Facing an uncertain economy as well as intensifying business pressure to deliver on artificial intelligence (AI), cybersecurity, and demand management, information technology (IT) is caught in a pincer between cost constraints and transformation expectations. Additionally, the outcomes that business seeks from IT in such an environment — namely agility, shorter lead times, and an expanded scope — don’t match IT’s own priorities like resilience and technical debt management. As IT leaders know, they must do more with less.
In practice, though, that isn’t happening. Even if it varies a lot by industry, IT expenditure already accounts for 2% to 12% of organizations’ revenue globally, according to our analysis, and pressure to innovate is driving up costs. Market research firm IDC forecasts worldwide spending on digital transformation to grow at a compound annual growth rate of 16.2% to 2027. Unfortunately, senior leaders we’ve worked with estimate that approximately 50% of digital transformation spend is wasted.
Sustainable IT-spend leadership — balancing cost and business value
To achieve success, chief technology officers and chief information officers must not view the imperatives of streamlining spend and delivering for the business as being in conflict. Rather, both flow from sustainable IT-spend leadership that places value first and then looks at the trade-offs between cost optimization and business opportunities. Based on our experience, such an approach can drive costs down by 10% to 30% while simultaneously improving outcomes for IT and other parts of the organization.
Those outcomes are far-reaching. Operationally, they encompass shorter time to market, increased delivery velocity, improved service quality, simplified information systems, and enhanced reliability. The advantages to strategic alignment include a balanced mix of onshore and offshore resources and optimal decisions about whether to build solutions in house, purchase them from vendors, or partner on them with others. Benefits even spread to culture, as fostering teams with a performance-driven mindset contributes to overall success.
IT-spend leadership is achievable and worthwhile, but it entails real transformation, not merely a budget review. Here’s how to do it.
Framing the strategic calibration of business and IT
Organizations must establish a clear understanding of their current spending patterns and operational key performance indicators KPIs to align the transformation with strategic objectives.
Begin with data
IT-spend leadership begins with comprehensive benchmarking. KPIs such as IT expenditure as a percentage of revenue, the ratio of costs to maintain operations (“running the business”) compared with costs for growth and transformation (“changing the business”), and the daily rates provided by IT service providers offer a clear financial snapshot. On the operational side, KPIs like software engineering productivity metrics are crucial. And for contextualized analysis, the organization must compare these metrics with insights into peers’ practices.
View investments by function
Organizations can’t rest content with a broad-brush picture; they also need granularity for strategic calibration. They should map spend to functional areas of the business to measure, for instance, the percentage of IT spend devoted to marketing compared with human resources. Such fine-grained insight is key to identifying areas of underspend and overspend, enabling investment according to the business’s strategic imperatives.
Balance cost optimization and value creation
Considering those strategic imperatives, organizations must realize that IT-spend leadership may require investments that would seem counterintuitive if the only goal were cost optimization. What looks like “overspending” may be warranted, even necessary, in specific areas if those areas provide a competitive edge, increase customer stickiness, or generate more revenue. By contrast, it is important to reduce costs for legacy products that only account for marginal revenue or no longer fit with company’s strategy.
Reconsider the stability of “run” budgets
Organizations often pay more attention to “change” budgets — those dedicated to building new systems or adding new features — than to “run” budgets such as infrastructure and licenses that propel the business’s daily operations. Run budgets may be more resistant to adjustment, but they are a material area of spend and require scrutiny every year to ensure business value and alignment with strategic priorities. That entails a multi-pronged approach including maturing DevOps, streamlining reliance on mainframe computing, consolidating vendors, and embracing open-source tools and components, among other methods. Companies that do so effectively have achieved over 10% recurrent savings.
Calibrate strategic ambition
Equipped with the analysis above, organizations must set a high, yet achievable ambition tailored to their unique goals. Importantly, the ambition should include an aspirational future operating model that captures outcomes such as lead time reduction, quality improvement, and delivery velocity uplift.
Executing change for lasting impact in the IT industry
With an ambition set, organizations must implement changes that will drive sustainable transformation through deliberate structuring, measurement, and shifts in culture.
Ensure sustainable transformation
Sustainable transformation requires careful attention to talent and organizational change. Technology leaders must assess the organization's capacity to absorb change over a three- to five-year period by considering the intensity of the changes, the extent of the culture adjustments needed to support them, and the shift in skills needed to execute them. Leaders and their teams must build the transformation together both to foster commitment and to ensure the transformation is embedded in the organization’s culture and operations.
Roll out transformation in waves
The success of a transformation relies on a series of waves. Each wave applies a certain lever across a small group of core business processes — for example, the customer credit journey in financial services — in a defined time frame. For a four- to six-month period, a business may focus on applying a systems simplification lever such as moving to the cloud, considering whether to make a solution in-house or buy it from a vendor, or optimizing assets with focused IT asset management.
Measure progress and outcomes
From the starting gate to the finish line, successful transformation requires value capture to be measured and communicated. KPIs like the number of systems being sunset, time to market, and the share of IT budget being spent on technical debt should be defined and reported frequently to senior leaders. One virtue of pacing the transformation in waves as outlined above is the early and continuous validation that comes from measuring their impact.
Champion change
With the financial and operational results of their efforts clearly measured, leaders in the functional areas of a business process that has been transformed during one wave become change champions for later waves. Each is the face of a successful transformation and can communicate to the broader organization the potential benefits for other functions.
When an organization embarks on the journey toward IT-spend leadership, it will soon realize that cost efficiency is just one benefit: As the transformation touches the entire organization, it will accelerate the business’s most valuable strategic aims.