Over the last few months, the COVID-19 pandemic has unleashed a human tragedy, affecting millions of people. In parallel, it is also having a disruptive and devastating effect on the global economy and on businesses. This article puts forth insights and best practices, drawn from our experiences and expertise on how IT leaders can navigate this turbulent downturn.
The humanitarian crisis is posing unprecedented challenges for all business and IT leaders. Most organizations are finding that the rapidly escalating situation is immune to previously known actions, instead, new methods are required.
IT leadership teams typically respond to COVID-19 following a clear pattern in time (4R): Reaction (response to crisis), Resilience (manage through uncertainty), Recovery (identify opportunities) and New reality (adapt to a new world).
The main part of organizations will struggle with profitability as demands shift and price fluctuates. Given the importance of cash flow in these uncertain times, we have put together some key take away’s focused on cost savings and enablement to stay in business.
Responding to the immediate challenge
Many organizations have already reacted to the crisis and implemented mitigating actions. However, one key area is to start the journey with a categorized IT cost base to quickly trim and eliminate IT costs that IT leaders can act independent on:
- Decrease out-of-pocket expenses (travel, training, social activities, overtime).
- Ensure employee engagement through digital communication channels.
- Extend non-critical lifecycle management activities as far as possible.
- Review ongoing projects and investments. Postpone or cancel non-critical projects, in order to in a fast pace reduce the CAPEX cost.
- Rationalize non-critical services or offerings. Reduce service levels where feasible but not business critical.
Reducing discretionary costs through tighter policies should aim to free up the budget for mission-critical activities required for survival and aid in positioning for longer term measures.
There are no reasons not to start today. Uncertainty is everywhere. Even if your organization is not adversely affected yet, we recommend management teams actively evaluate their cash flow requirements, assess risk to their employees and customers and develop appropriate actions under scenario modeling. To enable fast delivery of results, KPMG has developed a preventive methodology based on disclosing the full cost value potential and optimizing your IT spend. Though scenario planning and proven IT cost reduction hypothesizes organizations will be able to invest in growth areas and be ready to face the demands from a new reality.
KPMGs accelerated cost optimization approach originates from our Deal Advisory practice and was formerly used to help private equity clients quickly assess and understand the targets IT financials. Today, the methodology forms the base that helps CIOs rapidly cut through the IT cost base to arrive at the most impactful opportunities.
The approach is broken down to the following six steps, which all can be executed in a short timeframe, with a virtual team.
- Baseline: Rapidly disaggregate the cost base into major drivers to identify potential cost optimization opportunities.
- Hypotheses and scenarios: Identify improvement hypotheses for each possible future scenario.
- Comparators: Utilizing data, make comparisons with peers to understand where other models deliver a cost advantage.
- Evidence: Use supporting evidence to prove or disprove each of the hypotheses per scenario.
- Opportunity per scenario: Identify and prioritize improvement opportunities per scenario.
- Value delivery: Translate opportunities into financial and operational targets with key stakeholders.
Enable the new reality and long-term considerations
It is important to not only consider the react and resilience phases, but also to look forward and prepare for the recover and new reality. A common error when faced with urgent financial constraints, IT organizations tend to cut costs without considering their strategic needs. These spur-of-the-moment cost reductions often come at a significant price: missed opportunities in simplifying, re-organizing and bolstering your IT organization as a limitation on the long haul. KPMGs approach ensure organizations a better way: position cost-cutting initiatives by thinking through opportunities to restructure IT and strengthen capabilities in order to enable investments and adoptability to face the new reality.
The COVID-19 pandemic has affected a large range of industries and organizations, and experts are uncertain how quick the recovery will be and what the new reality will look like. The new reality will arise and organizations need to be prepared for a change in circumstances and nature of delivery. Predictions on the duration of COVID-19 is at this moment highly uncertain, especially in regards to the duration of the tangible effects originating from COVID-19. With this in mind, all organizations need to be proactive and prepare for long-term effects by continue improving the strategic perspective. The field of IT, including the digitalization journey, are identified as key accelerators of growth in the post-crisis world, where the new reality is highly dependent on digital solutions and this implies that all IT leaders are in a strong position to enable a successful business. However, this requires leaders and organizations who are able to establish this, well needed, solid foundation. There are a range of initiatives that organizations can apply and combine in order to be prepared for this new reality, all with the aim to enable new investments by reducing and optimizing current costs.
Our Cost Transformation related services include:
- IT Strategy: Update and align IT target state towards new business priorities and emerging trends. Selectively invest for quantifiable business benefits.
- IT Delivery model: Evaluate the possible scenarios of outsourcing or current vendor landscape overview.
- IT Transformation: Re-shape IT through organizational re-designs and supporting models to improve revenues, costs and experiences but also become more agile in the IT delivery.
- Cost and Price Modeling: Ensure cost modelling that drives decision making, using techniques such as Activity Based Costing, Zero Based Budgeting and Technology Business Management.
- Cost optimization: Principles based full-stack rationalization and cost take-out while safeguarding value creation (Products, Services, Applications, Infrastructure and associated resources).
- Demand & Portfolio Management: Integrate Strategy with Operational Performance to enable a on-time delivery with the adequate resources.
As a foundation for cost implication projects KPMG have a number of frameworks, benchmarking data, cost reduction hypotheses and deep experience from previous clients.
All together bringing out high value opportunities.