Digital business transformation is a top priority for many companies, but there’s a multi-billion dollar elephant in the boardroom that CIOs are often left to address: “how are we going to pay for this?”
A CIO can consider several cost optimization strategies when looking to answer this question and fund its digital business transformation. The right approach has to take into account the current corporate IT funding structure, the line of sight on efficiency, and the prevalence of IT initiatives driven from outside of the Office of CIO’s orbit. Here are four strategies we have seen IT and finance leaders take to fund digital business initiatives with cost optimization.
#1 Repurpose existing corporate IT spend
Most organizations start with looking at the existing corporate IT budget to fund digital business initiatives. This causes the least turbulence. Budgets have already been agreed on for the year and repurposed existing spend (with no net-new cost allocations) is more acceptable to Business Units (BUs).
How you go about this is reflective of your company culture. Is the value of the corporate IT budget understood by the business? If not, the repurposing will look like a simple math problem. Need $XX for digital business from a corporate IT budget of $YY? Let’s give IT a straight haircut across the board.
A better approach is to identify inefficient run-the-business (RTB) spend within the existing IT budget that can be safely trimmed and the savings earmarked for grow-the-business (GTB). Utilizing cost transparency tools, you are able to translate raw financial and IT operational data into RTB/GTB activity aligned to infrastructure, application and business units.
Through this lens, there is an agreed landscape where decisions on efficiencies can be made. Storage tiering by business initiative, app rationalization, unit costs for infrastructure choices over time: all drive the conversations about efficiencies of RTB spend most ripe to be repurposed for digital business. Once that landscape is defined, you can reduce that RTB spend by baselining costs to make informed optimization decisions for application, infrastructure, vendor and SaaS licenses investments.
When repurposing existing corporate IT spend to fund digital business, CIOs:
- Avoid funding digital business investments with across-the-board IT cuts.
- Identify RTB spend that could be more used more efficiently.
- Optimize RTB spend to strategically free-up budgets for digital business.
#2 Fund digital business outside of IT- with Office of the CIO oversight
According to Gartner research, about 25% of total enterprise spending on IT now resides outside the IT organizational budget and by 2020 that will increase to 50% for large enterprises undergoing digital transformation. Under this model, you can have a sponsor – often a Chief Digital Officer (CDO) – who has the green light to expand the digital business footprint. Unfortunately, this occurs without the Office of the CIO measuring the efficiency and optimization of that spend. This isn’t by deliberate omission: it’s just that the funding mechanism is outside of IT – which is accustomed to efficiency optimization – and therefore so is the oversight. In this case, the Office of the CIO can provide support by showing a CDO-sponsor of digital business what efficiency and optimization choices will stretch their investments further.
When funding digital business outside of IT, CIOs:
- Understand the implications of IT spend being driven outside of the Office of the CIO.
- Partner the Office of the CIO with non-IT sponsors of digital business spend to drive efficiency and optimization.
#3 Evaluate digital business impact on RTB spend
The distinction between funding within corporate IT and outside of it is real, but there is a strong interdependency. There is no such thing as an outside-of-IT digital business spend which has no impact on operating expenses for corporate IT. Consider a legacy IT investment: once a datacenter build project is complete, the depreciation against the projects will show up in OpEx, as will the labor, security, and tech-refresh costs that go along with maintaining the service that the project will become. Likewise, for digital business spend, organization must consider the run costs that accompany appropriation of digital business funding. Apptio Project Financial Planning customers budget across build & run spend for a holistic picture of project costs. Those capabilities impose discipline to a company’s digital business spend, both inside and outside of corporate IT.
When evaluating digital business impact on RTB spend, CIOs:
- View the build and run costs of digital business initiatives.
- View the RTB costs associated with digital business investments through the same lens, regardless if they are funded inside or outside of corporate IT.
Check out this short video to see how Cox Enterprises optimized their technology spend. To learn more, download the full case study.
#4 Determine the appetite for long-term run costs
Knowing there is ongoing RTB costs for digital business is one thing; the willingness of the business to pay for them is another. If there is questionable appetite to fund ongoing costs (building something new is exciting; maintaining something is not), then the Office of the CIO needs to articulate the ongoing costs to all stakeholders so they understand what they are signing up for. The Office of the CIO can be the arbiter for efficient and optimized digital business investment (regardless of funding source). By ensuring readiness to prolong that spend indefinitely, IT leaders can protect against run cost “hangovers” that threaten future IT budget agility.
When evaluating the appetite for new RTB costs, CIOs:
- Communicate to business stakeholders the build and run cost associated with new digital business projects.
- Leverage dynamic service pricing to reflect the ongoing cost of providing digital business services.
Digital business initiatives present an opportunity to validate and expand the influence of the Office of CIO. With digital business originating from the corporate IT budget, existing efficiency and optimization governance can chisel out appropriate spend while protecting core RTB activities from arbitrary cuts. For digital business spend outside of corporate IT, the Office of the CIO can showcase its strategic importance to the broader organization.
CIOs must shift focus from maximizing operational cost-efficiencies to increasing yields on change, download the Gartner report Maximize Focus and Outcomes for Investments in Digital Business to find out how.