IT Spending: The Value-Driven Approach

By on

Click to learn more about author Sachin Reja.

Advances in information technology (IT) are forcing businesses in all industries to evaluate their IT spend. The impetus here is to reduce staffing costs and other expenditures while investing more in digital tools and programing. With the landscape of IT evolving and with more platforms being utilized daily, software is no longer considered “ancillary” to performing everyday tasks. Rather, it is a business essential.

IT has become a more recognized and vital deliverable to the achievement of business goals, ranging from functions to personnel, from data and analytics staff to sales teams. But as spending on IT has increased and organizations’ internal IT infrastructures have grown in complexity, those IT dollars have not necessarily been allocated in ways that produce tangible net gains. Despite the sophistication of today’s IT role, the return on investment (ROI) can still be compromised if IT programs and services are not properly tailored to the size, needs, and objectives of an individual business. Regardless of the investment, when IT dollars are not prioritized in a way that correlates to the organization’s specific goals and objectives, odds are that money is being wasted.

So, what is necessary to ensure the benefits of the IT spend are materialized?

Value-Driven Spending Defined

Value-driven spending is best characterized as costs that directly impact the goals and objectives of an organization and how that spending moves the needle of productivity in a positive direction for that organization. Money is only wisely spent in terms of value when it is appropriately identified in a way where IT can create the biggest differentiators for an organization’s product or service delivery. If the money being spent is not aligned with the company’s directives, that money, regardless of how much, is not meeting real value. Value-driven spending is not simply focusing on how to lower costs for the sake of improving the overall bottom line. Value-driven spending should also not be confused with value-based spending, or the practice of understanding total costs before committing to make a purchase.

It is, however, important to put value-driven spending into context before allocating and spending said money. Value effectively drives spending when purchases clearly contribute to the goals and objectives of the organization. For example, if an objective is to increase market share by a certain percent, then there should be an identified reason as to why the current market share is underperforming. Knowledge of where and why the reallocation of a specific expense would realistically help to achieve this goal must be a prerequisite.

At some companies, management and staff collaborate through application-analysis workshops, during which all parties assess where the organization is spending the most money versus where IT money is being spent. That spending, for example, on website hosting and software customization, is then compared with how it relates to the achieving of (or not meeting) relative goals and objectives. Additionally, spending exuberantly on tooling where ROI is diminishing can be wasteful. Spending a significant portion of a budget on building custom solutions and reporting lacks value when the anticipated use case incidence of those programs does not justify a fit for those programs.

Allocation and Reallocation

In today’s environment, the more significant costs associated with running an IT department include the infrastructure; hardware, servers, and other utilities; delivery time of the hardware; recovery objectives and disaster preparedness; licensing fees; payroll and training; consultant payments; and travel expenses. The latter two areas are often low-hanging fruit for IT spending habits that can be altered and subsequently improved.

In general, research shows that 15 to 25 percent of projected industry budgets in 2019 were devoted to travel of staff and related expenses. In the face of the coronavirus pandemic, all business stakeholders have learned that unexpected environmental circumstances can relegate the ability to conduct business travel to a seemingly unattainable luxury. Investing in software and tools that enable employees to work remotely can be a cost-savings. Yes, this can invoke data privacy and security concerns, especially as they relate to the storage and transmitting of data. At the same time, proper vetting of how to minimize breaches, such as through the installation of a virtual private network (VPN), can keep assets secure while giving employees the ability to work from home.

Broad-based budget concerns can be mitigated by committing to the time-consuming task of comprehensively mapping objectives and goals throughout the company and aligning them to all expenditures. This process typically begins with detailed reporting of categorized IT spends, for example, by business lines, spend type, and ROI. Other modification strategies include:

  • Conducting a workshop with managers and executives from core business groups with IT leadership to identify key goals and objectives
  • Identifying and prioritizing all relative challenges that need to be overcome to meet goals
  • Listing specific IT objectives that would be expected to help achieve goals with budget estimates
  • Creating and committing to a one-to-three-year plan to evaluate outcomes

Examples of areas to include in an objective internal review include: review of hosting strategy; assessment and reduction of technology debt to the company, such as operational, maintenance, and upgrade costs of aging applications; conducting annual review of subscriptions; identifying industry-leading solutions for the most critical and complex areas of business, such as logistics and production planning; and identifying commonalities that exist within major sales and operations planning to simplify and standardize protocol.

Impediments to Value-Based Spending

The advent and evolution of new technologies have increased demand for specialized resources and created a shift in consumer trends from face-to-face transactions to web-based transactions. In the process, more competitive pricing has emerged. At the same time, achieving common business goals, such as reaching customers more quickly and efficiently, remain key drivers. That said, many organizations are missing out on the ability to reduce costs and gain an edge in service and performance by moving their server hosting from on premises to cloud-based. When configured correctly, this approach has proven to be more flexible and cost-effective.

Other impediments to value-based spending include loss of expert staff members when positions are eliminated as a cost-cutting measure and, similarly, a lack of IT executives being part of the c-suite when addressing company strategy and making decisions. Too often, organizations make change for the sake of change as suggested by third-party vendors, which can be detrimental to an organization if that guidance does not come with an individualized review of processes and spending.

While it is prudent to refer to advisory resources for guidance and recommendations when finalizing budgets, it is important to avoid a “cookie-cutter” approach to infrastructure and budget changes. Employing a diverse mix of vendors and regularly conducting third-party audits can be beneficial, but not without in-house experts who can more objectively evaluate services to ensure business continuity.

Future-Focused

The continuous advent of new technology will force companies to be more agile and to address fast-paced changes that could quickly make wasteful spending more impactful than ever before and place businesses at risk. Without a focus on the alignment of spending with goals and objectives, companies will be in a constant loss in attempting to achieve value-driven spending. This reality will only be exacerbated by the pandemic and the subsequent expectations that have developed among customers and employees as a result of sudden societal shifts. Before business operations return to normal frequency and performance, now is the time to re-evaluate expenses with a new business model future in mind as opposed to the way operations were conducted pre-pandemic.

We use technologies such as cookies to understand how you use our site and to provide a better user experience. This includes personalizing content, using analytics and improving site operations. We may share your information about your use of our site with third parties in accordance with our Privacy Policy. You can change your cookie settings as described here at any time, but parts of our site may not function correctly without them. By continuing to use our site, you agree that we can save cookies on your device, unless you have disabled cookies.
I Accept