The digital transformation requirements that the pandemic accelerated have had a profound impact on how businesses operate. According to a Gartner Board of Directors survey, 69% of directors cite the impact of the pandemic for a ramp up in spending on digital capabilities. Additionally, almost half of the respondents anticipate changing their organizations' business model as a result of the pandemic. With this increasing dependency on digital to improve operations and automation, spending on cloud migration, security, and employee collaboration will likely only continue to increase.
The shift to digital has also caused a necessary adjustment in thinking about IT spend. The mindset has gone from being viewed as costs to maintain and improve operations to a transformative investment in the digital infrastructure that provides the agility necessary to run day-to-day business and support overall business growth. IT stakes are higher than ever and IT investment needs to be viewed as a strategic spend, not as a line item on the P&L.
The fiscal year budget process may be behind you, but as you look ahead, thinking of technology spend as a once a year commitment may not be agile enough for the current rapidly evolving business environment. It’s important to revisit your budgets throughout the year. As conditions change and improve, a revised budget may need to be implemented to appropriately support digital infrastructure investments, including better connectivity and collaboration, increased bandwidth or an upgrade in network infrastructure. As cloud adoption and support for remote and hybrid work continues, the needs will continue to change and IT decision makers would need to build the business cases for funding to support new components of the stack, new applications and the related security solutions. With this in mind, it is more important than ever to continually re-examine your priorities with a focus on the long-term, not just what’s needed now, but what would position your organization for the future. Cost savings may be a necessity for many organizations but eliminating technology debt and outdated infrastructure can result in both managed costs as well as become an enablement factor for future value creation, to support a more comprehensive ROI analysis.
To support digital transformation, spending on cloud solutions has shifted from capital expenditures (CapEx) to operational expenses (OpEx) as cloud resources and/or SaaS solutions are typically offered as a consumption-based model unlike some traditional technology infrastructure investments. However, with the increased reliance on cloud-based applications, the benefits can accrue over a long-term period and as a result should be considered as a long-term investment for management decision making purposes.
Due to the rapid change in business models as well as the disruption and reinvention in processes, CIOs need to perform more investment modelling and analyses to project the resulting productivity improvements and cost savings in order to best support the investment case.
According to IDG’s 2021 State of the CIO report, 58% of CIOs have shifted from more functional and transformational leaders to business strategists largely focused on driving innovation in preparation for the future-state business ecosystems over the next 3 years.
The report also revealed that the pandemic continues to fuel technology adoption and IT leaders anticipate healthy tech budgets for 2021 – with 49% of IT leaders anticipating their tech budgets to increase. The technology initiatives that are expected to drive the most IT investment in 2021 are data/business analytics, security/risk management, enterprise applications (cloud-based), customer experience technologies, and AI/ML tools. Organizations are leveraging these technologies to drive business innovation, to address competitive threats and to prepare for the future-state of the overall business ecosystem. To better frame these strategic investment conversations, IT decision makers need to partner more with the lines of business and C-suite counterparts to identify, plan for and execute on the value-driven initiatives. This shift requires key budget stakeholders including CFOs and COOs to align on key technology investments and decisions. To get their buy-in, IT decision makers can leverage their technology vendors to become thought partners in supporting the cost saving opportunities and jointly building the ROI models.
From purely a financial value measurement perspective, the three main components of a business case would include the estimated cost savings, the expected revenue generated and the current value of future benefits. IT decision makers can leave the discounting of cash flows to the finance department, but should consider the historically low cost of financing, and capital in general, to further support the case to invest now. Budgets may be tight, but funding costs are low, resulting in much higher returns on long-term projects.
For many organizations and industries there is a necessity to minimize costs now. IT decision makers in those organizations should consider both the IT costs as well as the business process costs when building their business cases. In some instances, new technology can generate immediate IT cost savings. For example, using SD-WAN solutions to replace MPLS lines or adopting VoIP phone systems instead of using legacy phone lines. For others, technology costs may be higher but will be offset by the business savings through automation, removing redundancy and workarounds in manual processes. The business case for investment needs to be built around estimates of these process improvements and transformations. In addition to looking for ways to automate time-intensive processes, IT leaders can demonstrate cost savings in other areas in order to increase budget in the priority cost saving areas. For example, various studies show that organizations are now spending more on Network, Communications, Software & IT Services but certainly much less on servers, storage & hardware.
Despite cost pressures, many organizations remain focused on potential opportunities for increased revenue generation and new value creation opportunities. A recent IDG Quick Pulse study ranked cost improvement just a little ahead of enabling new digital business streams and products in terms of the business factors driving digital (69% vs 60% of respondents). Furthermore, about 70% of CIO’s are expected to contribute to business growth and new revenue generation (IDC State of the CIO). Such a revenue-growth focus requires multi-year projections and an investment mindset when building the business case. IT decision makers will need to work with their business peers to ideate, scope and define opportunities. In many of these cases, organizations can leverage their trusted technology providers to bring solutions to help foster potential cost-saving opportunities.
Investment in technology implementation is equally important as the investment itself. Technology is rarely the reason for IT projects failing but rather as a result of lack of investment in preparation, project management and implementation. Proven technology service providers with professional and managed services offerings can help organizations achieve value and thus help increase the project ROI for technology implementation projects.
The new business and technology environment that we are currently experiencing requires a change in mindset. CIOs and IT decision makers need to work together with the business and finance functions, think more strategically and long-term. They need to be agile and adjust investment and spending priorities on the go. IT spending needs to be viewed as much more than just a cost that needs to get approved by finance. This is an opportunity to rethink how to best support and enable your long-term business goals with technology at the forefront and become a true strategic leader in your organization.
The shift to digital business has caused a necessary adjustment in how we think about IT spend.