Digital transformation: 3 ways to find funding during the pandemic
There’s some consensus about the overall impact of the COVID-19 pandemic on IT budgets, with most industry watchers anticipating a downward shift in technology funding for the remainder of the year. Gartner predicts IT spending will dip eight percent to $3.4 trillion this year, down from $3.7 trillion in 2019. Computer Economics forecasts that IT operational spending will decrease between five and 11 percent in 2020, depending upon industry; the transportation will take the biggest hit (between 10 and 15 percent) while the public sector, energy and utilities, and manufacturing should see more modest declines. As of May, 55 percent of IT decision-makers surveyed by Bain and Company had cut their budgets for technology hardware, software, and services.
There is also some nuance, however, as certain aspects of digital transformation (particularly spending on technology to support now dispersed employees) are seeking an uptick.
IDC found that worldwide spending on IT infrastructure (including public and private cloud) increased 2.2 percent in the first quarter even as budgets for traditional non-cloud infrastructure plunged 16.3 percent.
“COVID-19 has certainly accelerated digital transformation activities using available funds, especially those initiatives that allow work to be performed remotely. The pandemic has further emphasized the need to adopt digital transformation at an accelerated pace,” says Shezhad Amin, director at Pace Harmon. “However, as IT departments are also faced with ever-increasing pressures to reduce costs, initiatives tend to be more selective in order to maximize investment value.”
The bottom line: IT leaders may face greater difficulty securing financial support for their digital initiatives going forward – at a time when some of those investments are more important than ever. “With the pandemic, budgets are tight, and – for many sectors – revenue is down,” says Bill Huber, partner in the digital platforms and solutions group at global technology research and advisory firm ISG. “Identifying funding sources for digital transformation requires more creativity than under normal circumstances.”
How to find money for digital transformation initiatives: Three options
Resourceful IT leaders can take a number of approaches to find money for their digital initiatives this year. Consider these options:
1. Asset monetization
Selling proprietary technology, operational centers, or physical assets can free up money for digital transformation. “Asset monetization essentially entails an analysis of which assets provide greater value to another organization than your company can generate from those assets internally, identifying potential buyers, and then negotiating a sale along with any necessary transition activities,” says Huber.
Doing this well takes some diligence. However, selling a captive offshore operation that no longer makes sense to own and operate, for example, can create significant capital for digital initiatives.
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2. Cost optimization
Cost-out or cost-optimization programs, ideally implemented using a zero-based approach, can help align expenses with the organization’s revenue-generating value stream. Thanks to increased financial data visibility and analytics, IT organizations can identify spending that no longer makes sense based on their organization’s long-term strategy.
“While immediate savings can be generated with tactical renegotiations and demand management programs, strategic savings is more structural,” Huber says. “[It] requires a clear understanding of which capabilities will be required to compete in the new future, and how to best leverage technology-enabled reengineering to replace less effective and efficient legacy approaches to key operational requirements.”
The opportunities for cost take-outs exist on a spectrum. Some examples:
- Cost elimination (pruning the project portfolio, downsizing, consolidating facilities)
- Repricing (renegotiation or recompeting commoditized services and products)
- Substitution (outsourcing, automation, or cloud alternatives)
- Strategic initiatives (technology modernization and elimination of technical debt)
“If done well, quick wins through renegotiations and demand management can provide initial funding to start on longer-term savings initiatives that require more time and initial investment,” Huber says.
3. Next-gen outsourcing
Partnering with skilled IT service providers can offer opportunities to snag dollars for digital transformation. “A strategy of bringing financial benefits forward by leveraging the strong balance sheets enjoyed by many IT service providers to contractually lock in run-rate savings early in a contract can be an attractive source of funding,” says Huber, “but only if implemented with specific structural elements.”
The interests of providers and customers must be aligned and met – and that requires implementing a new generation of transparency, measurability, governance, and innovation mechanisms that were absent from prior generations of outsourcing.
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