The disruption resulting from the COVID-19 pandemic is unprecedented and is requiring organizations to reevaluate their financial outlook for the year. Every line of business is having its financial envelope resized. In a recent survey1, 70% of IT leaders are using project delays as one of their top cost optimization tactics.
One path forward is for the business to apply a flat, cost-cutting percentage across the whole enterprise. This achieves the immediate financial goal but ignores the fact that not every dollar is created equal. IT, with the most complicated cost model of shared services within any line of business, has the most to lose from across-the-board cuts.
IT leadership will survive the economic crisis by looking at the context of IT spend and prioritizing cost-cutting steps before corporate finance mandates them.
In the first of a 3-part series, we will look at a recent survey that describes how IT leaders are responding to COVID-19 and capture how organizations are reprioritizing the project portfolio to meet—and get ahead of—cost-cutting mandates.
Four ways to optimize project spend
Before acting, review projects that are already in flight. Gartner advises distinguishing between critical and non-critical projects. Non-critical projects are mainly back-end projects that do not impact ongoing revenue; critical projects have an immediate impact on cash flow. For financial services, this may mean continuing to invest in mobile-banking technology while delaying internal infrastructure upgrades; for healthcare, this may mean upgrading telepresence services while delaying digitalization of archive medical records.
Organizations making defensive decisions may have to evaluate critical and non-critical projects to deliver spend cuts, but most start by only focusing on non-critical projects.
The need for prioritization varies by industry. In a recent survey 1, 63% of organizations have experienced an increase in demand for services as a result of COVID-19. But for healthcare organizations, it’s 92%. More pressure for services means more pressure to prioritize.
#1 Stop, postpone, or freeze projects
Projects, by their very nature, are investments that reap future rewards. IT services generate revenue; project spend is just the necessary investment to get the services live. Organizations with a large project portfolio, and an understanding of business priorities, have options to pivot spend based on the future rewards they want to see.
Organizations must ask themselves if they can live without a project that hasn’t yet delivered a service. Some projects add net-new capabilities (new data center, new application), others are simply upgrading an existing service. If the legacy service works, there may be an opportunity to delay the upgrade, put the project on hold, and redistribute spend in a re-plan.
Project type defines the prioritization list. Don’t delay projects connected with security. Meeting the needs of a security audit to renew cybersecurity insurance is table stakes for IT leadership’s credibility. Don’t mess with those types of projects. On the other hand, a network infrastructure project that improves performance (and isn’t related to security) may be worth pushing out or canceling. A project to add higher SLAs to email communications through new service tiering may also not make the cut. In 2020, project prioritization is less “nice to have”, and more “can’t live without”.
Which areas will you look to quickly optimize IT spend and costs?
In a recent Apptio-sponsored survey2, organizations are delaying projects as one of the top three tactics to cut costs.
#2 Prioritize project portfolio inclusive of long-tail OpEx commitments
Disconnected IT project investment (build) and IT operating (run) costs result in budgetary surprises. In 2020, no one has tolerance for “surprises.” Consider ongoing operating costs when a project sunsets and a service comes online. Historically, IT has poor visibility into project run costs—the CapEx budget for projects doesn’t update the OpEx budget with run costs. This is a painful disconnect at any time, but more so in the current economic climate. Organizations prioritize spend when they know their full financial commit to projects and services.
#3 Cancel failing projects
The red/amber/green (RAG) project status in a PPM solution has financial repercussions. A red project that is already behind schedule (through poor resourcing or scope creep) adds risk to the budget. With pressure on costs, IT leadership needs to make sure that projects are successful. This is not the climate to take on additional risk by continuing to fund a struggling project. If the project supports a key initiative, descope the deliverables to get it back on budget and schedule. Canceled projects have a stigma—some organizations may prefer to alter the scope, simplify the deliverable, and declare success rather than self-identify failure.
If many projects are red or amber status, prioritize or cancel them on more than just RAG status. If the portfolio is mostly green with a handful of red or amber projects, focus on the red projects and look for signs that each is worth putting more resources behind.
#4 Eliminate spend on projects without an identified business purpose
All IT spend needs a business purpose behind it, but tying IT spend to revenue growth—the ultimate measure of influence—is difficult. Many services are directly attributable to revenue (e.g., a POS service on a mobile app), but infrastructure spend rolls up to a series of shared services that is less easy to attribute to revenue. In response, many organizations look to directional metrics (% of Project Spend on Customer-Facing Initiatives) to tie spend to revenue.
A business purpose may not have aged well in the COVID-19 world. According to recent survey1, 64% of organizations have changed business priorities. Those altered priorities cascade down to projects and the business case they were built on may no longer be relevant.
A project not aligned with a business purpose is a prime candidate for elimination. IT leadership cannot advocate for spending that doesn’t have a business purpose and, without an advocate, a project will fail. 2020 has raised the scrutiny on all IT spend—eliminate projects without a business purpose.
Apptio helps to optimize project spend quickly
To help respond quickly and effectively to these challenges, Apptio has created a special offer to accelerate cost optimization and the process to update forecasted spend during this time of economic disruption. Apptio’s Financial Management solution is designed to help organizations quickly identify optimal cost-saving opportunities across core areas such as labor, vendors, and projects and then package them in an updated aggregate forecast. Read more here.
1 Source: Bain & Company – COVID-19 Implications: Early Perspective from IT decision makers in North America, March 2020
2 Apptio Database, May 2020