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The CIO challenge: Do you have enough money for IT innovation?

The CIO challenge: Do you have enough money for IT innovation?

Balancing innovative projects with keeping the lights on responsibilities is the reality for most CIOs today. Our research suggests that tackling this challenge successfully requires adopting a two-step strategy that can apply to organisations across sectors and geographies.

Why is innovation so challenging?

Why is innovation so challenging?

The search for impactful IT innovation, while maintaining operational efficiency is not new. However, given the extremely demanding and dynamic technological and organisational environments, CIOs must rethink how IT innovation can be achieved while maintaining and running existing systems.

In particular, as the speed of introducing new technological and service platforms, such as Internet of Things (IoT), artificial intelligence, and blockchain has recently increased, keeping up with the competition has become increasingly challenging.  

To keep up with the pace of innovation, CIOs have to allocate a significant portion of their IT budget to innovative projects while ensuring that they are keeping the lights on in an efficient and effective manner.

A recent study (by the author and independent research firm Vanson Bourne and commissioned by Rimini Street, based on responses from 900 IT decision makers across the globe) shows that finding the funds and achieving innovation is still a challenge for many CIOs, even when it is obvious to them that the survival of the firm depends on it. We found that:

  • 98 per cent believe that their organisation needs to increase IT innovation spending.

  • 71 per cent are worried about how their organisation will find budget for IT innovation

  • 83 per cent acknowledged a link between spending on IT innovation and the firm’s competitive position

  • 77 per cent indicated that the biggest blocker to achieving innovation in their organisation is the over-spending on ‘keeping the lights on’

  • 74 per cent stated that current contracts with service providers do not accommodate innovation

  • 63 per cent feel that they are locked in to current relationships with service providers thus lacking the ability to explore other options to innovate through partnership

First and foremost, companies struggle with shrinking to flat budgets to fund innovation

Dr Ilan Oshri, University of Auckland

With growing pressures on IT spending, overinvestment in keeping the lights on and slow pace of innovation from technology vendors, firms are at immediate risk of losing their competitive edge. They must up their game and consider radical strategies that will enable innovation now.

The state of innovation

Innovation is key for the firm’s growth and its competitiveness. Innovative firms are more likely to outperform their competition, attract superior talent and enjoy the trust of their customers and vendors. Innovative firms are known to be technology savvy, accustomed to rapidly integrating the latest technologies into successful services and products.

High performing innovation companies are used to transformations and changes in their operating mode and consequently embrace new business models as a way of integrating innovative solutions into their corporate strategy.

History has provided us with ample examples of firms that maintained their relevance by reinventing the sources of their competitiveness. Consider the top innovating firms in 2017 according to FastCompany, among them Amazon, Google, Uber and Netflix. What they have in common is their commitment to seek new technological solutions that transform their products and services.

For example, Uber was initially known for its superior app-based transportation platform that challenged the established taxi business, but now is experimenting with autonomous trucks to transform the economics of logistics.

Amazon, originally known for selling books through its website, has developed itself into a cloud-based service using artificial intelligence to provide a customer centric experience, including efficient delivery and timely and relevant information to make purchasing decisions.

AWS CEO Andy Jassy
AWS CEO Andy Jassy

Uber and Amazon have continuously invested in new IT platforms, such as cognitive computing and artificial intelligence, to challenge their own business models as well as reshape existing business solutions. These innovations are radical in nature, completely revamping the service offering of these firms and helping them create new revenue streams.

Radical innovation is capital intensive, often requiring significant investment in resources to transform the knowledge and operational base of the firm.

For this reason, radical innovation is often viewed by IT leaders as a risky strategy that puts constraints on the firm’s resources. Most firms pursue incremental innovation either alongside their radical innovation investments or as an alternative strategy. Incremental innovation is characterised as small improvements aimed at improving the firm’s services, products and processes.

This type of innovation requires steady and often reasonable amounts of spending on improvements in IT assets. However, it is unlikely to deliver a competitive edge, but rather maintain the firm’s relatively advantageous position vis-à-vis its services and processes.

