by Myles F. Suer

Intelligently cutting run-the-business expenditure

Apr 01, 2019
BudgetingCIOIT Leadership

What should the goal be for run-the-business expenditure...and can optimizing spending enable transformation?

A calculator displays dollar signs.
Credit: KTSimage / Getty Images

Organizations that want to transform need to skillfully reduce existing run-the-business expenditure and shift these funds into tangible innovation or making the improvements needed to support the company’s innovation goals. This is a big ask for CIOs and their IT organizations. For this reason, it was time to get the CIOs perspective on cutting run-the-business expenditure.

What percentage of IT spend should be optimally be spent on run-the-business versus changing-the-business?

I started by asking the million-dollar question—what should be the split between run-the-business and change-the-business expenditure. As a goal, CIOs said that they want an equal amount spent on each—a 50/50 split. However, CIOs were extremely candid that they have struggled to getting past a 60/40 split. They say that the message here is to be always questioning existing run-the-business expenditure.

CIOs are candid that many legacy businesses have struggled to change from an 80/20. CIOs say that inability to change the mix can relate to the type of business, its market position, and its acquisitions/divestment. One CIO said, “getting to 60/40, which I’ve managed to do twice, was very difficult. The key to doing this is culture, reward system, and ownership principles”. Culture is clearly critical, especially at CxO level. It is important that CEOs not think of IT as a cost center, otherwise you can never accomplish a run-the-business cost reduction.

CIOs believe importantly that all business leaders are responsible to the business and its shareholders to be working cost optimization. As a part of this, CIOs need to actively review overall spend and ensure it is being allocated efficiently and effectively. CIOs even say this review can even act a guide to everyone on where to begin digital transformation. CIOs say it essential that staff know that what is critical is the ability to deliver services/solutions instead of system/environment maintenance.

Some CIOs said they have been able to self-fund newer projects through cost optimizations exercises. They say, for example, if you haven’t reviewed your telecom/network spend in the last three years, there are potentially large cost savings to be found here. Where most of the IT cost is staffing expense, you need to find ways to pry loss staff time to change things. CIOs say that organizations that are in fast changing business know how to adjust quickly. Conversely, organizations that is resistant to change find getting past 90% run-the-business expenditure difficult.

Should CIOs have specific goals for reducing run-the-business expenditure?

CIOs say the simple answer is yes but taking this step alone can be detrimental to delivering business value, growth, or success. The goal for rationalization should be elimination and rotation. CIOs say that IT leaders should set targets and metrics for the reduction of keep-the-lights-on expenditure. CIOs say whether it is measured quarterly isn’t as important as that it’s actively measured. CIOs suggest that IT should be measured as a service against actual business drivers and strategy at the same time.

At the same time, focusing on innovation should not be viewed as a cost center, but as a source of competitive advantage.  Adopting newer technologies in many cases can lower costs and increase productivity, a message that should resonate with CFOs and corporate investors. The integration space, where I work is an example of where new approaches dramatically reduce what was hard to do in the past. Opportunities to change out what works but is hard to maintain should be sought out, say CIOs.

Whether a change out of existing tech debt or the implementation of new technology approaches will depend on where in lifecycle a company and its infrastructure. Optimization KPIs, say CIOs should be deployed both annual and quarterly where possible. Regardless of whether the organization is large or small, CIOs suggest an IT cost optimization exercise can substantially impact on EBIDTA. At the same time, CIOs say, these kinds of projects need to be tracked like any IT project and run like any P&L.

CIOs say that many IT leaders already run IT like a P&L and actively look for business synergies and where ever possible co-executing projects. CIOs assert that IT can increase profitability more than advertising and even product R&D. Nevertheless, many CIO go into the budget process like every other P&L business area. If they don’t have their strategy, plan, and roadmap figured out as part of the budget process, then CIOs are not prepared and deserve cost center results. Here the CFOs will find it way too easy to suggest expenditure reduction. Without a tie to business outcomes, IT becomes just a collection of unconnected pieces and parts.

As more and more companies become platforms (technology companies) the CIO role should expand in importance. When this happens, CIOs can represent the business to customers, partners, or even investors. The more transparency that CIOs can accomplish along with the business alignment of IT the better. CIOs believe that IT leaders should demand their teams know their customer facing value. They may be in the IT department, but they need to understand why their customers need them. This increasingly involves being able to demonstrate the business impact of IT.

Should CIOs with significant tech debt move first to deploy spending reductions into tech debt reduction?

