Effective cost optimization is critical for the market-speed enterprise

Today’s hyper-competitive and fast-changing global environment is prompting forward-looking enterprises to accelerate their investment in transformational IT capabilities. To deliver continuous digital innovation – and reveal the true value of technology spending in the digital economy – these enterprises are re-engineering the technology funding process.

To become agile, market-speed organizations, many are embracing dynamic investment for its breakthrough ability to forge a new financial connection between IT spending and value – one that aligns enterprises as never before with their ever-evolving markets and ongoing technology needs.

Unfortunately, a widening ‘digital divide’ exists today as global enterprises modernize to enhance agility, efficiency, and competitiveness. As digital leaders transform for the future, left behind are those without the insight to spend on technology in a manner that is as agile as their enterprise. The widening gap between leaders and those left behind is creating conditions for a ‘winner-take-all’ market.

Our previous article in this series examined the need for cost transparency. Cost transparency reveals the value of technology by identifying and classifying costs, defining cost drivers, and using the timely collection of cost data to inform smart decisions. This ‘building block’ is a foundational enabler for digital leaders to ‘cross the divide’ and harness the power of dynamic investment.

While it may be tempting to jump to this transformed way of funding value we call dynamic investment, we urge you to not forget cost transparency can reveal opportunities to better optimize the existing IT estate. The leaner the current IT operating model is, the greater the reward may be when shifting to dynamic investment. In this second article of the dynamic investment series, we illustrate how some successful enterprises approach cost optimization to get more value from their ongoing technology spend now and in the future.

Numerous approaches are employed today by enterprises tackling the need to optimize technology costs. Unfortunately, IT and finance typically work toward valid but divergent objectives in this pursuit. Technologists want maximum flexibility, while finance-types seek structure and predictability.

KPMG professionals often see flawed, unsustainable initiatives result when IT teams address cost takeout and optimization without much involvement from finance. The reverse is also true. These teams often face the challenge of making sense of technology’s increasingly sophisticated function and value.

IT and finance should be aligned as never before on how technology costs are identified and classified, and how to reduce cost from those insights. They must also collaborate with a shared appreciation for substantial shifts in how technology goods and services are purchased and provided. Long-term capital purchases (e.g., depreciable datacenter equipment) have been largely replaced by highly variable operational expenses bound by different contracts (e.g., cloud service provider agreements). It is only in pursuit of understanding each-other’s perspectives on these trends can IT and finance be effective in figuring out how to make dynamic investments in technology.

By bringing IT and finance teams together to collaborate in new ways and manage costs effectively, enterprises can identify ‘quick wins’ to help eliminate costs in areas such as:

• Infrastructure run and maintenance;
• Licensing costs, including over-subscription and the use of costly licenses for simple activities;
• Unmanaged spending on cloud resources;
• Duplicated investment in technologies and solutions;
• Time-intensive ‘management’ overhead (minimizing things like stage gates, council reviews, layers of reporting, etc.)

Firms operating without a centralized IT procurement-finance function, or experiencing a high level of shadow IT activities, can benefit from an exercise to rationalize costs. Opportunities also exist for enterprises with no direct linkage between IT/digital service costs and consumption, and those lacking regular reporting on IT costs and consumption. As you can see, cost transparency is an important enabler to refine cost optimization opportunities.

A rationalization exercise demands you ‘take nothing for granted,’ and results should be reviewed by an independent party not involved in the day-to-day operations. This is essential to identify duplicate investments and unmanaged or uncontrolled resources.

An important note not to be forgotten: digital transformation is not necessarily about IT cost reduction, but cost optimization frees up funds for higher priority needs that can accelerate the pace of change. Recovered funds can be deployed with greater velocity and effectiveness when enterprises leverage the principles we are about to articulate for dynamic investment…

Combined with ongoing optimization of past spend (some do it monthly), adopting a principled, forward-looking dynamic investment model makes holistic spend management a possibility by:

• Replacing static budgeting cycles with dynamic funding: The dynamic model replaces annual budgeting with a timely and flexible process. The goal is to fund innovation on a rolling basis. The key to this process is that funding adjusts to prevailing needs;
• Implementing product financial management: Enterprises need to shift from project financial management to product financial management. Supporting technology teams need to align to product development and product owners should organize products;
• Changing funding governance: Governance of funding is critical to replacing traditional project budgeting with product funding. A new governance model should include guidance on roles, decision-making authority, and the processes by which funding decisions are adjudicated.

These core principles of dynamic investment are our preview to the When, What and How of the dynamic model. Supporting actions to evolve in key finance and accounting areas include: the need for leaner and simplified value cases, updating of capitalization policies, and evolving financial analytics, including reporting, analytics and metrics related to spending, economics, and value.

Our key message to clients is this: the journey to dynamic investment is not linear, with cost transparency and cost optimization staged as building blocks that have cumulative effects. KPMG firms are here to help – and we believe there is no time to lose in narrowing today’s growing digital divide.