a budget.
According to a recent study by Gartner, funding and budgets have been identified globally as the second biggest hindrance to CIOs achieving their objectives, the biggest being talent gaps. Research by Telsyte, on the other hand, shows 75 percent of IT budgets in Australia are spent on operations and transformation programs, with 25 percent left for innovation.
In Australia, IT budgets have been relatively consistent, with Gartner expecting spending to reach almost AU$80 billion by the end of 2016, a 2.5 percent increase from last year when reported in local currency. However, the analyst firm said the problem with IT budgets is that they are growing disproportionately to digital transformation demands, forcing CIOs to identify ways to reduce the run costs of IT.
Most CIOs will admit they aren't financial experts. Their focus, as leaders of digital transformation and innovation, is to use technology to drive the business forward. Figuring out how best to optimise costs in the process is not a task CIOs speak fondly of. However, CIOs are no longer just operation enablers within their organisation; they're considered strategic business partners who have the shared responsibility to contribute to cost efficiencies within the organisation. This includes ensuring return on investment and the allocation of IT budgets are done to maximise results for the business as a whole and not for individual projects.
As 2017 rears closer, ZDNet spoke to a number of seasoned IT experts on how best to approach budget battles in the year to come.
BENCHMARKING YOUR IT BUDGET
The first task of the CIO is to benchmark his or her company's IT budget, according to Frederic Giron, research director and vice president of research and advisory firm Forrester.
He told ZDNet that to do this, CIOs need to compare their companies' IT and maintenance budgets as a percentage of its revenues to peers in the industry.
"Understand the risks and benefits; if your metrics are below benchmarks, the risk is that you are under-investing in critical technologies; the benefit is that you may have been really good in managing your tech costs," Giron said.
"If your metrics are above benchmarks, the risk is that you are carrying unnecessary tech costs; the benefit is that you have better technology systems than competitors."
While there is no "right" amount of investment in IT, with budgets varying across companies and industries, one thing is clear: digitalisation is critical to keeping the organisation relevant in a rapidly changing landscape.
Jane Livesey, Managing Director for Technology at Accenture, said technology is "omnipresent" and "embedded into absolutely everything we do today in a business, both within and outside the IT organisation."
"Too little investment in IT inhibits the ability for organisations to develop, conceptualise and deliver new products and services within the market, ultimately risking an organisation's market competitiveness and ability to harness customer satisfaction," she said.
According to Giron, the only way to compete is to become a digital business that continuously leverages digital technologies to create new sources of value and innovation to customers and brings more agility into the operational activities involved in servicing those customers.
"Not investing in such technologies will mean that digital leaders will be able to win, serve, and retain your customers, and put you out of business," he added.
Giron also noted that innovation isn't just about creating a new app, implementing big data technologies, or rolling out a new IoT pilot.
"This business-led, technology-enabled transformation has massive implications for the CIO and his/her team in terms of culture, organisation, skills, processes, technology, and metrics," Giron said.
"They need to operate a transformation that is customer-led, insights-driven, fast, and connected with the company's internal and external ecosystems in one cohesive move. In this transformation, the speed of change will separate the winners from the losers."
REDUCING OPERATIONAL EXPENSES TO INCREASE INNOVATION BUDGET
However, managing existing applications while delivering new and innovative services remains a significant challenge for CIOs, especially because budgets aren't keeping up with growth and transformative demands from business departments.
John Roberts, VP and analyst at Gartner Australasia, told ZDNet that IT budgets in Australia are only increasing incrementally -- about 2 to 3 percent on average per year.
"There is more demand for IT services than supply and budgets allow. There's also the continual governance challenge of deciding what are the most important priorities for an organisation. It tends to become more critical when there are external financial pressures -- we all know economic downturns come in cycles," said Roberts.
According to a recent study by specialist recruiter Robert Half, 32 percent of CIOs and CTOs in Australia identified a lack of technology investment and resources as their biggest challenge when developing and executing strategic initiatives.
While innovation is high on the agenda, the study found that CIOs spend on average 56 percent of their time on day-to-day operational activities. The remaining 44 percent is spent on developing and managing strategic initiatives aimed at business innovation and growth.
Gartner's research found that around 70 percent of IT budgets in Australia is spent on managing operations, while 30 percent is spent on projects aimed at growing and transforming the business, according to Roberts. These numbers are similar to Telsyte's research which found that 75 percent of IT budgets are being spent on operations, with only 25 percent left for innovation.
At a time when IT budgets are growing disproportionately to innovation demands, one way to maximise return on investment is by identifying ways to reduce operational expenses and reallocate funds to more expensive projects aimed at accelerating growth.
"There is a real thought and attitude change aligned to doing more with less. This is where developments such as automation and artificial intelligence can provide the pathway to more cost-effective delivery methods," said Livesey.
