Innovating to optimise: creating room in the IT budget for initiatives that boost business

Transcription

1 A report from The Economist Intelligence Unit Innovating to optimise: creating room in the IT budget for initiatives that boost business Sponsored by

2 Contents Preface Introduction 3 Spending to save, saving to spend 4 Innovation: a growing demand on IT 7 Optimisation: the right IT for the business 9 Conclusion 11 1

3 Preface Innovating to optimise: creating room in the IT budget for initiatives that boost business explores the challenges that today s informationtechnology departments face in directing resources to innovation at time of pressured IT budgets, increasing technology demands and an unrelenting pace of change. To find the money and time for innovations that pave the way to future business success, companies must get creative about optimising the core IT operations that traditionally account for two-thirds of IT spending. As the basis for this report, The Economist Intelligence Unit conducted a range of interviews with analysts, consultants and technology executives familiar with the financial, strategic and technology issues at hand. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. The author was Stephen Pritchard. Riva Richmond edited the report and Mike Kenny was responsible for the layout. We would like to thank all of the executives who participated, whether on record or anonymously, for their valuable insights. Interviewees: David Bradshaw, analyst at research firm IDC Paul Clarke, technology director at Ocado Jon Collins, author, analyst and principal consultant at Inter Orbis Scott Dillon, executive vice-president and head of technology infrastructure services at Wells Fargo Norm Fjeldheim, chief information officer at Qualcomm Rob Hornby, managing director for the IT practice at consultancy AlixPartners Bill Keyworth, analyst at research firm IDC Daniel Steeves, independent technology consultant 2

4 1 Introduction Innovation isn t a sprint but a marathon. Scott Dillon, executive vice-president and head of technology infrastructure services, Wells Fargo There is little doubt that the past few years have been a challenge across the business world, and that information-technology departments have been under pressure. Many companies have faced weaker demand and a squeeze on credit. And though profits have been strong for many, uncertainty about future prospects has led to cuts in discretionary and investment spending and IT has not been spared. The pace of business change, though, has not relented. Even during the downturn, companies continued to place more demands on IT departments as they engaged in merger-andacquisitions activity that required integration of acquired infrastructures and looked to remove risks from the supply chain, consolidate operations and even relocate manufacturing. Businesses have responded to tough times by striving to become more agile to both reduce waste and innovate more quickly. Increasing their agility has also entailed making IT more responsive to the business and the business more responsive to customers. Indeed, an agile IT department is one that stays ahead of business change and is in a position to drive it. Agility has also become important as demand for technology continues to expand. Even where businesses have cut back their operations, the proportion of tasks that rely on IT has continued to grow. Back-end business-process automation has gone hand in hand with growing use of personal devices and a greater emphasis on mobility some of it driven by a need to make workforces more efficient, some of it in response to exciting developments in consumer technology. Yet that growing demand for IT has not, broadly speaking, translated into larger IT budgets. Even allowing for the effects of the economic downturn, IT spending has fallen in real terms in many sectors. In some, such as banking, a new focus is on gaining value from information technology. This budgetary pressure has come at a time when the costs of running and managing legacy IT systems and keeping the lights on have risen, diverting funds from new initiatives that could support business objectives and, in some cases, reduce IT costs. During the downturn, some enterprises opted to let older systems run on rather than replace them, leading to unforeseen costs in maintenance and licences. Despite these challenges, businesses still need to innovate to take advantage of both new technologies and new ways of working and, ultimately, to stay ahead of their markets. Innovation isn t a sprint but a marathon. In general, we always want to look ahead two to three years in terms of technology, says Scott Dillon, executive vice-president and head of technology infrastructure services at Wells Fargo. As a business, we want to drive efficiency and increase time to market and scale. By optimising their core IT operations, which traditionally account for two thirds of IT spending, the best companies can and do find money and time for innovation. 3

