The journey begins with a new window on cost transparency

In the race to leave the global pandemic’s disruptive impact behind and embrace new opportunities for growth, forward-looking enterprises are accelerating their investment in transformational IT capabilities. In today’s hyper-competitive reality, these enterprises recognize that funding rapid digital innovation using diverse investment models can pose significant financial-transparency issues, under-utilization of new capacity and ongoing challenges to technology budgets.

To help reduce reliance on legacy technology and capitalize on game-changing capabilities such as enterprise SaaS, distributed cloud infrastructure, artificial intelligence and automation, re-engineering the finance and technology-funding process is now critical.

More enterprises are turning to dynamic investment for its ability to forge a new financial connection between IT spending and value, ultimately enabling rapid and continuous change in technology funding and implementation. Enterprises turning to dynamic investment are becoming aligned as never before with their customers, markets and ever-evolving technology needs.

Unfortunately, as leading organizations respond to today’s challenging market dynamics, we are witnessing a growing ‘digital divide’ in which enterprises trail competitors on the need for modern tech funding that enhances agility, efficiency, and competitiveness in today’s digital economy. Organizations on the wrong side of the digital divide are finding it increasingly harder to compete and this widening gap is creating conditions for a ‘winner-take-all’ market.
Slower-moving enterprises are struggling with cost transparency challenges related to identifying and classifying digital-innovation costs, understanding cost drivers, and using the timely collection of cost data to inform and enhance decision making.

A key challenge that we observe is a lack of knowledge concerning the need to establish a modern cost-management framework that is specific to IT and digital capabilities. This typically leads to a number of issues and limitations – including an inability to generate relevant data and timely insights into classifying, measuring and allocating technology costs.
It’s common to see organizations relying on various ‘shortcuts,’ for example consolidating IT and digital innovation costs into a single line item, and allocating investment using generic drivers such as the ratio of revenue versus costs, or employee headcount and related staffing costs. This generic cost allocation tends to be relatively ambiguous in determining costs and can typically prompt ongoing debate and disagreement regarding the ‘fairness’ or ‘appropriateness’ of IT and digital-innovation spending. In addition, many organizations still have a number of ‘shadow’ IT activities in which associated costs are not captured or analyzed in a centralized and productive manner.

Establishing a dedicated team possessing the skills needed to create an appropriate IT/digital cost-management framework is essential to resolving today’s challenges and delivering both new levels of cost transparency and insights into the value of IT and digital-innovation spending.

Cost transparency is important to consider to enhance identification and classification of costs while accurately identifying cost drivers and tapping into the power of data-based insights – as a critical enabler to become more agile and responsive to the demands of their markets.

Identification of technology costs: The finance function is a key influencer in developing a dynamic-investment approach, making it crucial that IT and finance are aligned on how technology costs are identified. To run at market speed and make quick pivots, enterprises need a real-time view into the specific cost elements of the technology portfolio and the levers available to adjust costs, quality, performance and consumption. Close collaboration that aligns the IT and finance functions to create a new view into the true cost of technology spending – including ‘shadow’ technology costs embedded in initiatives led by other departments – is critical to enhancing cost transparency.

Classification of costs: Aligning IT and finance teams on how technology costs are classified requires IT and finance to collaborate using a common language. The classification ‘taxonomy’ must evolve from outdated approaches in which IT costs are assigned to macro categories with a limited view of financials or project spending. This approach makes it hard to create a comprehensive view of technology costs from both IT and enterprise-wide perspectives. This all leads to new ways of working – with cost data continuously analyzed and refined to provide finance, accounting, IT and the rest of the enterprise with significant new reporting views.

Identifying cost drivers: Cost drivers related to technology spending are traditionally pre-built and based on considerations such as headcount, vendors, applications and infrastructure components, making it hard to change the cost drivers for various analytical purposes. As financial analytics evolve, information will be available based on the cost driver of choice and related to the activities they represent, with easily adaptable views making effective reporting quick and easy.

Timely collection of cost data: Replacing static IT budgeting cycles with a new reliance on timely data unlocks powerful capabilities to anticipate and rapidly address emerging technology needs. Smart decision-making demands that enterprises understand the impact of costs and investments across the entire organization. While finance is typically the gatekeeper of data and the insights it can offer on costs, true IT cost transparency fosters close collaboration, ongoing dialogue and new alignment between IT spending and the finance function.

As KPMG professionals stress to clients, the journey to dynamic investment is an incremental process, starting with cost transparency. Today’s CIOs and IT leaders are grappling with an array of challenges that include knowing where to start on this journey. But there is no time to lose – the digital divide is real and growing as today’s larger organizations set the pace on innovation.

At the same time, it’s important to note that more of today’s smaller competitors – while less advanced on the journey to dynamic investment – are recognizing the inevitable need to accelerate investment in game-changing digital capabilities. With their flexibility and inherent ability to move faster, these organizations now have an excellent opportunity to reallocate resources and enhance their capabilities in ways that can generate new value and ultimately increase market share. Dynamic investment can play a critical role in helping these enterprises narrow the prevailing ‘digital divide’ and become truly competitive, market-speed organizations.

Wherever your organization is today in adopting dynamic investment, a variety of services are available from KPMG firms to help assess, design and transform technology cost management and investment practices within your enterprise.