Successful technology spend optimization is a continuous journey
As businesses around the world continue to reap the benefits of one of the longest periods of economic expansion in history, uncertainty in global markets and growing geo-political concerns are signaling potential macroeconomic risks.
But disruption can take many forms: according to the 2019 Deloitte Global Cost Survey, digital disruption soared to the top of the list as one of the biggest external risks to companies at 61%, up from just 6% in 2017. As digital and economic factors collide, companies should reimagine technology spend strategies to fund transformation and drive improvements in future performance and market position – even during a downturn.
The companies that have embraced the opportunity of digital have benefited, with Gartner's 2019 CIO survey reporting that enterprise use of artificial intelligence (AI) grew by 270% over the past four years. In uncertain times, digital can also support the cost imperative and continues to be a standard business practice around the world.
Our Global Cost Survey found that 71% of global organizations are planning to undertake cost reduction initiatives over the next 24 months, with 66% targeting reductions of 10% or higher. On average, the study shows that out of the US companies surveyed, 84% are the most likely to undertake cost reduction actions. The likelihood is significantly lower for APAC (70%), Europe (66%) and LATAM (65%).
The survey also indicates a significant change in cost management mindset: in 2017, many companies around the world were managing costs in a “save to grow” model, where they were pursuing cost savings to fund growth strategies in an improving economy.
In 2019, the results show that this is evolving into a “save to transform” model, where companies continue to use cost reduction lever to fund business model transformation programs using new digital technologies such as robotics, AI, and cloud to deliver dramatic improvements in competitiveness, performance, and operating efficiency.
To help maximize the value of technology investments, operate with agility, and drive shareholder value, business and IT leaders should consider focusing on continuously optimizing technology spend through economic cycles (see figure 1) to realize savings, reduce technical debt and transform their business models, all without potentially sacrificing capabilities and quality of service delivered.
Bold plays using digital technologies to optimize spend across the economic cycles
With a technology spend optimization strategy, leaders can take a long-term business growth view and make bold, technology-driven business transformation plays across applications, data, infrastructure and security layers. This not only supports long-term business growth that spans economic cycles, but also consists of investments that will likely yield returns and drive advantages in both prospering times and downturns.
Select examples include:
- Cloud: According to our Cost Survey, 63% of the global organizations reported that cloud is the most widely implemented digital technology for reducing cost and increasing productivity. It is important to architect cloud in such a way that it provides the flexibility to scale or reduce the technology spend depending upon the business need during economic cycles. For instance, a US regional insurance company was struggling to scale rapidly and remain competitive in the marketplace due to growing technology debt, high capital expenses and a traditional IT operating model. By leveraging cloud, the company turned their IT function into a modern “as-a-service” model and shifted ~40% of expenses from CapEx to OpEx for an expected ~30% savings on total cost of ownership over five years. At the same time, the company was able to continuously improve, rapidly roll out new products and features, as well as deliver a more consistent experience which led to advance their brand and customer retention.
- AI/Machine Learning (ML): A balanced portfolio using a broad array of AI/ML applications can drive growth and enhance processes such as call center operations and infrastructure management. It can also free up funding to streamline other core processes and fuel quicker go-to-market strategies. Robotic process automation (RPA), especially when it’s combined with cognitive technologies, can deliver improved service quality and consistency by reducing human error and taking actions automatically in response to user requests and reducing downtime via automation.
- DevSecOps: There are other bold plays that can be made during lean times (or any time, really) to streamline new application development and aid in digital transformation. For example, many companies are integrating security with their traditional DevOps development philosophy. DevSecOps facilitates greater collaboration between security and release teams, which can reduce delivery cycle times and increase agility in application development and accelerates time to market for production feature releases—enabling companies to focus resources on value-added activities.
Traditional plays to optimize spend across the economic cycles
Companies that employ a technology spend optimization strategy can maintain their focus on delivering value, regardless of external pressures. This is where these strategies can really pay off because of the focus on tightly managing costs through all economic phases. Companies that practice technology spend-optimization can continue to leverage technology to add value from initiatives begun in growth phases and even invest in new initiatives if the need arises.
Effective plays include:
- IT Sourcing: One traditional spend-optimization play that tends to work well for many companies is to reevaluate IT strategic-sourcing processes to identify opportunities to rationalize service providers and their contracts. This reevaluation process can enable the organization to streamline the number of indirect procurement suppliers—and drive greater value from critical supplier relationships. Digital technologies have further transformed outsourcing environment. Outsourcers are leveraging technologies such as augmented and virtual reality to deliver the services in a new way while optimizing spend.
- Application Portfolio Rationalization: This helps companies keep pace with business efforts by identifying opportunities to reduce application spend, portfolio complexity and align digital solution portfolios to meet current and future business needs. For example, a global multi-line insurer company realized ~$250 million in savings by rationalizing its 2000+ applications through the adoption of software-as-a-service (SaaS) solutions, consolidating redundant and re-platforming old applications. As seen in the following chart, this approach can help organizations weigh the benefits between on-premise applications and SaaS solutions to help streamline their existing portfolios and free up technology budgets to invest in new disruptive technologies to support business transformation programs.
Source: Deloitte Consulting Analysis
Figure 2: Applications Spend Optimization Drivers Summary
- Software Asset Management (SAM): Companies continue to struggle with managing the software assets. SaaS solutions and introduction of new software licensing models by providers has added even more layers of complexity to software asset management. In software asset assessments recently performed by Deloitte, clients had unrealized cost savings averaging 25% of their annual maintenance spend. According our recent research, SAM can save a company upward of 20% of its software budget.
Wrapping it up
Adopting a save to transform mindset and embarking on a continuous technology spend optimization journey requires a comprehensive approach to technology spend analysis. The technology spend optimization plays we’ve discussed here merely scratch the surface.
Other areas to consider include:
- Cloud Spend: Is your organization efficiently migrating the workloads to cloud? Have you established appropriate governance to avoid cloud waste?
- Re-imagining Applications Portfolio Strategy: Business stakeholders are becoming technology savvy. How can IT work closely with business leaders to optimize application spend?
- Thin IT operating model: IT is evolving from project to product to ThinIT operating model. What is the right-balance of in-house vs. outsourcing to maintain the IT spend and service quality levels?
One thing is clear from the outset, however: technology spend optimization is a continuous journey that can provide dividends for those companies that are forward-thinking enough to embrace it. By putting into place a strategic framework that reimagines technology as a method of transformation, companies can have the opportunity to realize long-term, sustainable value – now and in the future.
Jagjeet Gill, principal and technology spend optimization offering leader, at Deloitte Consulting is co-author of this column.