Digital Transformation Has a Digital Divide - InformationWeek
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8/2/2018
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Digital Transformation Has a Digital Divide

Companies in all industries are talking about digital transformation, but success may depend on whether the firms have world-class or ordinary IT organizations.

Digital transformation tends to take more time and effort than enterprises and IT departments expect. For one thing, businesses are undergoing digital transformation while their IT departments are going through their own transformation, morphing into more agile, innovative and customer-centric organizations.

"IT is having to transform its own function to become more of a digital operating model. A lot of the earlier results we saw were about IT trying to enable digital transformation. They've been doing that, but they've been overlooking the transformation of their own function," said Richard Pastore, senior research advisor, IT Executive Advisory Program at The Hackett Group. "We're seeing a little bit better balance between the two transformation missions, including more effort to automate and digitize IT's operations."

Image: Shutterstock
Image: Shutterstock

While the digital transformation missions of the business and IT are interdependent, given the finite resources of time, talent and capital, most IT organizations are finding it difficult to strike a balance.

"For the past few years, robotics processing automation has been coming into finance and other operating functions, such as procurement, where they have a lot of routine tasks and IT has been helping them with that," said Pastore. "Now IT is looking at RPA to automate more of its own function. That wasn't on the table before. No one was talking about RPA in IT."

The Hackett Group recently released a report showing the dramatic differences between what "world-class" IT organizations are able to achieve versus "typical" IT organizations.

World-class IT organizations are those that achieve top-quartile performance in both efficiency and effectiveness across an array of weighted metrics The Hackett Group uses for its comprehensive IT benchmark. The Hackett Group’s IT research is based on an analysis of recent benchmark results, performance studies, and advisory and transformation engagements at hundreds of large global companies. 

World-class IT organizations spend less and get better results

The report reveals that world-class IT organizations are more effective than typical IT organizations even though they spend 22% less on IT per employee. For example, a company with $10 billion in annual revenue that has attained "world-class performance" can drive as much as $41 million in potential savings.

Rick Pastore
Rick Pastore

World-class IT organizations are able to achieve those savings by spending 51% less on infrastructure management, 43% less on end-user support and 25% less on application management per employee than typical IT organizations. For one thing, they're using fewer enterprise systems, such as ERP and customer databases, which means they have less complexity to manage, and they're managing the complexity more effectively than other organizations.

"The most successful companies are the ones that can reduce the complexity and cost of running the lights in IT, running the technology – not to build it, not to plan it, not to experiment with it, because they're doing that, but some are not doing it fast enough," said Pastore. "It's not a matter of turning off systems and finding redundancies, that's the simple stuff and people have done that before. It's a matter of taking monolithic, expensive architecture platforms and changing them to something like cloud. It's simplification."

World-class IT organizations also approve 44% fewer IT projects than typical IT organizations which enables them to deliver high-value projects at least four times faster than their counterparts.

"I think the biggest problem is trying to figure out what is the Number One thing I need to do," said Scott Holland, the group's principal and Global IT Executive Advisory practice leader. "Today you say you want to reduce complexity and then you have a conversation with your end users and it's how do I get RPA to help them? Then you go to someone else and it's how do I get AI and sensors to do this?"

Managing the demand for IT services is critical because IT leaders are being pressured to keep costs down even though the demand for their resources is exploding as a result of digital transformation. In fact, digital transformation now accounts for nearly 30% of all projects in the pipeline.

Meanwhile, there's also the risk of digital transformation shadow IT. For example, if finance engages an RPA vendor without IT's assistance, finance may not realize that the robotic software needs to be maintained and updated, which can cost $25,000 per year for a single robot. That falls on IT which didn’t expect it.

"Shadow IT is about complexity," said Pastore. "The [best] way to be efficient and world-class effective is to reduce complexity in the technology infrastructure of the enterprise overall."

Scott Holland
Scott Holland

According to The Hackett Group's research, world-class IT organizations are able to complete more IT projects, on time, on budget and to spec than typical IT organizations. In fact, they're able to deliver the core functionality of high-profile, high-value applications in 90 days or less, which is four times faster than typical IT organizations. World-class IT organizations also are three times more likely to use rapid development and iterative methodologies than their typical IT organization counterparts.

The time and money world-class IT organizations save can be invested in digital transformation and innovation initiatives, giving them a significant edge over their less-efficient counterparts. Specifically, they're able to focus on building new capabilities, such as infrastructure, applications and updates and access to Big Data sources. They're also able to invest twice as much in emerging technologies.

However, all IT organizations can improve operational efficiency by automating the IT service delivery cycle. Fully implementing automation tools can reduce operating costs further for both world-class and typical companies, largely by reducing run costs, the research found.

Why IT should drive digital transformation

Notably, when digital transformation is driven by IT, process costs for other general and administrative (G&A) functions, such as finance and procurement, can be reduced by an average of 25%. 

"What was different and what we didn't know a year ago was that the G&A costs per end user can come down by 25%. Twenty-five percent is a nice chunk across functions such as HR, finance, and procurement. For IT which is already highly automated, there's a digital prize if they transform the function which is 19% for most companies," said Pastore.

The largest percentage of pilots and completed transformation projects tend to involve end user support including the IT service desk, network and data center IT operations, and risk and security management.

Not surprisingly, cloud-based applications are becoming increasingly popular in IT as well in the G&A functions. In fact, The Hackett Group expects cloud-based applications to double or triple in G&A functions in the next two to three years. While cloud-based applications are not necessarily cheaper than traditional on-site deployments, especially given the rising cost of SaaS alternatives, SaaS options are easier to manage because they eliminate traditional forms of customization, apply upgrades systemically, and effectively outsource the optimization of technical infrastructure.

The Hackett Group’s research found that IT help is necessary to enable the business to transform its processes, products, delivery channels and decision-making insights. To do that, IT must apply its five core enterprise transformation capabilities which are technology innovation, modern digital architecture design, advanced cybersecurity, accelerated service delivery and advanced data and analytics. Although none of those capabilities are particularly new or foreign to IT, IT needs to improve its own capabilities for the business to realize the full benefits of digital transformation. Otherwise, IT simply becomes a bottleneck.

For more on digital transformation in the enterprise, check out these recent articles.

What Cloud Natives Can Teach the Rest of Us

The Generational Shift in IT Drives Change for IT Pros

How to Kickstart Digital Transformation: Government Edition

3 Ways IT Leaders Can Deliver Business Transformation

 

Lisa Morgan is a freelance writer who covers big data and BI for InformationWeek. She has contributed articles, reports, and other types of content to various publications and sites ranging from SD Times to the Economist Intelligent Unit. Frequent areas of coverage include ... View Full Bio

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