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More and more, CIOs find themselves on the hook to link technology investments to business outcomes, and to drive alignment of IT and the business. Key to success: fundamentally changing the IT operating model.
Few IT organizations today can support the rapid-fire change that’s driving business—a fact that many CIOs recognize. Ninety-one percent of CIOs we surveyed expect to make one of the following changes to their IT operating model:
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Each of these changes could require significant financial investments and process changes, but each holds the potential to deliver long-term enterprise value. CIOs are often challenged to convince their peers that behind-the-scene technology investments are worthwhile. And only one-fifth of CIOs have access to dedicated finance talent who can help justify these investments to the C-suite and the board. “You have to partner to deliver quickly and keep up with the pace of the industry,” says Kiwi Wealth CTO Dave Bruce. “A critical factor in being able to balance delivering on our own versus leveraging partners is the support from the board in allocating funding for us to innovate and try new things.”
In recent years, some enthusiastic industry pundits and executives have diluted the meaning of transformation to the point where it’s often invoked to characterize incremental improvements. But in the digital era, the rate of change truly is growing exponentially, and we can’t expect IT’s traditional ways of working to keep pace.
Real transformation likely demands a whole new approach to delivering IT services. It’s a multifaceted challenge with two critical elements: money and people.
But the CIO is typically still on the hook to connect technology investments to business outcomes. This can become easier when IT and the business work together, jointly owning the full circle of investment processes from upfront planning to measuring results and impact. “I want IT to be viewed as enablers, so that people come to us with problems and ask how we can help them solve them. Too often we have rolled something out and haven’t had any input or engagement from members of Parliament and their staff and that ends up in frustration and complaints,” says Michael Middlemiss, CIO of Parliamentary Service of New Zealand. “Parliament is steeped in tradition, and there are processes and protocols that date back to the 1600s. People want to preserve some of those things, but for emerging technologies to benefit and add value there has to be a formal decision-making process that is jointly owned by IT and the people we serve.”
If you have a governance structure that aligns IT to the business, IT delivery should just sing. The IT organization should be able to deliver what the business needs, maximize the value of technology investments, and improve every year.— Norm Fjeldheim, CIO and SVP facilities, Illumina
Our work with leading organizations shows that when IT and the business are aligned on investments and prioritization, they are more likely to have a significant impact on business outcomes. Unfortunately, the CIO survey indicates that IT/business alignment is uncommon. Only 52 percent of baseline organizations have a technology investment decision-making process jointly owned by IT and the business, and only 35 percent have a clear process for prioritizing IT investments. Digital vanguards are a little ahead: 60 percent share the investment process with the business, and about half have a clear process for prioritizing IT investments (see figure 11).
Digital vanguards are often more intentional about IT investment decisions than baseline organizations; vanguards have established more effective tech governance methods and are spending more of their IT budgets on business innovation compared to other organizations. But even these industry leaders have a long way to go.
Board members and senior executives expect a positive return on all investments, including technology. Many IT organizations come up short. Only about one-fifth of CIOs and CXOs agree that their organizations have a structured process for measuring the value of technology investments. And surprisingly, 14 percent of respondents don’t measure the business impact of IT investments at all.
CEOs are looking to IT to enable growth through technology innovation. This means changing the business mindset that IT is an expense versus an investment. This mindset change enables the organization to efficiently allocate funds for innovation and measure the results. — Subhasis Mukherjee, VP and CIO, Pekin Insurance
Of the organizations that do measure value, about two-thirds evaluate IT investments on a case-by-case basis. About a quarter rely on business leaders to measure IT investment outcomes. Only 27 percent evaluate technology investments using a consistent financial model—a leading practice that can improve accuracy, objectivity, and alignment with business strategy.
Measurement methods that digital vanguards use may be slightly more effective, but there’s still plenty of room for improvement. Compared to baseline organizations, vanguards are less likely to measure business results on a case-by-case basis and more likely to have a financial model. Interestingly, they also rely more on their business leaders for measuring the impact of IT investments on business outcomes, which could indicate closer alignment with their business peers (see figure 12).
Lack of effective investment governance isn’t the only hurdle. As CIOs try to reallocate budgets to increase IT’s focus on innovation and business improvements, the traditional fixed annual funding cycle and a lack of discretionary funds can restrict their options. Project-based funding models often lead to chronic underinvestment in technology innovation and offer little flexibility for shifting business or technology environments.
Many CIOs will recognize this annual budget routine, in which most of IT’s budget is pre-allocated to ongoing business operations, and much of what’s left is set aside to tackle the business’s wish list of incremental improvement projects. Growth and innovation? That’s practically an afterthought. Remarkably, CIOs report similar budget allocations across industries, even those with very different business needs (see figure 13).
Only a few years ago, it wasn’t unusual for ongoing operations to make up more than 70 percent of IT’s budget. Cheaper storage and processing costs, cloud platforms, and outsourcing have helped drive down operating costs to about 56 percent today, but there’s more work ahead. CIOs expect ongoing operational costs to continue to drop over the next three years, thanks in part to greater efficiencies created by cloud, process automation, and an increasingly modernized core. The question is whether CIOs can take advantage of those savings and put them toward business innovation.
Many digital vanguards are a few years ahead of other organizations in shifting budget focus from operations to innovation. CIOs in these organizations allocate less than half of their budgets (47 percent) to operations, with nearly equal amounts going to business mandates: business enhancements (27 percent) and innovation/growth (26 percent). Over the next few years, they anticipate reducing operational costs to about one-third of the total budget, with the savings primarily going to innovation spending, which is expected to increase from 26 percent to 38 percent (see figure 14).
These gradual budget shifts can’t be called truly transformative, though. What would it take to get there? The CIO’s goal of a flexible IT delivery model will likely require iterative funding, a life-cycle view of budgeting that takes into account all costs over the technology’s lifetime, and a mindset based on product rather than project. This fundamental shift in IT funding is in its early stages. For example, in our consulting work, we see some IT organizations shifting from annual, project-focused budgeting to continuous, capacity-based rolling budgeting. It’s a start.
Many CIOs have the right intentions, but more is needed to compete and tell the value creation story. Many are burdened with antiquated investment processes and suffer from a dearth of supporting budgeting and forecasting skills. To truly revamp budgeting and funding processes and build governance structures that can enable and support such initiatives, CIOs will likely need to acquire the requisite skills and support in budgeting—and help ensure that consistent prioritization, measurement, and accountability are established for technology investments. Bottom line? There’s a lot of work ahead.