CIOs are required to consider both incremental and radical innovations. Incremental innovations will provide support to existing platforms that drive contemporary business objectives while investments in radical innovations will offer a leapfrog advancement that transforms the firm’s business model. As both types of innovation require significant investments of capital and knowledge, firms need to weigh all their strategies and trade-offs to fund their innovation strategy.

Investing in innovation

Most firms claim to have the drive and ambition to be an innovator. However, many of them face challenges in achieving success through innovations. But why is innovation so challenging?

First and foremost, companies struggle with shrinking to flat budgets to fund innovation.

A recent study by Gartner shows that firms have invested about 90 per cent of their IT budget in ‘keeping the lights on’ and incremental innovation, while only 10 per cent of the budget is allocated to transformative innovation.

Our study confirms these concerns, with 77 per cent of IT leaders stating that the biggest obstacle to achieving innovation is overspending on ‘keeping the lights on’.

'Spending too much keeping the lights on is a blocker to innovation in organisations around the world'

With the majority of IT budget invested in maintaining and running current IT systems, firms are losing on both drivers of success, i.e. operational excellence and transformative innovation.

Reflecting that concern, 89 per cent of the IT leaders in this study clearly indicated that their organisation should be spending more on innovation, and 68 per cent said their organisation is spending too much on ‘keeping the lights on” (see Figures 2 and 3 below).  

Considering that IT budgets are tight and spending on IT is expected to increase by only 2.7 per cent by 2019,  it is hard to see how firms will be able to cope with a lack of investment in both innovation and achieve operational excellence. Specifically, 71 per cent of the IT leaders are worried about investing adequately in IT innovation.

‘Are you worried about how your organisation will find the budget for innovation?’ Split by region 

Interestingly, IT leaders believe that current allocation of IT budget to innovation initiatives falls short by about 5 per cent to allow the firm to achieve its innovation goals. In budget terms, an additional allocation of 5 per cent of the IT budget can be a substantial amount for medium and large firms.

While IT leaders are convinced of the benefits of innovation; the results so far highlight serious concerns about the ability of firms to achieve their innovation objectives.

When asked about the main roadblocks for innovation in their organisations, IT leaders pointed to overspending on keeping the lights on (77 per cent), complex legacy infrastructure that makes innovation difficult (76 per cent), board support for significant investment in innovation (76 per cent), and lack of skills critical to delivering innovation (74 per cent).

'What are the biggest blockers for innovation in your organisation?'

Who should be leading the innovation effort?

CEOs today are acting as both an innovation visionary and a facilitator, ensuring that the business objectives behind technological implementations are clear and well aligned with the firm’s strategic roadmap and that resources are available for the team to deliver impactful innovation.

However, pursuing breakthrough IT innovation initiatives like artificial intelligence or cognitive computing may require revisiting the idea that the CEO should be at the helm. Such innovations require both technological knowledge and business relevance of the proposed solution to allow the innovation champion to make an informed decision.

Our study shows that respondents were in the opinion that IT leaders, either the CTO (19 per cent) or CIO (18 per cent) should be leading IT innovation within the organisation. They also reported that currently the CIO (20 per cent), CEO (18 per cent) and CTO (15 per cent) are leading IT innovation initiatives.

‘Who is leading your organisation's innovation initiatives?’  

While our results show that there is innovation leadership at the board level, 50 per cent of our respondents reported that they failed to convince the board that investing in innovation is critical for the business.

There was also an agreement among respondents that the board shies away from transformative projects that integrate the entire IT infrastructure (64 per cent), is not confident that the firm has the skills to meet innovation objectives (57 per cent), and is focusing on cost cutting rather than innovation (63 per cent).

  

Board-level attitudes to innovation

The state of vendor relationships

Historically, clients assumed that working with partners and third-party providers will benefit their operations and competitive positioning. After all, third-party providers possess wide experience of doing things better.  

But it is only relatively recently that client firms have paid greater attention to examining how closely working with their software vendors would deliver value-add to their operations. Our study shows that while the idea of achieving innovation from your vendors is potentially beneficial, in reality our respondents expressed disappointment with their existing vendors in regard to the support offered in helping them to achieve their innovation objectives.