5 2 Spending to save, saving to spend The ideal ratio of maintenance to innovation spending is often said to be 50:50. In many organisations, though, the ratio remains at 70:30 or 80:20. 4 IT has always had to focus on running core operational and business systems to keep the lights on alongside helping the business to develop and grow. But since the late 1990s, that responsibility has shifted, first, in response to expanded outsourcing and, more recently, because of the growth of cloud services. The remit of IT is changing. Increasingly, the IT department is focused more on purchasing and orchestrating services than on buying and running hardware and software. While that gives IT the scope to move away from day-to-day operations and should, in theory, reduce costs and increase agility, only a minority of companies have been able to turn those savings into new resources human and financial to support innovation. IT has also had to deal with the costs of the growing importance of technology to business. As IT has reached into more areas of operations, inevitably it has required more time, resources and money. Some IT departments will seek the management efficiencies that can come with standardisation and automation. Yet others will decide that the benefits of having specific technologies and platforms are worth the additional management effort. But either way, without astute management of the many systems that IT departments oversee, they cannot carve out resources to support innovation. In days gone by, IT was just given a 15% or even 20% savings [target] that it had to achieve, says Rob Hornby, managing director for the IT practice at consultancy AlixPartners. But now IT plays two roles in cost-cutting agendas: first, to cut what can be its own very large cost base and, second, to find savings elsewhere in the organisation, he says. IT has an interesting vantage point in that it sees business from an end-to-end perspective, and IT is in a good position to spot unnecessary inefficiency. I think it s in a good place to see where consolidation could happen and where it could be technologyenabled. Maintenance vs innovation Industry analysts argue that large firms typically spend too much on day-to-day IT operations and too little on innovation. Funds go to hardware, maintenance, licencing, IT operations and other overhead items, leaving too little for new projects. Yet it is those new projects that will ultimately deliver the most value to the organisation through improvements within IT or more widely in the business. The ideal ratio of maintenance to innovation spending is often said to be 50:50. In many organisations, though, the ratio remains stubbornly higher at 70:30 or 80:20. This starves the organisation of funds it needs to develop new capabilities and improve competitiveness. There s a pie chart of IT being 40% innovation and 60% keeping the lights on, says IT analyst and author Jon Collins. But this ratio would be common only among the best companies and, possibly,

6 IT should be a partner in the business and forcing the conversation around what can be done collectively to manage down the costs of IT and improve the value the business is getting out of it. Ben Taylor, IT specialist at consultancy Ernst & Young before the financial crisis. New developments in technology, especially related to cloud computing, can help companies find savings by allowing them to outsource non-core technology to service providers with specialists able to maintain systems that are important, but not business differentiators, more efficiently and less expensively because they have economies of scale. IT should be a partner in the business and forcing the conversation around what can be done collectively to manage down the costs of IT and improve the value the business is getting out of it, says Ben Taylor, an IT specialist at consultancy Ernst & Young. Yet locking in efficiency savings remains difficult. Legacy IT can be hard to decommission completely. Some businesses find that, even though they have moved users or applications to newer platforms, they are still paying for old platforms. Some CIOs report finding that entire systems remain online to support a single application, or just a handful of users. IT departments also find themselves managing and supporting a proliferation of systems, old and new, and a growing rather than shrinking IT estate. Moreover, large IT systems are not static. Over time, modifications, change requests, customisation and rewrites accumulate, causing the phenomenon of technical debt, or inefficiencies in IT that build up over time. Thus, an older IT system can be significantly more expensive to manage than a modern counterpart. There does seem to be a lot of money spent in areas that nobody sees any particular value in, and that balance needs to be restored, says Ron Tolido, chief technology officer for application services in continental Europe at CapGemini, a global consulting and technology outsourcing firm. Using innovation to cut costs Some IT innovation can, of course, directly reduce IT costs. This is especially the case where businesses face a growing IT-driven energy bill. In countries such as the UK, the Carbon Reduction Commitment (CRC) mandatory carbon emissions reduction scheme may also force businesses to reduce power consumption, driving them towards new technologies that advance their energy conservation agendas. Other areas of innovation, such as cloud computing, produce less clear-cut results. A move to cloud-based computing increases flexibility, but is no guaranteed cost-cutting measure. Renting IT infrastructure can cost more than outright ownership, especially for larger businesses that enjoy internal economies of scale. And the potential for savings falls further if moving to the cloud adds another layer of technology and complexity rather than replacing existing infrastructure. Using savings to fund innovation To lock in the benefits of new technology, businesses need a rigorous approach to switching off the old. Discipline is also required to harness those funds for investments in the new and to ensure that the subsequent savings are dedicated to innovation. We need to be efficient to support growth; growth in the business is more rapid than in my budget, says Norm Fjeldheim, CIO at Qualcomm, a US wireless-telecommunications company. We need innovation in IT to keep up with that. Mr Fjeldheim has been able to fund projects that have paid off handsomely. For example, Qualcomm s move to virtualisation cost $250,000 to get started. It became self-funded at $190,000. We stopped counting at $36m in savings. We avoided having to buy a new datacentre, he says. Pay-offs of this magnitude show how managing and optimising a company s existing technologies effectively can unlock significant funds for innovation. But successfully delivering large corporate IT projects also involve overcoming organisational inertia and sometimes an unwillingness to change, both within IT and the business. This may mean moving towards a service-based approach to IT, rather than one based on service-level agreements or broad-brush measures such as uptime. It can also mean asking corporate IT to take a different 5

