The move into digital operations caused companies to expand their capex and opex budgets to invest in automation, digital technologies, as well as modernization and the move to the cloud during the last 10-15 years. They are now in a mature state in the digital world and have been investing at an almost torrid pace to deliver even greater value. As I have explained in previous blogs, they have ongoing demand for more investments to continually evolve their tech stacks and business operations almost in lockstep.
The new reality in the marketplace, though, is that technology budgets are now either flat or in the process of being reduced because of a potential significant recession. This puts CIOs and CTOs in a difficult situation.
There was always some relationship between technology and operations driving a need to continue to evolve the technology, but the amount of change was less intimate and less dynamic between tech and operations in the past. In those years, even in times of recession, companies could freeze or delay modifications and could continue to operate with the tech stack at the stable level of enhancements. That is no longer a reality. In today’s digital world, even if you shrink the company, you still have to invest to change the tech stack. So the demand to continually evolve the tech stack will not go away because of a recession.
How can CIOs and CTOs reconcile investing in digital technology and services to continue to meet the business demand if they have less money to do so? This blog discusses several ways to approach this problem.
Demand Won’t Disappear Despite Reduced Budgets
CIOs and CTOs have responsibility for a company’s digital estates. The nature of those estates is that they continue to need to advance the changes to the digital environment. They cannot stop investments or even slow despite heading into a recession. Why not? Because of the intimate dynamic relationship between operations and the tech stack, which I’ve discussed in several blogs.
This intimate relationship between the tech stack and operations means they are much more tightly integrated. Companies now cannot change anything in their operations without changing the digital technology stack. And changing the technology stack sets off changes in operations. Thus, CIOs and CTOs will continue to have a significant demand for new technology and for changing or reconfiguring their technology stacks.
The velocity of investing to address the dynamic need for change will continue to build without respect to an economic cycle or flat/reduced budgets.
How Companies Can Address This Funding Dilemma
Solution #1: Digital Rationalization and Cloud Management. There may be opportunities for cost savings within a company’s digital estate. There is a big movement in the marketplace now to rationalize or streamline digital estates.
One aspect of this movement is that there is a significant amount of pressure to bring cloud consumption under control. That’s not to say companies are looking to move away from cloud, but they increasingly look to manage their cloud expenditures.
In many cases, cloud costs crept up over the years. So, it’s time to go back and take a top-down view of cloud consumption or digital consumption. Put metrics in place and start to manage the costs. Look for inefficiencies and waste that likely crept into the structure, particularly during the last two years of rapid expansion after COVID.
Companies are now paying a lot of attention to digital rationalization and cloud management, including both the technology and related services.
Solution #2: Portfolio Rationalization. This rationalization comes from both a technology perspective and a service provider perspective. From a technology perspective, often digital estates have multiple technologies or vendors that do the same function. There is now an effort to standardize and identify duplications and eliminate the spend.
Pick a champion and migrate the workloads off their competing vehicles into a more cost-effective champion, thus reducing the number of vendors or service providers. Look at how to use consolidation to negotiate better pricing as well as more efficient use of the technologies.
The past two years particularly have seen a rampant increase in the number of service providers in companies’ portfolios. This happened because of the talent shortage during the last two years. Most companies added more service providers into their mix under the philosophy of more providers equals more talent.
But now they face the need to wring cost savings out of this environment. Portfolio rationalization and reducing the number of providers, thus increasing the volume of work to fewer providers, can be a route to get pricing and efficiency concessions.
Solution #3: Legacy Estate. A third strategy to get more with less is to squeeze the legacy estate. Companies moved legacy estates to the cloud or modernized those technologies over the past several years. They still have the appetite to modernize, but they no longer have the capital required to continue that journey at the previous torrid pace.
Now they want to find ways to cut cost in legacy through portfolio rationalization yet also make modest targeted investments in automation (which is different from migrating to the cloud). This often involves moving work offshore.
We at Everest Group currently observe a significant rise in new GBS startups or captive startups. It is cheaper for companies to do the legacy work in low-cost locations by using third-party providers or by expanding their captives or Global Business Service (GBS) centers.
However, accompanying this strategy is a problem due to the new intimate dynamic relationship between the tech stack and the business operations. This is challenging when the services time zones differ widely. For example, the time zone difference between India and the US (particularly the West Coast of the US) creates problems around the required intimacy. Consequently, there is now significant interest in expanding closer locations such as in the Caribbean and Central America for US companies and Eastern Europe locations for European companies. Thus, there is a significant interest in nearshoring.
Solution #4: Level of Talent. We also observe a willingness of companies to have a greater mix of young new talent in services. This is another way to save money.
Substituting freshers or people right out of college instead of using experienced workers is easier to do in the legacy model than in the digital, intimate relationships that require highly skilled people to support the digital technologies.
Any savings that can be generated out of the support for legacy systems can then be redeployed to fund the ravenous appetite of the digital estates.
These are five examples of what companies are doing to accomplish more with less when it comes to high demand for technology and services.