How to make your IT family happy
Every company's technology situation has unique aspects, yet most 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 most IT organisations 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 centre. 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 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 prioritise investment.
Indebted: In industries where technology has suddenly become much more important, historically underfunded IT organisations 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 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 labour pool, coupled with mounting technical debt, greatly reduced the efficiency of every dollar spent on technology.
Gold-plated: Poor governance and a failure to prioritise led some IT organisations to over-invest in the wrong things, often chasing the new idea of the moment or failing to rationalise 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.
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 organisations 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 prioritise the top two or three companywide initiatives, then allocate budgets to lower levels, where teams can spend with some autonomy and 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.
Do we execute effectively on our investments? Perhaps the most significant IT investment, especially for indebted IT organisations, is improving the organisation's capabilities, which can boost efficiency and effectiveness. Shifting to agile development and focusing on outcomes rather than project milestones can yield savings of 20-35% by removing unnecessary work and overhead.
Gold-plated organisations can root out bloat by tracking everyday activities such as how a new environment gets provisioned or how application security handles access management.
Neglected organisations should start with an inventory of capabilities to uncover strengths and weaknesses in order to prioritise investment.
Can we afford our investments? Gold-plated firms can rationalise the portfolio to create a more effective function. One global financial services company had multiple development environments that were overconfigured, with expensive software licences and infrastructure designed for peak usage. The company moved to a cloud-based delivery model and reduced 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 organisations should investigate the potential of non-proprietary, open-source software as well as cloud computing.
Efficient ways to reduce short-term costs without harming long-term prospects include rationalising demand, seeking concessions from suppliers, and limiting work by contractors and other external support.
Written by Will Poindexter, a partner with Bain & Co in Chicago and member of the firm's Global IT practice; Florian Hoppe, a partner in Bain's Singapore office; and Sharad Apte, a partner in Bain's Bangkok office.