7 approach to risk. To foster a climate of innovation, companies need to accept that some projects will fail. You need to know where you are trying to go. You need to be asking, is there a more clever way of doing this? says independent technology consultant Daniel Steeves. A strong case can be made for investing in new technologies or platforms that will bring more flexibility and, if managed well over the medium to longer term, significant cost savings. With a more positive investment climate in IT, as in business more widely, CIOs should be making the case that it pays to spend, in order to save especially through modernising the IT estate. We felt that the only way to deliver ongoing value to our customers was to have this tight relationship where both sides of the organisation had a seat at the same table to understand and solve for customer pain points and business challenges, says Mr Dillon of Wells Fargo. The old mindset of some companies that IT teams were the order takers has long been over at Wells Fargo. 6

8 3 Innovation: a growing demand on IT Businesses are succeeding in innovating, despite or perhaps because of the challenging business climate. 7 Efficient and reliable technology is essential to today s day-to-day business operations. But the focus among IT departments on maintaining core systems and on security, compliance and resilience, can conflict with a business need to innovate. In some cases, this conflict can manifest as direct restrictions on what the business can do, for instance, limits on employee use of mobile devices and bans on consumer cloud applications. In other cases, firms impose resource constraints: with IT spending such a large percentage of its budget on operations, funds may simply not be available to invest in new ventures. Or IT departments might take an overly conservative approach that might be viewed as holding the business back. This may lead to the growth of shadow IT, where the lines of business buy their own technology and bypass the IT department altogether. Often shadow IT is driven by a belief among lines-of-business leaders rightly or wrongly that they can innovate more quickly on their own than with IT support. IT-led standardisation can provide important efficiencies and, when managed well, aid innovation by making it easier to experiment and deploy new services. However, it can be seen as a direct barrier to innovation, if it unduly limits a business choice of devices, operating systems, applications or platforms. Nonetheless, businesses are succeeding in innovating, despite or perhaps because of the challenging business climate. Using data to get smarter Companies are only now starting to understand the potential of the vast quantities of information they hold and the vastly improved computing power for analysing them. Big data analysis offers the potential to build a much more accurate picture of customer demand, business activity and company operations and give a clearer view of what might happen in the future. Likewise, enterprises are only now starting to understand the potential of the instrumented organisation the use of smart buildings, supply chains and business processes to provide the organisation with more data and thus improve decision-making. As the UK online retailer Ocado has found, tying in data analysis, advanced modelling of its business processes and real-time connections from shoppers apps to the warehouse can transform the customer experience so much so that the company now provides its advanced supply chain and distribution technology to other supermarkets, most notably Morrisons. However, such business-driven innovation does increase the demand on IT resources and pressure on IT-management systems. One example is social media, which has the potential to generate vast quantities of unstructured information, either directly through brands creating and sharing content with customers, or indirectly through social-media monitoring. It is important to note that whilst

9 We are finding that support costs are going up. IT is being hoodwinked into buying faster, better, cheaper technology without understanding the cost of ownership. Mr Taylor, Ernst & Young. social-media applications and even transactional or promotional apps are usually free to the consumer, the tools to monitor, support and integrate them with existing back-office business systems cost money. This is not a cost that IT can bear alone, especially without a sound management strategy. We are finding that support costs are going up. IT is being hoodwinked into buying faster, better, cheaper technology without understanding the cost of ownership, warns Mr Taylor of Ernst & Young. Likewise, enterprises have turned to powerful consumer technologies, especially in areas such as smartphones and tablets, to meet growing customer and employee demands for flexibility. But, again, these technologies need to be supported and, in many cases, paid for. A growing range of devices can also lead to a proliferation of operating systems, applications and hardware vendors. As one IT director points out, his organisation needs to support Android and ios devices because each has useful specialist applications, but the cost is increased complexity. Meanwhile, that business units are increasingly looking broadly at technology and technology innovation in ways that IT is not always geared up to supply, is forcing IT departments to become more innovative. The downturn, if anything, has allowed time for thinking to mature about how to make the best of IT, says Mr Collins, the analyst. So while there has been this reductionist attitude of just trying to keep things going as long as possible and spend as little as possible on IT, at the same time that has offered technology a bit of breathing space to mature. This maturation process, however, is more often driven by lines of business than by IT. The best strategy for IT is to support the emerging or innovative technologies that business units need by seconding or embedding IT experts within the units themselves. This can both create a better two-way flow of information between the business and IT and also help IT to bring technology innovation into the fold, ensuring that security, data protection and compliance issues are addressed with centralised solutions. Managing these risk areas can enable investment and innovation and avoid duplication, which drives up costs. 8

