In my previous blog, I talked about companies needing to structure their IT organizations so they are leaner, more agile and able to constantly use the world’s best coders with the rarest and newest skills that are dramatically scarce. To achieve these goals, I explained that they need to consider using a gig platform as an integral part of IT.
In the blog, I explained the benefits, especially accelerating the rebuilding of a business in the post-COVID-19 world. However, companies must understand the challenge in embracing a gig platform at scale: they must first restructure their organization. Here is a look at some important considerations and what is involved.
The COVID-19 crisis has resulted in a devastated economy. Executives are looking at their businesses from a recession and retrench mindset, knowing they need to preserve cash. That involves eliminating inefficiencies, and enterprise IT organizations have significant inefficiencies and redundancies. So, companies have laid off many programmers and IT professionals. While these lay-offs created a surplus of IT talent, there is a talent shortage of necessary skills. Despite the lack of skills, companies recognize that coming out of the crisis will necessitate becoming more agile and innovating faster. In this blog, I discuss a potential answer to this problem.
In the ninth episode of our Digital Reality podcast series, Cecilia Edwards and Jimit Arora highlight examples of financial engineering solutions service providers are offering to accelerate the digital transformation of cash strapped enterprises. They also discuss changes in internal funding approval and allocation processes that support rapid decision-making while limiting the associated risk.
Jimit Arora: Welcome to this month’s episode of Digital Reality, Everest Group’s monthly podcast that moves beyond theory and beyond technology to discuss the realities of doing business in a digital-first world. I’m Jimit Arora…
Cecilia Edwards: and I’m Cecilia Edwards. Each month we bring you a discussion that digs into the details of what it means, fundamentally, to execute a digital transformation that creates real business results.
This month, as we continue to see the impacts of the COVID-19 crisis globally, we shift the conversation to an important issue facing IT leaders as they wrestle with whether they should they increase or decrease the pace of digital transformation. From our leadership team’s conversations with over 50 enterprises in the last few weeks – the biggest regret we hear is that they wish they had made more progress on our automation and digital agendas prior to the crisis. So clearly the posture coming out of this crisis is that the pace of digital transformation needs to accelerate to drive the needed efficiencies in the organizational value chain.
However, there is a sobering reality check here – digital transformation requires investment, and budgets are the one thing that have been impacted significantly given the broader recessionary environment that we find ourselves in. So this creates a paradox – companies need digital transformation to bend the cost curve and at the same time find themselves lacking the budgets to realize these transformations.
Jimit, you have noted this paradox in the past – what are some strategies that you think are important to potentially find the funding to drive digital transformation.
JA: Yes, this is indeed an interesting paradox – the good news is that this isn’t new. As an industry we have been dealing with this issue for as long as I can recall, because no CIO will say that their budgets are adequate to keep the lights on and deliver the change they need. What is most instructive is: if you look back to prior crises – the dotcom bubble, the global financial crisis, and now in the aftermath of COVID-19 – one of the funding strategies we are going to see is a resurgence in is financial engineering.
Now, financial engineering is not new – it has been around for a while. Effectively, you end up using accounting strategies – either your own or your vendor’s – to realize benefits without incurring all of the costs upfront. The most common manifestation is that you are using a partner’s balance sheet in the form of financing to make investments today and realizing value in the near term, where the payout happens over a longer period of time. A simple example of this becomes taking investment strategies that require CapEx and turning them into OpEx.
It might sound simple, but it isn’t a one-size-fits-all approach and is going to be a function of how a company’s financial rules and internal accounting policies are structured.
For example, what aspects of new projects and upgrades are capitalized vs. considered an operating expense? How does your organization account for the labor involved in implementing new features and functionalities? Fundamentally, if the goal was to increase OpEx and your finance organization insists that these need to be capitalized then you may not be able to realize the benefits. I think that is one caution I provide organizations that are looking to leverage vendor financial engineering solutions to ensure that the path you are looking to go down will meet the necessary approvals of the finance organization. Which is why one of the most important things for IT leaders to do is to ensure you work very closely with your finance organization.
CE: Excellent point Jimit and a much-needed word of caution here. I think there is definitely a lot of commitment on the part of two categories of participants in the digital transformation enablement stack. BigTech vendors, like Microsoft, SAP, AWS, Oracle, Cisco, and systems integrators are preparing significantly to leverage their impressive balance sheets to enable client transformation programs to offset the decline in demand that they are likely to see.
A very public example has been Cisco, which said it is allocating $2.5 billion to help customers defer up to 95% of payments on new products and associated services until 2021. I also have examples of systems integrators that are offering to help “collapse the stack” by offering to the client a single monthly invoice that takes into account the investments in the infrastructure, software, and services by getting the client to the post-transformation run rate in year one in return of a seven- or 10-year deal. So clearly the wave has started, and companies need not be constrained by their own budget challenges, because BigTech and SIs are ready to make things happen in return for a large, long-term deal.
JA: Cecilia, changing gears somewhat. I know you have been examining an alternate mindset to thinking about investments and funding for digital transformation and you actually presented that in a recent webcast we conducted.
CE: Yes Jimit. In some ways, the approach we mention is consistent with the discussions we have had on how digital transformation is not an IT conversation exclusively but a business conversation. So three broad factors to keep in mind:
First, ensuring alignment of the digital transformation effort with strategic objectives is very important and often this trumps traditional ROI calculations. Why? Because in a number of situations, the business objectives might be framed on dimensions that are hard to quantify and put a dollar figure on. Coming out of this crisis, productivity and resilience are emerging as very important dimensions – and current models can’t effectively frame these into a robust ROI conversation;
Second, empowering those with business context to make many decisions becomes most important;
Third, strategic priorities will change over time. Having the discipline to stop funding for things that no longer align with the strategic priorities is important (i.e., avoiding the sunk cost fallacy) and also ensuring new funding for new priorities. Traditional budgeting approaches need to change, and ensuring that you have mechanisms to fund and defund only for value becomes paramount.
