November 05, 2020
Making the case for technology simplification
Uncertainty in today’s business environment has raised the urgency for enterprise agility. This has in turn forced IT leaders to finally reckon with technology complexity, which is the nemesis of agility. Companies burdened by high levels of complexity are less able to quickly pivot to new operating or business models, mitigate impacts of economic upheaval or take full advantage of fleeting opportunities. (Scroll to the bottom of this article for a link to a free complexity reduction opportunity assessment that generates an instant results dashboard.)
But CIOs can’t wave a wand and make decades of technical debt, redundancy and uncontrolled proliferation disappear. They must make the case for investment in simplification. The Hackett Group data can offer guidance: G&A total operating costs are 25% higher in companies with high technology complexity, compared to those with average levels of complexity. Compared to companies that have achieved low levels of technology complexity, high-complexity G&A functions suffer a 58% increase in costs.
Hackett Benchmark Data Reveals Elevated Operating Cost in G&A Functions with High Technology Complexity
We assess relative levels of technology complexity by the volume and iterations of applications, platforms, hardware, databases, programming languages and other factors, within the context of number of factors such as enterprise employees, total revenue and other characteristics.
It’s easy to blame IT for technology complexity. But in fact, it is not just IT that’s to blame. Technology complexity is largely the result of factors not entirely under IT’s control, including:
- Failure of business stakeholders (and shadow IT) to adhere to IT’s architecture standards.
- Business cases that fail to identify compatibility issues and redundancies for new tools and technologies.
- Lack of enterprise data ownership and standards.
- Rapid growth and aggressive mergers and acquisitions.
- Stakeholder insistence on customizations to packaged software.
However, complexity is IT’s problem to solve – no other business function has the perspective and insight to drive simplification. In the past, such efforts were seen as IT attempts to get its house in order and reduce technical debt. So, not surprisingly, there was little appetite in the C-suite to spend what it would take to replace paid-up legacy systems with modern standardized cloud data platforms and core or peripheral applications. To make headway in this environment of uncertainty, IT must be seen as teaming with stakeholders to reduce complexity for the sake resiliency, agility and business value delivery.
MAKING THE CASE FOR COMPLEXITY REDUCTION
Building a compelling case and setting targets requires understanding of causes and consequences. Also, IT must correct the flawed perspective that all complexity is bad. Some aspects of a digital architecture are inherently complex but add value, such as data models that accommodate structured and unstructured data from a variety of sources. Rather, it is the self-inflicted complexity that adds no value which should be the actual target. For example, companies compound data complexity through a lack of an enterprise data model. This permits a siloed approach to defining, storing, accessing and interpreting data, resulting in islands of data that require the addition of back- and front-end applications to integrate and manipulate it.
Some root causes of complexity are dependent on circumstances, such as rapid business growth. But most are systemic and influenced by business culture, including disregard for standards, deferred system replacement and lack of systems integration for acquired companies. These problems can’t be resolved by IT unilaterally – again, it needs to be a collaborative attack.
Complexity’s consequences are lost value and resources. High-complexity companies suffer a steep penalty in their operating costs compared to companies that have managed to achieve and sustain low complexity (lower than average). For the IT function, high complexity drives a 61% increase in operating costs. For finance, the cost penalty is 63%, and for HR, 51%. There are less tangible but no less significant effects on the front as well as the back of the house. These include higher opportunity costs, lower customer satisfaction, slower response times, reduced resiliency, and slower time to market/value. Essentially, complexity robs the company of agility.
Although our cost analysis is based on all areas of technology infrastructure, the biggest factor by far is the number of applications supported per end user. Application proliferation burdens companies with spiraling costs associated with maintaining outmoded, overly customized, on-premises software.
There is a 58% difference in operating cost between those with a low number of applications per end user compared to high. Also, IT functions with high application levels carry 27% more full-time equivalents per end user. The toll for other G&A functions is also high: HR’s technology cost per employee is more than 200% higher for those with high application complexity, and finance and procurement functions spend twice as much on technology as a percentage of revenue when burdened with high application levels.
In contrast, world-class IT functions in our ongoing benchmark support 44% fewer applications per 1,000 end users than typical companies. Their costs are correspondingly low – 21% lower total costs than typical IT functions. These organizations drive the number down by simplifying host platforms, consolidating core systems and replacing heavily customized applications with standardized solutions. And, they resist stakeholder pressure to build new applications atop antiquated platforms.