Clients are likely to entrust their service development with vendors when the relationships are based on a partnership between equals, in which the parties are creating opportunities to equally benefit from joint activities.

Opportunistic behavior on behalf of either side is likely to diminish trust, resulting in lack of aptitude to engage in co-development activities. Fifty-four percent of our respondents reported that they have felt pressured to adopt the vendor’s cloud strategy. Similarly, 63 per cent of the respondents reported that they felt locked in to their relationships with their vendors, hinting at their inability to make changes in the contract or service, despite changes in needs over time.  

Troubling vendor relationships   

While many firms tend to auto-renew their engagement with their vendors, a healthy practice is to assess the needs and market offering well in advance of the end of the service contract. In doing so, client firms are required to re-assess their future needs and examine solutions available in the market, compared with the current levels of service and associated costs by the existing provider.

Respondents (56 per cent) indicated that they are under so much time pressure that they often allow software support contracts to auto-renew without properly evaluating the alternatives. This evidence is particularly worrying as we also see that the vast majority of the vendors took little interest in helping client firms benefit from value-add services. To conclude, it appears from this study that client firms are ‘stuck’ in a transactional relationship with their software vendors, expressing growing dissatisfaction with the vendors’ intent and commitment to help them innovate and transform their IT service platforms.

The future of IT innovation

The future brings additional challenges. There are numerous disruptors that firms should mitigate in the form of either introducing technological innovation or new processes. Our respondents indicated the top three risks to their ability to innovate are cybersecurity (62 per cent), legacy IT systems (57 per cent) and moving to the cloud (42 per cent). These issues require significant investment of both capital and knowledge that may drain the organisational resources and occupy management for long periods of time while the firm gradually develops and executes a plan to mitigate the risk.

Take the move to the cloud as an example. Forty-two percent of respondents indicated that they would invest their IT innovation budget in moving to the cloud in the next 12 months. They estimated that, on average, it would take three years to move core systems to the cloud, at an expected average cost of US$62.5 million. Thirty-one percent of the respondents have already started their cloud migration.

 Does your organisation intend to move its core systems to the cloud?’ 

However, these estimates by IT leaders reveal the extreme challenge firms face in implementing their strategic plans. Consider that IT budgets are usually 3 per cent (large firm) to 6 per cent (small firm) of total revenues.

On average, a firm with US$1 billion in revenue is likely to allocate about US$40 million as their IT budget, thus needing to seek a significant budget increase of nearly 50 per cent to finance the move to the cloud over three years. How can such a significant increase in the IT budget be realistically achieved over a short period of time?

Solving the ‘budget problem’: The service and innovation model

Firms nowadays sustain market position mainly because of their access to external sources of knowledge. Thinking of innovation as a collaborative effort that includes the involvement of end-users, stakeholders and vendors is imperative.

Firms that have adopted this approach have sped up their innovation process, shortened the intervals between introductions of new services and shortened time to market.

A key element in such a strategy is the ability of a firm to collaborate with its vendors. While client-provider relationships may often be portrayed as prone to disagreements and disputes, they also bear a great potential for success beyond the transactional contract.

Our long examination of the relationships between contracting out services and innovation has revealed some specific conditions that can lead to success in terms of both service and innovation. Put simply, firms can enhance innovation by contracting out enterprise services.

We identified two strategies to achieve this:

First, by contracting out the optimisation of existing IT and software assets and redirecting savings to sponsor innovations.

Second (and more promising), by incorporating innovation into the service contract.

While both strategies will result in the reduction of costs associated with ‘keeping the lights on,’ the latter likely will facilitate ongoing innovations delivered by the service provider.

Both strategies require savvy vendor management capabilities on behalf of the client firm in which the client and vendor closely cooperate to achieve their objectives.  

Strategy 1: Reduce ‘keeping the lights on’ costs

Firms can pursue multiple ways to reduce the costs involved in keeping enterprise systems and services up and running including exploring cloud computing, optimal license models, and third party support options to reduce expensive maintenance and support fees. Reducing IT costs by using in-house capabilities will require the firm to regularly optimise its software assets and licenses and continuously monitor the usage of applications to avoid servicing low-utilised assets and retire underused applications.

