Fortify, Fast-Track and Invest in Your Digital Future
The Analysis You Need to Develop a Practical, Rapid Action Plan for Your Digital Future
The scale and speed of this pandemic have required a herculean effort to manage through the disruption. Technology has been a lifeline for minimizing the impact on business operations and processes. For the most part, business continuity plans have prevailed. Enterprise connectivity for employees, suppliers, and customers has enabled business to continue, and companies have been able to make decisions — albeit with imperfect data and analysis — to respond to immediate business needs.
As the economic fallout continues to unfold, companies will face declining revenues and the prospect of a liquidity crunch. They will need to make difficult choices to manage the order of the day, while also planning with an eye toward the future. Technology and digital transformation will be catalysts for change as business leaders make profound operating model changes to meet new demand patterns and remain relevant. To prevail in the next normal, companies will need to fast-track investments to secure technology and digital avenues, fortify the business model, and retool to enable business capabilities in the next normal.
Pre-crisis digital and automation trends will accelerate — particularly among companies most affected by the crisis. According to The Hackett Group’s recent poll, 42% of companies reporting a high operational and financial impact from the disruption expect to accelerate cost takeout and efficiency initiatives, compared to only 15% of companies that suffered only modest impact. Digital enablement will become a necessary way of conducting business as companies align their sales, general and administrative (SG&A) costs to projected revenue declines, looking to operational efficiency to close the gap. To fund digital enablement and technology investments, companies will need to advance an aspirational agenda built on modern architecture — with cloud-based, digital and automation solutions to increase workforce productivity; and data, artificial intelligence (AI) and visualization tools to make rapid decisions — while lowering the IT cost base.
Companies will need to address three near-term imperatives:
- Define the next normal
- Redefine needed capabilities
- Refocus the technology operating model
Targeting the Next Normal
As companies define new business norms and align SG&A costs to projected revenues, they will need to be very deliberate about technology investments. In most cases, rightsizing the SG&A service delivery model will require technology investments to be self-funded. Companies will need to rationalize current internal technology spending and pivot new investments to deliver expected operational efficiencies in the medium to longer term and digital leadership in the next normal.
The Hackett Group has analyzed potential IT investment funding requirements based on the severity of the crisis impact and current technology footprint. Across industries in our analysis, the typical $10 billion company must reduce SG&A costs by 15%, or $241 million, to sustain operational efficiencies across the enterprise and maintain its pre-crisis ratio of SG&A cost to revenue. However, the transformation required to achieve these efficiencies will require a $39 million (.39% of revenue) investment in new technology capabilities. Because the total value of IT rationalization for this same company — which includes the volume effect of supporting a 15% lower revenue base — is $78 million, it can reduce IT spend by $39 million.
To prevail — rather than simply sustain performance — in the next normal, this company will need to achieve digital leadership. This requires it to reduce SG&A cost by 30%, or $486 million. However, achieving digital leadership requires additional investment in growth and innovation. This transformation requires IT investment of $96 million (0.96% of revenue), of which $78 million (81%) is self-funded through IT rationalization and $18 million (19%) comes from net new funding.
Given the enormous disruption, companies will need to re-examine their technology operating model. This may include a number of key changes: leveraging more “as a service” business models to manage demand volatility, determining the right new third- and fourth-party infrastructure partnerships, accelerating e-commerce technologies and digital services for new customer channels, fast-tracking smart automation for operational efficiencies, and shoring up investments in digital and AI-driven capabilities for predictive analytics to enable better decision support and insights.
Technology functions must anticipate and take advantage of opportunities to realign services and capabilities coming out of this crisis. They must also develop the right investment strategy and portfolio mix to deliver material impact, rather than just purely looking for cost reductions within IT. This will require careful alignment of technology-enabled improvements with strategic goals.
The Next Normal Requires Focused IT Investments
The Hackett Group’s analysis provides direction to companies and technology leaders struggling to calibrate their post-crisis technology investments to support multiple goals: rightsizing SG&A costs with revenues for the next normal, reducing core technology run costs, unlocking further operational efficiencies, and/or funding customer experience improvements and other digital initiatives designed to defend or grow revenues. The result is an estimate of the degree to which funding for transformation comes from internal technology rationalization versus net new investment.
This analysis groups industries on two dimensions: the estimated severity of post-crisis revenue impact (significant, moderate and minimal revenue impact) and current level of technology investment:
- Very high — (5%-10% of revenue; 7.5% midpoint)
- High — (3%-5% of revenue; 4% midpoint)
- Moderate — (2%-3% of revenue; 2.5% midpoint)
- Low —(1%-2% of revenue; 1.5% midpoint)
The appropriate response for organizations and their technology leadership lies at the intersection of two dimensions. Achieving digital leadership will require a different type of response depending on the impact of the crisis on revenue:
Severely impacted (20%-40% revenue decline; 30% median):
Companies in these industries will increase technology investment to support efficiency improvement initiatives that protect the margin and rightsize their cost base for the new revenue level. Technology investment in growth and innovation will remain unchanged to avoid jeopardizing future competitiveness. No or little net new funding is available, so all technology investment must be self-funded.
Moderately impacted (10%-20% revenue decline; 15% median):
Companies in these industries will aggressively invest in efficiency improvement initiatives, while moderately investing in growth and innovation to achieve leadership in the next normal. Limited net new funding is available, so most of the investment is self-funded.
Minimally impacted (10% increase-10% revenue decline; 0% median):
Companies in these industries will invest in efficiency improvement initiatives at the historical rate, while increasing investment in growth and innovation to capitalize on a shift in consumer preferences in the next normal. Investment includes both self-funding and net new funding.
For a company in a technology-intensive industry, categorized in this analysis as operating with very high technology budget of around 7.5% as a percentage of revenue, a significant drop in revenue will require rapid reduction of its internal technology budget to help the organization reach its overall SG&A resizing target. But given the broader reach of technology inside the business, that company would also require some additional funding to invest in automation that eliminates transactional work, as well as to pursue other technology-enablement initiatives.
On the other end of the spectrum, for a company in the low technology investment category, with estimated technology spend of around 1.5% of revenue, a significant drop in revenue will require additional incremental funding to enable the technology initiatives necessary to meet SG&A resizing targets. Because these industries cannot materially reduce internal technology costs, they are unable to self-fund most of the necessary improvements.
by Angela Caswell-LaPierre, Sean Kracklauer, Erik Dorr, Richard Pastore, and Paul Morrison of The Hackett Group
Available for download with permission.