The hidden technology costs in business

Published on the 28/02/2024 | Written by Heather Wright

The hidden technology costs in business

And how tracking it can reap big returns…

When Verizon’s CIO looked closely at technology spend within business units at the US telco, he was able to reduce business-wide technology spend by 2.3 percent within seven months.

Sid Sahoo, Gartner senior director analyst, says Australian and Kiwi companies can reap equally good returns – and create more value for the organisation from a cost perspective, while improving efficiency and risk management.

“The first thing is we need to start measuring it and that’s when we start to manage it as well.”

When Sahoo talks enterprise-wide technology spend, he’s talking about all the business unit-led work that often isn’t being done in collaboration with the CIO and IT teams.

It’s the marketing communications platforms deployed by marketing teams, the ATM within a bank, robotics, or maybe project around IoT or even AI or data and analytics..

“If business units are running their own technology, especially things like operational technology which is enabling more external services, how is that being tracked at an enterprise level.”

The answer, he says, is that more often than not, it’s not being tracked at all.

At the Gartner CFO and Finance Executive Conference in Sydney this week, just 20 percent of attendees in Sahoo’s session said they were tracking enterprise wide IT spend.

Seventy-five percent admitted that the spend they know about is not being managed effectively.

Speaking with iStart this week, Sahoo says while traditional formal IT spend that the CIO controls is, on average around four percent of operating costs, the other technology spend which accounts for total enterprise spend is believed to be anywhere from 25-30 percent.

He admits that’s very much an estimate, based on surveys and conversations with customers. As yet, there’s no benchmarking to rely on.

Nonetheless, he says there are big opportunities for organisations to improve their operations through understanding and managing their enterprise-wide technology spend.

“Failing to track technology at an enterprise level creates silos and it allows value killers to thrive,” Sahoo says.

“If the business makes decisions on things like applications or systems or buys their own software or engages their own license support or hires their own people without consulting IT – because a lot of this is also making sure the business is not just making tech decisions without talking to the CIO or IT team – that actually leads to higher integration costs.

“When they make a decision on spending on an application or tech, they also expose the organisation to risk. You may have more load on your networks or more integration costs in the long run.

“So the first reason why understanding your enterprise-wide technology spend is important is in making sure that from an efficiency perspective we are managing the risk and also the cost.”

But there’s also the opportunity at the enterprise level to ensure you’re getting the best value in your investments.

“Who is managing the governance at the enterprise level to make sure the value of investments – say if HR is spending its own money on Workday or marketing is spending its money on a marketing communications platform – is being realised for the entire company,  not just for that function?”

Sahoo believes the idea of enterprise-wide technology spend is about to have its time in the sunshine. A recent conferences where he’s discussed the topic, the response from both CIOs and CFOs has been highly positive, with many acknowledging it was an area of opportunity they hadn’t previously thought about.

“One CIO actually said this is a really good way for them to strengthen their relationship with the CFO. We all know how challenging this is and how challenging CIOs find it to come out of IT being a cost centre and have those relationships, especially with CFOs.

“This is a really good way for CIOs to partner with the CFOs. And, the other way around, for the CFOs to have a motivation to actually partner with the CIOs, because we’re not just looking at the IT spend, we’re looking at the enterprise-wide technology spend.”

The biggest challenge for companies will be silos, including between the IT team and business units, he says.

“The CIO has their own agenda, they have their own budgets, their own policies.

“Business units have their own agenda. For them increasing revenue, reducing cost is top of mind. Managing risk is also part of what business unit leaders are being measured on at times.”

The silos start to exist when the CIO has different agenda to the business unit leader, he says.

“This is where this enterprise wide tech concept is critical. But it’s also the biggest obstacle.

Critical because if you remove the silos and there is more partnership between the CIO and business units in terms of technology spend it leads to better efficiency. But the biggest hindrance also is the silos. Unless we remove those silos, unless we have that governance, unless we have somebody like CFO or someone in C-suite level bringing it all together and making the case, that is the biggest obstacle in making this a success.”

Of course, some business units are more than happy to have their tech spend out of view of the CIO and IT teams.

Sahoo says that’s where he’s keen to impress on people, especially CFOs, the need to make the process less rigid.

“You need rules – you need the financial governance, we need to make sure there are proper controls around who is spending what, but at the same time we need to enable the business to thrive as well.

“This is where the CIO needs to look beyond just my IT budget or my controls and my security risks and partner with the business to have that mindset of being almost like a consultant to the business. Coming in and saying ‘I’m here to help you. Let’s talk about which tech platforms we want to invest in. I have the expertise to do that, and I’m here to help you.’

“And along the same lines, the business unit leaders also need to recognise that by taking that consulting advice from their CIOs and working with IT they can find better efficiencies.”

For organisations, getting a handle on enterprise-wide technology spend starts with defining cost structures within the organisation and ensuring the CFO is enabling support from a financial structure perspective to enable the tracking.

“Start by creating the right structures, make sure you’ve got a solid cost centre structure which is tracking all enterprise-wide technology. That is the basics of getting this right,” he says.

“The CIO can not do this on their own. They’re there to run technology and manage their own budgets, but when it comes to anything at the enterprise-wide level you need the CFO’s buy in and support.”

Removing those silos, and ensuring there is open discussion between the business and IT is the second step, with Sahoo also keen on rewarding for good behaviour.

“So making sure you’re accelerating the process, not having long conversations and elongating the process, making sure things are getting resolved, and that’s in the best interest for the CFO and CIO from a financial perspective and also an IT perspective.”

So what does the ideal process look like for managing enterprise-wide technology spend?

Sahoo says governance, and requiring business cases involving any investment around technology are going through central governance, is critical.

“Instead of functions doing their own thing, the most ideal process would be to have a central governance team that is managing all enterprise wide tech spend.”

But for that to be effective, it needs to be a little more fast paced and not weighed down by bureaucracy, he says.

“One of the reasons why sometimes business units don’t want to engage is because they think it is going to take more time. If I have to go through central team or to governance it’s going to take more time and my opportunity for whatever I want to do in the business, to get market share, whatever, might be impacted.

“So a fast paced governance model with strong CFO/CIO/CEO support is critical to making this successful.”

It’s about having the right structure and support to be able to do that, he says. That includes making sure you have the right resources and skills, and  making sure you have good finance support.

For CFOs, it’s about making sure they’re enabling the structure and support for the CIOs so that when business case evaluations come up and there are questions about what the technology spend will yield for the business, there is a good support model to answer the questions and the governance model is leading it from the forefront rather than waiting for business units to come and ask the question.

“One of the things you could do, most companies have reviews, on a monthly basis, where the leadership team get together and talk about financials, what is happening in the business. Having a place in that forum to talk about enterprise technology spend, and giving the governance team the right model and platform to have that communication with the business,” he says.

And that Verizon example we started with? Sahoo says the 2.3 percent was achieved in seven months. “They had a lot more impact after that.”

“He did some of the things I talked about. He went to each business unit and looked at what they were spending on technology. Then he started benchmarking, creating targets and benchmarks for each of the functions in terms of what they were spending on technology. Then he started doing contract reviews looking at how much spending across vendors, and using the skills and expertise he has at the CIO level for how he manages the IT budget, and extending it across the entire enterprise.

“It’s a really good example of how a CIO partnered with the business unit leaders and with support and structure from the leadership found cost savings beyond just the IT budget.

“And it’s absolutely attainable for Australian and New Zealand businesses. If the CIO is partnering with the business units, if we start to define it, track it, measure it, I don’t think impossible task to conquer. But the first thing is we need to start measuring it and that’s when we start to manage it as well.”

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