It’s a perennial dilemma in IT shops everywhere: So much of the IT budget is spent on keeping aging systems running that the wherewithal to invest in new, transformative technologies too often remains frustratingly elusive. So when an opportunity arose to gain some insight on how to deal with that dilemma, I jumped on it.
That insight is being shared by CGI, a global IT services and consulting firm headquartered in Montreal. CGI recently conducted a survey of nearly 1,000 of its client executives worldwide, the findings of which were included in a white paper that discusses how companies can invest in what CGI calls “step up” activities that achieve market differentiation, while maintaining the “keep up” activities that are core to running the business.
I discussed all of this in an interview last week with João Baptista, president of Eastern, Central, and Southern Europe operations at CGI, and I began the interview by citing one of the key findings of the survey: Even though business executives increasingly view IT as a means of business transformation, only 18 percent of IT budgets are allocated toward transformational investment, with the remaining 82 percent used for maintaining existing business operations. I asked Baptista for his thoughts on why that’s the case, and he said it all goes back to the legacy issue:
A lot of companies have very complex IT environments that they have inherited or built over the years, through a combination of new and incremental investments. Established companies are quite often burdened with legacy systems that they’ve been tweaking for years and years. So by the time you need to make any change—let’s say you need to upgrade the capabilities of the front-end channel-supporting systems—the upstream consequences of doing any change are tremendous. Then you have to fund lots of tweaks all the way down the chain, which are very inefficient. Often a lot of those platforms are still built in COBOL or some other language that is no longer current—you have fewer and fewer people with that very specialized knowledge, and the cost of those individuals is prohibitive. So a lot of companies keep postponing the time at which they have to bite the bullet and do a major transformation, with all the capital investment, and the risks for the business, that that typically represents. Quite often, the leadership tries to push that down the road—that’s why you end up in that situation.
So what, I asked Baptista, is the right split? What percentage of the IT budget should be allocated to transformational investment, and what percentage should be allocated to maintaining business operations? He said there’s no universal rule:
Certainly if you think about companies that are on the forefront of consumer or B2B competitiveness, they’re allocating 80 percent to new, and 20 percent to legacy. I’m referring to cases like Amazon; First Direct, which is a leading [online] consumer bank in the UK; even Lego. A lot of these companies have done what I was describing—jettisoned the legacy and invested a lot in front-end systems that enable much higher functionality, and then integrated it all the way to the logistics systems on the basis of new platforms. They’ve been compromising as little as possible in terms of repurposing legacy. So you don’t have to be 80 percent—if you’re 80 percent, you’re probably a new company, mainly online. I would certainly think that if you can move to 40 percent—doubling the “step-up” investments—that gives you a huge advantage relative to competitors. But there isn’t a hard and fast rule—it’s just spending as little as possible on legacy. Some companies are able to do that faster than others.
The survey found that some companies spend up to 20 percent of their revenues on IT, compared to just 2 percent in previous years. I asked Baptista if the companies that spend a higher percentage of revenues on IT tend to be the ones that spend a higher percentage of their IT budgets on stepping up, as opposed to keeping up. He responded affirmatively, noting that these companies may have, for whatever reason, a pent-up demand to transform themselves:
Maybe something happened, like a cybersecurity breach that revealed that this is not going to be solved with a patch, and therefore they decided they would undertake that long-needed transformation program. … A lot of companies that have seen their budgets reduced over time are companies that either are trying to maintain profitability in the expectation that maybe they will be taken over and have their problems solved for them, or they are companies that have made those investments in the past, and are now benefiting from a renewed platform.
The white paper cites the importance of having a CIO who is willing to relinquish the day-to-day running of anything that is not on the critical path for market differentiation. So I asked Baptista who determines what’s on that path and what isn’t, and how it’s determined. His response:
The stakeholders that are best placed to determine this are the customer-facing units—the customer facing leadership. They may be informed by the IT team and leadership, and the CIO in particular. But ultimately, they need to be the judge of what the differentiation is that they’re looking for. There needs to be a healthy tension between their desire to maximize that differentiation, and the capabilities of the technology, as well as the availability of financial resources to underwrite any investments required. That creative tension needs to be biased towards a can-do attitude, driven by an understanding of the markets. The best CIOs are those who understand their markets very well, and who can work hand-in-hand with customer-facing units without intimidating them, or without somehow creating barriers that prevent close dialog.
Finally, I noted that outsourcing “keep up” activities is one of the best practices that CGI is recommending in the white paper. I assumed it follows that a company should not outsource “step up” activities, and Baptista said I was correct in that assumption:
I think the step-up activities are ones that need very, very close interweaving with the business units. They are more prone to very quick development cycles, maybe based on agile approaches. Those really need a very tight dialog. So when you completely outsource that leading-edge development, it becomes harder for there to be an intimacy between the client and the partner. These are things you do with partners, but not with an arms-length outsourcing contract.
A contributing writer on IT management and career topics with IT Business Edge since 2009, Don Tennant began his technology journalism career in 1990 in Hong Kong, where he served as editor of the Hong Kong edition of Computerworld. After returning to the U.S. in 2000, he became Editor in Chief of the U.S. edition of Computerworld, and later assumed the editorial directorship of Computerworld and InfoWorld. Don was presented with the 2007 Timothy White Award for Editorial Integrity by American Business Media, and he is a recipient of the Jesse H. Neal National Business Journalism Award for editorial excellence in news coverage. Follow him on Twitter @dontennant.