By Ed Page, Managing Director
One of the budget struggles chief information officers are continually faced with is reducing operating costs to make room for innovation. And while several studies, including our own, show that they have succeeded in bringing down “lights on” expenditures over the past decade or so, in many cases those savings have been absorbed by urgent non-strategic needs, such as compliance and security, too often leaving innovation to languish.
The consequences of failing to innovate are hardly trivial. The emergence of technology-enabled competitors who, unfettered by legacy technology, are able to develop and deploy new products and services faster and more efficiently threatens to leave behind older, more established companies, and especially those that perennially struggle to build innovation into their IT budgets.
I’ve seen this struggle firsthand in talking to our clients, and our recent benchmarking report, based on the responses of almost 400 C-level technology leaders to Protiviti’s 2016 IT Trends Survey, confirms it.
This dichotomy between the strategic and the urgent is evident in the numbers. While more than half of respondents overall (54 percent) said their organizations were undergoing digital transformation driven by the need for new functionality and innovation, virtually all of their top-10 priorities were security or operations oriented. Only 13 percent of the IT budget, on average, was earmarked for innovation or transformation.
In my experience, companies, and IT departments, fund their most urgent needs. Which means that, even though digital transformation is talked about, most companies are still stuck, budget-wise, in a reactive mode, putting out fires — regulatory, operational, and cybersecurity. These are very real pain points, so that’s where budgets are allocated. While there is an aspiration to transform, other priorities often prevent IT departments from getting where they want or need to be.
There is one consistent differentiator between companies that actually innovate in IT versus those that merely talk about it. The difference is that serious innovators make IT transformation part of their strategic plan and rely on it for the success of other strategic goals and objectives. Very often, these firms view themselves as technology companies, even if others might see them as part of another industry. As the CEO of Capital One, Richard Fairbank, once told investors, “We’re going to need to think more like technology companies and maybe a little less like banks.”
In the absence of a clear plan and executive and board buy-in, IT transformation is just another project competing with a lot of other projects for money. Aligned with company goals and objectives, it becomes an enabling force.
Where such strategic alignment can often benefit an established company the most is in modernizing core IT infrastructure. Management of outdated systems, on which everything else depends, is increasingly becoming the dead weight preventing companies from meeting new challenges and customer demands with agility and speed. CIOs and technology leaders are faced with having to invest more time and resources into keeping these systems up, while at the same time trying to squeeze cost reductions out of them without impacting service levels. In fact, responders to our survey pointed to legacy systems and processes as the number one obstacle impeding IT transformation.
The good news is that a small but growing number of organizations are taking the strategic decision to modernize their aging cores to achieve both increased agility and sustained long-term savings in costs and resources. Among respondents from financial services companies, 70 percent said their companies are undergoing digital transformation (16 percent more than the general population) — perhaps because the field, eagerly entered by emerging fintech companies, is even less forgiving, and because innovative IT structures, once implemented, can create significant opportunities where none existed before.
To be sure, transformation is disruptive, and replacing or modernizing core technology can be very expensive. Both of these barriers can be mitigated, however, through careful planning and a phased approach incorporating newer technologies, more modern architecture approaches and more nimble delivery methods, such as cloud technology, microservices, application program interfaces (APIs), and agile product development and software delivery methodologies.
Once again, real priorities are reflected in the budget, and innovation is unlikely to receive a bigger slice of the pie unless it is seen as a strategic, business project first. While cybersecurity, a key expenditure, will continue to command its share of IT resources, there is a case to be made that these resources can also be used more strategically, efficiently and effectively. We will focus on cybersecurity spend and priorities in a follow-up post. Subscribe to our blog to follow the discussion.