Funding more transformational capacity – Show me the money!

by Chris Hennesey, Enterprise Strategist, AWS Enterprise Strategy

As I meet with more AWS customers, it is clear that many enterprises struggle to have enough capacity to focus on transforming their business. Transformation spending provides a company with necessary resources to embrace new technology and innovation for enhanced capacity. With close to 80% of IT capacity focused on run-the-engine (RTE) activities, it leaves little margin for technology transformation. In this blog post, we explore ways to drive efficiencies in RTE activities and optimize financial management mechanisms to increase the focus on transformation capacity.

Transformational capacity is an investment in the future and helps ensure sustainable operations in the face of adverse events and rapidly evolving technology. Not all organizations leverage the same technology framework. Although not the same, they are similar because all organizations typically compartmentalize required resources to run-the-engine and what remains for new feature development.

The recent pandemic demonstrates the urgency of funding transformational capacity. It is a real time example of a worldwide influence that fueled the necessity for rapid changes by taking advantage of technologies to ensure a sustainable business model going forward. The current social distancing requirements have proven that digital transformation is not only intelligent, it is essential. Organizations that were able to rapidly deploy “work from home” policies and engage creative aspects of remote operation through advanced technology were most successful in responding to the pandemic. Many have discovered new ways of doing business that result in more money falling to the bottom line and enhanced product lines.

Funding transformational capacity involves changing the mentality of those who believe “continuing to do what we have always done” equips them to succeed in a future world. This magnifies the challenge of convincing key stakeholders and executives that financial investments must be allocated into transforming technology first—and then the impact on business operations and the bottom line will show them the money. And it’s not just about changing how you do business but creating new avenues for business. According to a 2020 International Data Corporation (IDC) study, the average enterprise IT budget is approximately 80% dedicated to “keeping the lights on” and approximately 20% invested in new capabilities.

Investing to compete and thrive in an industry is crucial; however, organizations struggle with the ability to make the necessary financial investments to deliver on their business strategy. With capacity building, organizations focused on a sustainable future know that investing in whatever is necessary to manage all aspects of operations, program delivery, and services, is a “must have”—and not a “nice to have.” They recognize it as an ongoing competency and not simply a one-time deal. They acknowledge that capitalizing on changes that deliver innovation and open up new avenues and streams of revenue, as well as sustain operational capabilities, are the bridge to the future.

So, we know it’s essential to fund transformational capacity. Then why do organizations have such a difficult time making the necessary financial investments to make it happen? First, we have to take a closer look at funding mechanisms within various organizations

Funding Capacity

Too many organizations focus on the present with a myopic approach to the future. Information technology (IT) has often been a “back burner” budget item and one that has been charged back to various areas of an organization based on complex methodologies. Organizations may even be penalized for their use of resources rather than applauded for developing creative ways to enhance service delivery, execute their data strategy, and expand the organization’s outreach. Once again, it’s a short-term approach versus a competitive way of doing business internationally.

Depending on the organization’s financial position, it may or may not be able to support the typical upfront investment needed to support the migration to the cloud. Many organizations are at a tipping point and funding mechanisms can be utilized to increase the critical IT transformation investments.

A reinvention strategy that considers the inter-connectivity and inter-dependency of systems and processes leads to success. Transformational companies expect IT investments to deliver innovation, create new sources of revenue, identify new markets, and develop a broader range of products and services.

So, let’s explore creative ways your organization can increase the transformational IT spend. We will take a look at four funding mechanisms that can be deployed for the organization’s sustainable future.

1. Plan

Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.” If you don’t plan, it won’t happen.

A long-held and key financial management practice is to hold a financial pool of investment at the Top of the House (TOH). This investment is vetted and under the authority of the CEO, CIO, and the rest of the Leadership Team. A cohesive executive leadership team committed to a sustainable future based on leveraging technology is an important part of planning for transformation capacity. This team holds the purse strings for establishing an appropriate budget.

So where do you start?

Beyond your baseline investment capacity, establish an additional small portion of your total IT budget that is dedicated to transformational investments. Target approximately 5% of your remaining IT budget as a baseline. This is a great starting point to have isolated transformational funding that can be decisioned by the executive leadership team. It is an effective way to get started and begin to build the muscle of driving efficiencies and redirecting that funding to additional investments. It also eases the burden inside the organization on how much incremental discretionary investment exists and how it will be governed.

Deploying the investment at the appropriate time is a critical part of the overall plan. Ideally, there will be several time-based stage gates to deploy the funds to ensure they can actually be leveraged effectively. Making investments at the beginning of each of the first quarters for the fiscal year is a good place to start. Aligning the IT spending plan according to these gates allows time to leverage the expenditures and achieve intended outcomes.