Developing such an internal capability is likely to be less efficient than current offerings on the market, as service providers have developed greater scale and technological abilities to perform such regular audits, thus outperforming most in-house services in this area.

Choosing the client-vendor collaborative path has both advantages and risks. On the one hand, working with a third-party has proven to deliver significant cost savings to client firms, often forming long-term relationships and commitments between vendors and clients that resulted in new sources of competitive advantage.

On the other hand, this path can be risky, as clients and vendors might not always interpret the contract in a similar way, and expectations might lead to disappointments over time.

Indeed, our research has shown that lack of commitment on behalf of the parties often leads to failure in collaboration. Thus, when choosing the collaborative path, the client firm needs to ensure that their software assets are ready to be serviced by an external vendor and carefully select the most suitable partner to assume responsibility for the service. A strong approach to governance on behalf of both parties and the ongoing engagement in both maintaining and improving the service is likely to mitigate common risks.

While each of these options is likely to deliver costs-savings, it is the CIO’s responsibility to ensure that savings gained are redirected back to value-add initiatives. With tight budgets, there is a possibility that the board will not be convinced that savings should be redirected to innovation activities. Money could instead be directed to the bottom line or to marketing and other departments outside of IT.

Strategy 2: Blend service with innovation

The second strategy is to seek opportunities to blend innovation with outside services. Put simply, as part of the collaboration with a vendor, the client firm should seek to create conditions for the parties to collaborate on both incremental and radical innovations. In this way, innovation is generated within the engagement, by working closely with the vendor and leveraging the knowledge the vendor has acquired about the technological and business platforms of the clients.  

One key challenge: the vendor’s willingness to innovate for the client as part of the service engagement. Our research (Oshri, I., Kotlarsky, J. and Gerbasi, A. (2015) “Strategic Innovation Through Outsourcing: The Role of Relational and Contractual Governance,” Journal of Strategic Information Systems, 24(3), pp. 203-216) into this issue reveals that many vendors shy away from engaging in innovation for their clients mainly because of the relatively high degree of uncertainty in innovation.

Vendors are concerned that failing to meet the client’s innovation expectations might negatively affect the service relationships. In return, clients are dissatisfied with vendors’ efforts to innovate within the engagement, as we have seen in the results of this study.

Clients and vendors can and should create the appropriate conditions to achieve innovations within their service engagements.

For one, the parties should design a contract that captures innovation opportunities throughout the lifecycle of the engagement. These can be sponsored via cost savings made within the engagement or as a co-sourcing model. Indeed, one major obstacle to achieving innovation is the lock-in position of client firms in contracts that do not accommodate innovation. But clients and vendors need to do more than just designing a contract that encourages collaboration.

They must familiarise themselves with each other’s technological and business platforms and share the service roadmap to explore what technologies and methodologies may assist in the near and long-term future to achieve the firm’s goals. Clients should articulate their objectives, be these cost savings, shorter time-to-market, or even improved strategic positioning in the market, and closely work with their vendor to explore avenues to achieve these goals.

A software vendor needs to be attentive to the client’s objectives and seek to develop standardised – but also customised – solutions that deliver value from the partnership. The collaborative innovation model is unique in assuming a long-term partnership between the parties in which greater familiarity and strong relationships allow the parties to meet their goals.     

'Thinking of innovation as a collaborative effort that includes the involvement of end-users, stakeholders and vendors is imperative' - Dr Ilan Oshri of the University of Auckland
'Thinking of innovation as a collaborative effort that includes the involvement of end-users, stakeholders and vendors is imperative' - Dr Ilan Oshri of the University of Auckland

Dr Ilan Oshri is a professor at the Graduate School of Management at the University of Auckland. He is the author of 17 books on global sourcing and has extensively published on the future of work in both academic and managerial journals. He has acted as a consultant to numerous organisations in Europe, the United States and Asia. He is also the the co-founder of the European and Chinese global sourcing conferences and  a regular speaker in trade and academic events.

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