REDUCING AND AVOIDING COMPLEXITY
Even with an understanding of the quantitative and intangible consequences, the case for complexity reduction can still founder. Only 15% of IT leaders report being consistently successful in their efforts to reduce technology complexity. Another 33% say they fall short, and the remainder have inconsistent results.
From our experience with clients, we believe the best way to ensure a green light for technology simplification is to link it to delivery of new or improved business capability or value. In a recent poll, 26% of respondents said they fund complexity reduction primarily with this method. Slightly more (30%) secure funding by tapping operating cost savings achieved through previous consolidation or simplification initiatives. Another 20% rely on allocations from IT’s budget. This is less likely to work in the long term, since the value generated will be invisible to business stakeholders, causing them to withdraw funding support.
The practices that minimize infrastructure complexity span all aspects of the IT service delivery model and reinforce each other. But organization and governance are areas where perhaps the greatest long-term impact can be achieved. Addressing complexity must be a priority in the modern enterprise governance process. This way, it is less likely to be an afterthought or viewed by stakeholders as an arbitrary roadblock.
By making complexity considerations a standard aspect of governance, IT is also more likely to achieve a sense of shared responsibility and accountability from stakeholders. The burden cannot sit on IT’s shoulders alone. Transparency will make it plain to all stakeholders why certain decisions are being made and how they drive or complement enterprise goals.
A major focus of governance transparency should be costs, particularly when cost optimization is a strategic priority. IT leaders should apply a TCO model to provide a full picture of the cost of complexity to specific business functions, as well as any spillover impact on other functions. The effects of complexity should be shown from the perspective of the entire end-to-end process, which may span multiple platforms and applications.
Governance models should embed complexity considerations into business case requirements so that it becomes a natural part of the flow for greenlighting new initiatives. Particularly, business cases for new systems should specify the systems to be decommissioned as a result.
Along with governance, IT’s organization structure and operating model are in the midst of an evolution at most companies. In the past, companies had to choose between a global centralized IT model, a local model or a federated hybrid approach, each with tradeoffs and complexity ramifications. Now, there are more-refined choices that include aligning the IT organization with business platforms and products, consolidating expertise through centers of excellence (CoE), and setting up independent innovation teams.
IT organization that field horizontal CoEs reduce the chance of technology redundancy across large distributed organizations. CoEs will know where, for example, advanced analytics tools and AI engines are deployed, and will be better able to reuse and repurpose these systems in other areas of the business, avoiding the redundancy or solution proliferation that happens with siloed IT models.
Digital transformation teams, whether part of the IT organization or independent, have the potential to affect complexity positively and negatively. If the team is reactive, it may deploy digital tools to automate processes without regard to their ability to integrate with other processes, and their desire for speed may result in building new digital tools on top of legacy platforms, perpetuating technology proliferation. Digital teams should instead work with the IT organization on a systematic technology sunsetting program as part of the enterprise digital transformation or platform modernization effort. The goal is to create or migrate to a simplified global set of host platforms that accommodate modular applications that are relevant for business units and user groups but standardized for easy upgrade or replacement.
Of course, legacy technology decommissioning doesn’t need to wait for the introduction of digital alternatives. IT has been striving for some time to consolidate iterations of ERP/MRP and limit new customization. CIOs have turned off little-used applications temporarily, checking to see if anyone would notice or complain. If not, the applications would be unplugged.
There is a danger of backlash from aggressive complexity reduction and standards discipline. Such efforts could sour stakeholder perception of their IT partnership. That is why it is vital for IT leaders to explain why they are unplugging systems, enforcing standards and opposing customization. These decisions tend to first impact lower levels of the enterprise, where there may be little regard for or understanding of the bigger strategic picture. IT and business stakeholder leadership must continuously communicate and reinforce a finite set of concrete business goals that will be advanced by simplification actions.
To help IT leaders consider where they have the best opportunity to reduce complexity, The Hackett Group offers a free online complexity reduction opportunity assessment. By comparing complexity factors and capability maturity levels, the tool provides instant guidance on the best opportunities to make simplification progress. Contact Christopher Key at firstname.lastname@example.org for access or click here: https://thehackettgroup.co1.qualtrics.com/jfe/form/SV_1Rl9QhiwihDhFkN?fn=1