Wednesday, May 2, 2018

Ongoing Costs of Transformation Projects



Digital transformation is the need in every industry. Bill Schmarzo defines digital transformation as “The application of digital capabilities to processes, products, and assets to improve efficiency, enhance customer value, manage risk, and uncover new monetization opportunities.” [1]
There is a lot written about how to justify the need to invest in digital transformation and calculate the value that it will create. Funding the digital transformation projects is essential, but CIOs and CFOs must balance the funding needs with the returns expected.
There has not been a lot of conversation about the ongoing costs of maintaining and upgrading transformation projects. Digital transformation using the agile method allows small changes to be made and brought into production quickly. The old legacy systems are not shut down and transitioned into the new systems at once which was the old waterfall approach. But what this means is that the company will have expenses for legacy as well as for the new systems which leads to an increase in run expenses for a certain time period  in addition to the cost of funding the transformation.


As a business partner to IT, finance should help IT understand the overall expense estimates for the period of transformation and beyond and message that to the business. Here are 3 points to consider while assessing and planning for ongoing expenses:
  1. Legacy system retirements: One of the most important questions to ask when estimating the impact of ongoing expenses of transformation is “will this new application replace an existing system/application?” In agile methods of development, parts of the old legacy systems are replaced with new applications along with providing new capabilities. But for some time, both the new application and the legacy application run side-by-side. This leads to incremental maintenance expenses during that period because IT cannot shut down the legacy systems and free up the resources. It also means help desk or service agents must be trained to service both systems and understand the capabilities provided by both applications.
  2. Cloud consumption: With the movement to cloud computing, investments in fixed hardware-based data centers have been replaced with ongoing cloud consumption-related expenses. Companies that are moving towards cloud computing are doing so in stages with some applications while other applications might still be in the existing data center. This means that business will see an increase in cloud consumption-related expenses but with a minimal decrease in the existing data center costs. Data already in storage in existing data centers requires investment in order to be cleaned up and moved to the cloud. This does not happen as a big-bang approach but rather the move is slow and may take years. In the meantime, the business may be growing, so the overall data-related expenses may be growing. Finance needs to work with IT to help business understand that although the per-unit cost of data might be declining, the overall data/cloud consumption may increase; thus the company will see an overall increase in cloud expenses during and after transformation.
  3. Infrastructure needs: An  iPhone10 will not be able to perform to its capacity if it is run on a 2G network. The user will be frustrated that he or she has spent $1000 in equipment that does perform, but the problem is the network, not the equipment. With the upgrades in applications and systems and the move to cloud computing, the infrastructure of the company also  requires an upgrade to keep up with the transformation. This means the company’s personal computers and networks also need continuous investment so the employees can take the full advantage of the digital transformation. And this means that there will be in increase in the pace of rising infrastructure upgrade expenses during transformation.
    Digital transformation is a huge change-management project. It requires a culture change within the company and support for the required investment by the investors and shareholders. But this large investment also needs a holistic funding and impact analysis with transparency around the budgets and expenses. Finance needs to partner with IT to explain both the long-term and short-term value of the investment and prepare the business on an ongoing basis for the future changes in expenses, and this will require tough decisions and prioritizations.



[1] https://www.cio.com/article/3199030/analytics/what-is-digital-transformation.html

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