William Confalonieri, CIO at Deakin University, told ZDNet that while budgets have been relatively stable at the educational institution, "optimisation and automation on the operational side of things has allowed [Deakin] to significantly increase funding for the most disruptive, innovative part of the [institution]."
Roberts said IT budgets typically represent between 3 and 4 percent of a company's total expenditure, but it's the other 96 to 97 percent that CIOs need to consider more carefully when it comes to cost-optimisation activities.
"Don't just focus on optimising your 3 or 4 percent because the business value of IT comes in driving improvements in the other 96 or 97 percent," said Roberts.
"Everybody can see how much IT costs, but the value of IT becomes embedded in the way the business, as a whole, works."
Kate Carruthers, Chief Data Officer at the University of New South Wales, pointed out "there are no IT projects; they are all business projects."
"A lot of organisations are splitting out innovation from their IT department and business as usual. But it is the role of the IT leadership to balance spend between business as usual and innovation within their own sphere."
Roberts said it's often difficult for CIOs to demonstrate the value of innovation initiatives to CEOs and CFOs because "everyone knows how to cheat at business cases".
"All we have to do is agree between us that this million dollar investment will save $10 per purchase order. So if it's costing us $50 per purchase order to run this business activity, then we say this project is designed to cut that down to $40 or $30. Multiply the savings by 50,000 purchase orders and we've got a business case approved," said Roberts.
By focusing more on the 96 to 97 percent of business expenditure, CIOs will also be able to make a more compelling case for investing in more expensive projects because a portion of the costs saved in operations can be reallocated to innovation.
It's always important to keep in mind that every new investment needs to have a compelling business case behind it. Giron said CIOs need to ask themselves: "Will the technology we invest in win, serve, and retain customers?"
Livesey said CIOs should also "enhance their ability to provide deep analysis and recommendations on new tools and technologies which are emerging within their sectors and how they will impact their business models". Further to this, they need to be able to "clearly articulate how these tools and technologies can enable their business to deliver higher quality services in a more cost-effective manner."
COST-OPTIMISATION AS AN ONGOING, COLLABORATIVE PROCESS
At a Gartner symposium last year, Roberts surveyed the CIOs in the audience about how far they had progressed when it came to pursuing opportunities to optimise IT costs, and the audience said they'd progressed about 43 percent.
"In other words, when CIOs sit back and think about managing the budget and the opportunities that they have to optimise costs, they think that they're not even half done," said Roberts.
He added that CIOs tend to have a knee-jerk reaction when it comes to cutting costs.
"They think, 'What should we stop doing? What should we cancel? Can we terminate our contract workers? Can we put a hold on new projects?' That's the crisis approach to cutting costs. What we recommend to CIOs is that they always keep cost-optimisation in mind," Roberts said.
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"There needs to be a continual process of looking at all cost structures and looking at the changes that technology enables moving forward. One thing about technology that's guaranteed is it's going to continue to change, so one-off approaches tend to be sub-optimal compared to an ongoing discipline of managing the IT budget wisely."
Working in partnership with all business unit leaders within a company is critical to keeping costs down, according to Roberts. There is a tendency among business units to hand over technology-related responsibilities to the IT department, who then ends up being accountable for the expenditure of other business units within the company.
IT shouldn't be considered a separate entity, Roberts noted. He recalled a CEO client who was providing all business unit leaders in his company a digital innovation budget, thereby making them accountable for investments in technology relevant to their departments.
The total technology spend of an organisation needs to be managed across multiple divisions within the organisation, Roberts added.
"Digitalisation embraces every part of the organisation. A challenge [within organisations] is categorising what is and what is not [within the domain of] IT. But there is technology in every budget. What we need is a collaborative approach -- we need to be able to say: 'How can we manage all of this IT spend without duplication, redundancy, and waste?'," he said.
"When a department outside IT has a technology project, then the IT department may well provide resources into that project. For example, the project might need someone with security knowledge or someone who's a database expert. The project will also need input from the [relevant department] leaders so that the [outcomes of the project] are in line with the needs of the department."
Over time, new data captured as a result of new innovation will be integrated back into the business' core systems, Roberts pointed out.
"Things that start as innovative, over a number of years become a core part of the business, so they may well migrate into the IT budget as consolidation happens," he said.
Giron said the good news is that, from a technology perspective, it is never too late to start a digital transformation.
"[The] cost of technology has gone down massively over the past few years, driven by open source and cloud. This consequently dramatically reduced the risk of innovating. The main risk is embracing the status quo and not innovating."
Livesey agreed with this sentiment, saying "CIOs should not wait until renewal to action their initiatives. Through ensuring they are innovating (and automating) in parallel to cost-optimising, IT organisations can avoid operating in isolation from the wider business."
From a business perspective, however, Giron warned that "the cultural transformation [that's required for successful business transformation] will take years to bear fruits."
"So starting as soon as possible is absolutely critical," he advised.