This was a question that I thought that I knew the answer, but CIOs said that heavy tech debt is a symptom of a larger business problem. They believe that IT leaders should solve this problem immediately. They say doing this will help with spend management and enhance predictability. CIOs stress that tech debt comes with other disadvantages beyond maintenance cost. Large tech debt results in higher overall IT cost and higher security risk.

With this preamble, CIO gave cautiously a yes to the question, but CIOs say this can be both maddeningly incrementalistic and fail to catalyze on the potential for innovation. There should be for this reason on-going debt management and planning as part of the product/service lifecycle. Effective CIOs think about tech debt all the time. They, also, make sure its business impacts are perceived by business stakeholders.

Clearly, old system with continued value is not necessarily debt. We need to understand the cost, the benefit, and the impact of a change out. However, CIOs say that in many cases, they don’t have effective partners to help them in evaluating their organization’s tech debt.

Nevertheless, CIOs say tech debt should be part of the planning and strategy process. The same can be said for hygiene projects that reduce or delay the debt. Part of fixing this involves making sure IT is a customer facing organization. Even if the customer is only internal folks, you need to run IT like a business, and if IT doesn’t keep the customer satisfied, it won’t stay in business! Today, they can go somewhere else and pull your funding.

In evaluating opportunities for cutting run-the-business expenditure should CIOs focus on the size of the opportunity or the opportunity to impact the business?

CIOs say focus on both. It is important to look at what’s possible with available resources (unless you can get a resource boost). This decision shouldn’t be an either or. It should be a balancing act.

With this said, most say CIOs they should put emphasis on the latter. One CIO said here that I would look at it as a balancing act between the two, dependent on business priorities. This can be like walking a tightrope over the tank of sharks. CIOs say, for this reason, they like a standard complexity/value matrix for quick hits and longer projects. They say that it is important to make sure the entire portfolio is evaluated for the impact of change to individual debt components.

CIOs say the key to deciding what to work on involves determining where the value from the results can be applied. In some cases, it is purely a dollars and cents decision, but in others it’s specific people and skill sets. There, clearly, is not a problem with plenty of new and shiny stuff being around, but a lot of it seems to have been driven by a digital transformation playbook with everything but the bold headings redacted. Failure is having buzzwords but not the substance behind them.

CIOs that do not understand their business generally “do not have a seat at the table.” And frankly, don’t deserve one.  CIOs after all need to be business leaders. They need to learn their business.  As with any prioritizing of projects, things that should be considered include support for business strategy, growth, legal and mandatory requirements, and cost reduction. CIOs stressed at #CIOChatLive, the focus should never be just upon cost reduction alone.

CIOs believe that IT leaders need to look for opportunities as far upstream as they can. Often this takes place as products become increasingly digital engaging directly with customers. CIOs need the ripples to go downstream and make all the continuous improvement and tech debt discussions easier. This means being clear as to the “why”. As important, big savings take time and require trust. The other side of this is that sometimes you need to pull out the axe to remain viable. Clearly, a CIO at an immature organization needs to put out fires first, as one CIO said “it’s hard to be strategic with your pants on fire”

Where should a new CIO put their focus?

CIOs say start by building out lifecycle plans, then use them to identify things that need to be eliminated or replaced. This includes strategically planning to make this happen. In this process, there usually needs to be a burndown approach.  At the same time, a new CIO should not just learn the IT landscape. They need learn the business.  From here, cost optimization exercises can be used to reduce cost and fund technical enablement of the business. All the while, CIOs need to ensure the “trains keep running.”

A part of doing all of this, say CIOs, is understanding partners and community. Otherwise, they say you’ll break something important. CIOs claim a good place to look is any system that’s built up with a cadre of people considered “the masters of the domain”. Or look at the analytics for support tickets. Clearly, nobody notices when the trains run on time, only when they stop. For this reason, it should become table stakes to keep them running.

Some CIOs suggest that this may be why CIOs needs a number 2 to complement them so they can cover both areas. It is right to get the fire out first. To do this, you must get to root cause and then figure out if you have a technology, process, education, or personnel issues that can be mitigated. A first step always needs to be keeping the lights on.

Whenever you go in as interim, CIOs should show a 30-day view of their world from a fire standpoint, lights on and potential quick hits for growth. This should, however, be followed with a 90 day for transformation to begin.

CIOs believe that all IT leaders need to take conscious steps to optimize spending for run-the-business. They see this as enabling transformation and a better balance between run-the-business and change-the-business expenditure. Acting now matters. The question is, are most CIO ready to start?