In addition to staged investments, it is essential to have a sense of how effectively each organization can reasonably deploy the capital. This puts a spotlight and heavy focus on IT and Human Resources. Both components are keys to success. From an HR perspective, there are two primary options to consider. Labor can be culled from existing employees or a third party spend may be more effective. Major factors impacting this decision include availability and accessibility of associates, and the skills, knowledge, and expertise to transform. Non-labor considerations must be planned in advance as well. Software, networking, and other non-labor components of transformation must be included in planning and budgeting. Omission in funding for non-labor considerations can jeopardize the transformation process if not properly planned.

And finally, in the planning process utilize the planning framework as an incentive for teams to earn the right to get this funding. Those that demonstrate budget-conscience thinking and efficient work methods should be empowered and rewarded at the highest level. Motivating and encouraging excellence permeates throughout the transformation team from the top down.

2. Operationalize

Start by embedding operating norms into Agile practices. Since Agile methods integrate best practices for development, they can significantly impact transformation timelines and budgets. Communicate these practices and milestones to the transformation team. Schedule demonstrations to assess systems and identify potential issues. And measure everything with Key Performance Indicators (KPI).

For example, dedicate at least 1 to 2 weeks during a three-month planning cycle to focus on innovation capabilities. This represents between 5-15% of time during that planning cycle and could serve as a structured way to devote capacity to transformation. Coupling this approach along with tangible KPIs is a great recipe for success within your organization.

Operationalizing the transformation process is a meticulous process that requires careful evaluation and observance of performance. KPIs make it possible to assess progress at pivotal milestones for rapid adjustment and adaptation to unexpected challenges. This identifies potential risks early in the process to minimize rework and issues surfacing downstream. Periodic demonstrations provide valuable feedback on the design and development effectiveness.

3. Self-Fund

Transformational capacity is not established in a silo. It is integrated as part of the overall organization’s IT labor and business strategy. As we saw earlier, a large majority of IT capacity is focused on the 80% to RTE. When properly managed, efficiencies gained in RTE can be used to self-fund the transformation process.

Start by creating a dedicated RTE reduction program/culture that is a top-down priority. Establish targets to reduce RTE activities with measurable milestones against expectations. Efficiencies gained can be directly reinvested back into the transformation projects with an aligned incentive model, versus simply dropping to the bottom line. Two examples of ways to drive down RTE costs include: 1) managing unplanned work for your teams; and 2) ensuring you have an optimal mix of engineering versus non-engineering staffing.

Having clear intent and healthy projects in queue for your teams is vital to ensure you achieve the highest velocity for their through-put. However all too often unplanned work enters into the ecosystem, which disrupts the flow. Leveraging a KPI surrounding the percentage mix of unplanned work and actively managing it is a great way to ensure you operate at the desired mix.

Another idea is evaluating the mix of data and software engineering versus non-engineering capacity. Too many times when engaging with customers, I hear of problems with the support staff growing at a faster rate than the engineering community. The goal is to find the optimal mix of resources without unnecessary expansion of support roles. Some of the organizations that expand include Chief of Staff, Communications, Program Management, Shadow Finance, Capacity Planning, and others. While these roles are vital, it’s critical to be intentional of the mix and build this KPI into the dashboard of key metrics to not lose track of. If your mix is out of balance, leverage this as a way to not back fill the support roles and expand the engineering roles, which is a way to self-fund more transformational capacity.

4. Seed Fund

Leveraging additional capacity to fully dedicate multi-skilled teams to focus on top transformational priorities is another effective strategy.

Start by seeding dedicated innovation Agile teams and cultivating them to grow. It enables instant momentum and results in quick wins for the organization. Members of these teams feel valued and empowered. Empowerment drives them to greater heights of success with a focus on creating velocity and wins for the organization.

This approach does not come without risks. The first is that you will need to either secure incremental funding to staff these teams or shift resources from other priorities to these teams. The second risk is that non-innovation teams may feel overlooked and dissatisfied if they begin to lose out on the ability to innovate themselves. Both of these risks can be managed, but it is important to consider them before jumping in.

Summary

Organizations are contemplating their digital transformation, but those who wait too long will be left behind. Transformational capacity is an investment in the future that ensures a sustainable business model in the rapidly evolving world of digital technology. It’s the gateway to expanded products and services, enhanced customer service, and proactive avenues of customer outreach. But it does not come without a cost.

There are multiple options to fund transformational capacity. Planning, operationalizing, self-funding, and seed funding are four effective ways to garner the support and financial investment needed to succeed. Innovative leaders focused on a secure future will find creative ways to transform digital capacity and design sustainable organizations.

Once financial investments are identified and allocated to transform digital technology, then the impact on business operations and the bottom line will show them the money!

—Chris