Spend money to save money is an age-old aphorism. No statement may ring more true today for IT leaders hungry to disrupt, as CIOs are investing in digital technologies that both reduce operating costs and transform the business.
Cloud services, robotic process automation (RPA) and cognitive technologies, such as artificial intelligence (AI) and machine learning (ML) boost performance and facilitate operations at a fraction of the cost of more traditional technologies and human labor. Not surprisingly, they are fast becoming key investment for today’s CIOs.
Digital risks, including concerns about disruption and cybersecurity threats, are spurring organizations to use cost reduction as a mechanism to fund technological transformation, says Omar Aguilar, Deloitte’s global leader of strategic cost transformation.
More broadly, the trend is a sign of how CIOs have evolved their approach from reducing costs to grow the business, to a “save to transform” mindset, says Aguilar, who surveyed 1,200 executives and senior business leaders worldwide for research on cost management.
“In today’s increasingly digital world, more and more businesses also recognize the need to transform their operations and capabilities with infrastructure investments,” says Aguilar.
Digital transformation costs a pretty penny
The investments are substantial. Global spending on digital transformation will reach $1.18 trillion in 2019, an increase of 18 percent over 2018, and will top $6 trillion over the next four years, according to IDC.
Indeed, despite a looming recession, CEOs have not put “tech in the crosshairs” for cost cutting, according to Gartner analyst Mark Raskino. In fact, 27 percent of 473 CEO and senior business executives cited “technology enablement” as a cost-control method, according to a survey Gartner conducted in late 2018.
“There is a strong propensity to invest in digital and IT capabilities because they are pursuing digital transformations, which leads to growth and revenue,” Raskino says. Seventy-seven percent of CEOs Gartner polled said they planned to increase investing in digital technologies, while 74 percent said they would boost spending on IT.
With those marching orders, CIOs are using cloud and other modern and emerging tools to winnow costs by reducing legacy infrastructure and technical debt, jettisoning bloated contracts and nixing inefficient processes. Such moves can take out existing cost bases by 20 percent to 30 percent. “They are parlaying that into progressive, new-age digital transformation,” Raskino says.
Cloud, RPA and AI are offer some of the most explicit examples of digital tools enterprises are using to rein in cost while transforming their businesses.
Top cost reduction tech
Thousands of enterprises have embraced cloud computing of one form or another, electing to swap out on-premises infrastructure for software rented via Amazon.com, Microsoft, Google and other vendors. While the switch from capital expenditure to operational expenditure requires significant care and feeding to ensure proper financial savings, CIOs have at their disposal tools tailored for wrangling costs.
Hundreds of enterprises are using cloud-based technology business management (TBM) software, which uses sophisticated financial analytics to help CIOs align IT costs with business value. Bharat Amin, CIO of Newport News Shipbuilding, adopted software from Apptio to show each business unit what it cost to support them. “Because of that transparency, I got more trust,” Amin says.
RPA meanwhile duplicates data entry, freeing up humans to work more closely with customers and other tasks that add more value to the business. State Auto, a super-regional insurance firm, saved more than 60,000 labor hours per year using RPA to reduce the time the insurance company’s staff spends processing claims and other tasks. Reallocated staff now handle more complex claims, says State Auto CIO Greg Tacchetti, adding, “RPA has been a real nice lift for us.”
Robotics and AI are helping grocery conglomerate Albertsons Companies, which operates Albertsons, Safeway and Shaws, modernize store operations. Through a partnership with Takeoff Technologies and warehouse automation vendor Knapp, Albertsons is experimenting with an AI-based fulfillment center, Ramiya Iyer, general vice president of IT, digital and marketing, Albertsons, tells CIO.com.
In this proof-of-concept, robots, totes and conveyors collect items for online grocery orders within minutes, and deliver items to an Albertsons employee, who prepares the order for the customer. The company is also exploring computer vision technology to help optimize staffing at its stores to meet shoppers’ needs. The driving force? Getting goods to consumers faster and without friction, Iyer says.
Stiff challenges to cost management targets
Such technologies are enabling new enterprise operating models that are supplementing labor and facilitating ways of working that we “could not see before,” according to Deloitte’s Aguilar.
Seventy-one percent of executives Aguilar surveyed are undertaking cost reduction initiatives over the next 24 months. Sixty-eight percent reported total reductions of 10 percent or higher, while 31 percent have cost improvement targets above 20 percent. The most common cost reduction action over the past 24 months was streamlined business processes, followed by streamlined organization structure and improved policy compliance.
Naturally, there are some downsides. Globally, 81 percent of respondents were unable to fully meet their cost reduction targets (18 percentage points worse than in Deloitte’s 2017 cost management study). Only 4 percent of global respondents exceeded their cost targets. Implementation challenges remain the top barrier to successful cost reduction initiatives, followed by lack of effective ERP systems (stemming from poor data quality and configuration) and infeasible targets, Aguilar says.
The good news for CIOs? With cost management complementing digital transformation, “CIOs are adding more value than ever to the business,” Aguilar adds.