Every company’s technology situation has unique aspects, yet most companies share a common trait: No matter how much they spend on technology, executives are often disappointed with the results. This creates a tension similar to how Leo Tolstoy described families: “All happy families are alike; each unhappy family is unhappy in its own way.” And with technology spending expected to grow at 3.1% annually over the next five years, IT leaders feel intense pressure to deliver better results.
This is particularly true at companies embarking on broad digital transformations and searching for effective and efficient ways to self-fund the expansion of their digital capabilities.
How companies achieve cost savings and long-term sustainability depends on their starting point. We find that most IT organizations fall into one of three types: neglected, indebted or gold-plated.
Neglected. Some companies spend only enough on technology to maintain current operations and fix problems. Their executives tend to view technology as little more than a cost center. One oil and gas company, for instance, had grown rapidly while making only limited investments in technology for basic operational needs. When the company acquired a business almost twice its size, it found that its existing systems and infrastructure would not scale up to support growth expectations and capture the anticipated synergies. The technology staff was stretched thin, had large gaps in capabilities and wasn’t up to the task of making difficult decisions about trade-offs. The challenge was determining where to prioritize investment.
Indebted. In industries where technology has suddenly become much more important, historically underfunded IT organizations may suddenly face big upticks in demand. They often struggle to keep up with the needs of the business and depend heavily on external contractors. This is now prevalent among retailers dealing with the rapid change brought on by online shopping. One national retailer that relied heavily on external providers, for instance, let its own capabilities stagnate. As the in-house technology teams fell further behind, it became more difficult to hire top talent. The complexity of managing this labor pool, coupled with mounting technical debt, greatly reduced the efficiency of every dollar spent on technology.
Gold-plated. Poor governance and a failure to prioritize have led some IT organizations to overinvest in the wrong things, often chasing the new idea of the moment or failing to rationalize redundant systems. Gold-plating leads to unnecessary complexity caused by custom-made solutions, unchecked business demand or too many initiatives around the latest certifications and tools. A telecom provider was funding more than a dozen different billing systems because each business unit wanted a bespoke system to meet its specific needs. This kept costs high and made it harder for the company to invest in new functionality that it needed to integrate customer data and interfaces across the services it offered.
Three things to get right:
These three archetypes can be helpful as IT leaders think about where to focus their efforts in managing technology spending. Regardless of the starting point, IT leaders should ask three salient questions:
Do we invest in the right things? Too many executives simply look at cost when they should focus on the value of what they are buying. Demand for resources will always outpace supply, so executives need to make their spending as effective as possible.
Gold-plated organizations may have the hardest task as leaders will need to place limits on contractors and suppliers that may have run unchecked. Departments accustomed to feeding their own demands may need reining in by senior executives who can prioritize the top two or three companywide initiatives, then allocate budgets to lower levels, where teams can spend with some autonomy—and ample accountability.
Companies that have neglected IT may need to overspend for a while to bring their technology capabilities up to par as they put governance in place to balance new investment in basic infrastructure and services with investment in new business capabilities.
Do we execute effectively on our investments? Perhaps the most significant IT investment, especially for indebted IT organizations, is improving the organization’s capabilities, which can boost efficiency and effectiveness. Shifting to Agile development and focusing on outcomes rather than project milestones, for example, can yield savings of 20% to 35% by removing unnecessary work and overhead.
Gold-plated organizations, meanwhile, can root out bloat by tracking a set of everyday activities through the organization such as how a new environment gets provisioned or how application security handles access management.
In IT organizations that have not kept pace, a good first step is to take an inventory of capabilities to uncover strengths and weaknesses, which helps executives prioritize areas for investment.
Can we afford our investments? In gold-plated technology organizations, rationalizing the portfolio can help create a more effective function. One global financial services had multiple development environments that were overconfigured, with expensive software licenses and infrastructure designed for peak usage. The company moved to a cloud-based delivery model and reduced the number of environments, saving up to 15% on development costs.
Poor architecture raises the costs of operations and new development. For most companies, the solution lies in protecting some portion of discretionary spending for long-term housekeeping and the evolution of architecture, and not allowing the urgent impulse to build something quickly to overshadow the need to build it correctly. Neglected IT organizations should investigate the potential of nonproprietary, open-source software as well as cloud computing.
Efficient ways to reduce short-term costs without harming long-term prospects include rationalizing demand, seeking concessions from suppliers, and limiting work by contractors and other external support. Focusing on these opportunities while protecting top business priorities ensures a healthier and more stable IT function.
Read the full report: Neglected, indebted or gold-plated: Which type of IT do you have?
Written by Vishy Padmanabhan, a partner with Bain & Company in New York, and Will Poindexter, a partner in Chicago. They work with the firm’s Global IT practice. Follow @BainInsights on Twitter.
This article was written by Bain Insights from Forbes and was legally licensed through the NewsCred publisher network.