10 4 Optimisation: the right IT for the business How do we use innovation to do what we re doing better not just stronger, faster or cheaper. The innovations that will make this happen are those that are not yet clear. Daniel Steeves, independent technology consultant Effective strategies are available for businesses to deploy to improve the balance between innovation and the ongoing costs of running IT. Innovation is what we do with the possibilities how do we use them? says Mr Steeves, the consultant. How do we use innovation to do what we re doing better not just stronger, faster or cheaper. The innovations that will make this happen are those that are not yet clear. One of the key roles of the CIO is keeping existing systems on, but that is no substitute for actually enabling the business to innovate, says David Bradshaw, an analyst at research firm IDC. In some cases, the IT department can lead innovation, and, in other cases, the IT department should get out of the way of innovation and take away the restrictions. Creative culture Best practice in innovation is also putting in place a structure, and creating a culture, where innovation is allowed, or better still, encouraged. As Qualcomm s Mr Fjeldheim points out, innovation can and should be part of the company culture. This entails allowing people to experiment and accepting that sometimes projects will fail. Smaller, lighter, quicker projects are more likely to result in innovation and growth than are largescale, centrally led projects where the emphasis is on removing all foreseeable risk whether in IT or the wider business. It also means keeping a focus on the customer. Indeed, the flexibility to identify and accommodate emerging customer requirements is a cornerstone of a business that uses IT to support innovation. Over the past few years, we ve grown in size, scope and complexity, says Wells Fargo s Mr Dillon. The needs and expectations of our customers have also changed dramatically. Today our customers have such a strong connection to things like their mobile devices that they have a completely different outlook and expectation of technology. Mobility, for example, has changed the way we think about most everything. But businesses also need ways to identify which strategies for boosting innovation are the most likely to succeed and which technologies are best placed to support it. Such strategies do not always require a large financial investment. Business focus There are some tremendous business innovations that could come from very, very simple uses of technology, says Mr Collins. It is not always about looking at leading-edge technology and thinking, We could be so much more innovative. A lot of business-model innovation and service innovation can come from the use of what could be seen as older technology. A strong connection also needs to be made between innovation and reward. This is a strategy that Qualcomm has found to be highly effective, Mr Fjeldheim says. In much of our investment, we look at each project on its own merits. If staff do a project that saves money, they can reinvest that. At Ocado, we expect and encourage people to 9

11 see innovation as a fundamental part of their job, says Paul Clarke, the firm s technology director. Much of its innovation is top down, but a lot comes from the bottom up. If we think it s got legs, we will then build a production project on the back of that. Another large multinational, says Ernst & Young s Mr Taylor, created a parallel IT organisation reporting to the CIO just to work on innovation. Of course, successful innovation also requires action. It s not that difficult to brainstorm or get people into a workshop and generate great new ideas, says Mr Tolido of CapGemini. The real issue will be in executing on the promise and moving things forward, and creating a solid understanding of the actual metrics, and certainly also the financial engineering. Maybe it s a bit unexpected in the context of innovation, but I ve found it consistently to be a success factor. 10

12 5 Conclusion IT departments that are innovative will be more successful in the long run. Norm Fjeldheim, chief information officer at Qualcomm Innovation can go hand in hand with optimising IT. In fact, rather than being in conflict, optimising IT can be an important precursor to innovation, freeing up resources and providing a solid but efficient base for new projects. Meanwhile, innovation is a prerequisite for many IT-optimisation projects. After all, only by trying out new ideas can IT teams develop new, more effective ways of working. Innovation is critical in my industry and the technology industry, says Qualcomm s Mr Fjeldheim. IT departments that are innovative will be more successful in the long run. The reality is that, in today s world, unless IT can support innovation in the business, the business cannot move forward. A key question technology executives must ask themselves is: Are you able to accommodate the emerging technologies in the industry so that it works with my business? says Bill Keyworth, an analyst at research firm IDC. We ve found there s a general belief that investment IT is capable of driving bottom-line results, says Mr Hornby of AlixPartners. There s more sense now that that kind of investment is not just a begrudged, keep-the-lights-on necessity, but in an age where we have online channels, where we make strategic use of data, investing in IT creates growth and profits. Innovation and optimisation are not in conflict; they are partners. 11

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