The Digital Cost Paradox
Digital transformation has multiple dimensions and challenges. One challenge is to find resources and funding for new digital initiatives in an era of continuous cost cutting. Looking at the IT organization, this cost challenge is particularly evident as the IT budget increase (1,0-1,8%, source Radar) in less than the general industry GNP growth. IT is generally granted less money to secure IT stability and productivity, and also to support business growth and innovation. The challenge of balancing the investment portfolio and budget is often in focus of IT Management.
A couple of year ago, Gartner did a survey to understand what characterized successful IT organization. They noticed that some IT departments enabled higher business profit growth, return on equity, business value and customer satisfaction than other IT organizations. They could even show a higher degree of cost efficiency! The conclusion was remarkable and showed that IT organizations focusing on “Customer Intimacy” (business IT interaction and value creation) performed better than those focusing on “Operational Excellence” (productivity and cost). In other words, IT organizations learning how to prioritize and create business value was more cost efficient than those only focusing on only cost efficiency. Cost efficiency is a result of effective prioritization – based on Business IT Interaction and value focus!
When studying the current IT environment, we see situations where “value” is excluded from the cost equation. For example, IT consultants and project managers are purchased from consultant brokers based on price only and not taking value contribution or experience into consideration. Afterwards, many complain about weak deliveries and wonder why their ecosystem does not support their innovation ambitions. It is an impossible equation, and in the end, it is about your purpose and meaning. How does the IT department create value to business? If you only focus on the money – you will get consultants and employees working for the money without any passion or heart to make you successful. If you pay peanuts – you will get monkeys!
Another example of this scenario is within System Integration. It is fascinating to see how companies spend a fortune on tailor made integration (using expensive consultants) when standardized platforms perform the same or better. The fact is that standardized platforms are 40-60% cheaper than custom made integration and also eliminates “break changes”. What we need to understand is that System Integration today is a hygiene factor in many organization with limited value adding. It need to work – be stable and productive. The actual value comes from how the data and information is used based on architecture, information management and decision making. It is more logical to spend money where it makes a difference (adds value) and reduce money where is has limited impact on business performance (for example: system integration). To learn what is value adding and non-value adding is a key success factor for companies embarking on the digital transformation journey.
A year ago, I had the opportunity to work with a global company to re-balance their investment portfolio. The company had approximately 35 different IT departments working in silos with own IT capabilities. We concluded that 80% of their IT capabilities did not contribute with value to their end customers (not willing to pay a premium price) and could be rationalised and harmonized with same level of quality but with a more efficient supplier. 20% of the capabilities added value and should have increased budget and investments. The focus on customer value and Business IT Interaction reduced the IT cost by 30-40% and enabled and funded the digital transformation journey. The secret is in understand the concept of value.
Recommendations:
- Understand what IT capabilities that create value to customers – and what does not. Work to rationalize “low value adding” IT capabilities and invest in “high value adding” IT capabilities.
- How can your IT organization be more business oriented and better at prioritizing from a business value perspective? Do you have a good business IT interaction and method of measuring the value IT delivers to business? This is a mind-set journey that need to be started with more business-oriented IT leadership and governance.
The Digital Transformation is much a personal journey challenging our traditional way of governing and steering. The “traditional” theories do no longer apply and many IT professional must improve their understanding of value creation and how each part of the IT organization supports business ambitions. The concept of value has many different meanings but, in the end, it is about managing expectation. What expectations does business have on the IT organization – and how is it perceived today? Those IT organizations that manage value (and not only cost) will be more successful in the digital transformation and more likely to survive the digital revolution.