JA: Unprecedented is probably the most used (and potentially misused) word to describe the nature of the crisis at hand. However, this crisis has also helped amplify the need for digital transformation. Microsoft CEO Satya Nadella recently said that we saw two years of digital transformation in two months. And this transformation needs sustainable and creative funding strategies. There are clear lessons for us as we think through the funding strategies available to us today. We call these lessons Digital Reality Check Points:
Leverage financial engineering – it is real, effective, especially in a hypercompetitive supply environment and can help accelerate your transformation journey;
However, this is not a one-size-fits-all approach. Ensure the applicability of these vendor financing solutions to your organization’s financial and accounting context;
Align new investment strategies to the business’ strategic objectives.
As individuals or as businesses, any life-changing event results in rethinking our position. In the case of the COVID-19 crisis, it will change the way companies conduct business for a long time, as the crisis revealed weak spots in business practices and investments. Moreover, as companies begin to exit the crisis, they move forward with a recession mindset. However, the global crisis also reveals business opportunities going forward. Let’s look specifically at two factors: working from home and discounts from third-party service providers.
COVID-19 has revealed some crippling inadequacies to enterprises across the globe. With employees locked down in their homes, manufacturing processes on hold, warehouse facilities inaccessible, and supply chains at a standstill, businesses are facing an undeniable economic crisis. This downtime has made them question their underlying business models, operating methodologies, and, most importantly, their tech investments. An overarching question that also looms large is: What will a post-pandemic business ecosystem look like, and how can enterprises and service partners be better prepared for it?
The 2008 financial crisis was a wake-up call for businesses around the world, and was accompanied by new financial governance structures, steps to ensure transparent and efficient decision-making, and large-scale legislative reforms. In contrast, COVID-19 is expected to usher in massive technological reforms. We already see early signs of enterprises preparing for the future by leveraging technologies not only to address current requirements but also to build a strong foundation for the post-pandemic ecosystem.
Let’s take a look at some areas where technology is being leveraged to respond in radically newer ways.
Next normal – virtual experiences
Imagine taking your kids to a safari, or attending a concert in London, or test driving a car, all of this while you are in self-quarantine at home. Virtual tours, virtual resource-sharing, and even virtual personalities and friends are likely to become routine, compelling enterprises to rethink their business models. Customer interactions and customers’ expectations from brands will also change dramatically, requiring enterprises to design innovative solutions and new experiences, and ensure their seamless delivery. Technologies such as Internet of Things (IoT), Augmented Reality (AR), and Mixed Reality (MR) offer enterprises exciting opportunities to address these needs. Service partners will play a critical role in helping enterprises understand customers’ evolved expectations, visualize future demand themes, re-design virtual customer journeys, and build the required technological assets.
Amid the lockdown and uncertainty across the globe, technology platform-based businesses seem to fit like pieces in a puzzle. Think about food and grocery delivery businesses or content delivery platforms such as Amazon Prime and Netflix, or even social media platforms such as Facebook. As users get more comfortable with technology and use it increasingly to meet varying needs, the treasured data gathered across platforms will also pave the way for cross-industry collaborations. For instance, secured access to customers’ virtual profiles can enable insurance firms to design personalized products based on lifestyle and preferences. Similarly, travel and tourism businesses can identify target customers and offer them curated solutions based on their preferences identified by converging insights across these platforms. These changes will usher in a new wave of innovation, driving seamless interactions, deeper customer insights, personalized marketing, and new business opportunities. Service partners will be trusted with the critical role of catalyst, which can onboard various stakeholders, enable seamless integration of diverse systems, and facilitate value realization for all entities involved.
Business continuity planning
Many technology firms are already supporting enterprises with solutions to ensure business continuity. For instance, Oracle, Salesforce, SAP, and ServiceNow are enabling collaboration, file sharing, and data sharing with flexible payment options to support their enterprise customers. And Cisco, Dell, Nutanix, and many others are offering free-to-use solutions or adopting creative financial models such as deferred payments and lower initial payments to facilitate business continuity for customers. This is, in turn, helps their clients build brand equity, which is likely to pay off in the long term. These firms are “doing good by doing well,” essentially responding with much-needed solutions. Increasingly, service partners will be expected to bring about changes in their engagement, delivery, and commercial models to address the challenges confronting their clients.
While businesses are still trying to fully grasp what it will take to survive and thrive post-pandemic, we can say one thing for sure: an astute understanding of customer needs, coupled with the right technological assets, proper governance, and a structured investment approach will help prepare enterprises for the world we encounter on the other side of the pandemic.
If you are looking to understand the evolving business ecosystem and a roadmap for how you can prepare your organization better for growth post-pandemic, please write to me at: [email protected].
As companies attempt to shift to 100 percent remote working model during these unprecedented times, accounts payable departments are struggling to maintain a fluid “business as usual” approach in managing their invoice processes in a timely and cost-effective manner in the absence of a sound digitally-applied account payable strategies.
Organizations can and should take steps now to digitize accounts payable not just to ensure business continuity, but to also tap the immense potential in it to save time and cost.
In this webinar, Everest Group’s Shirley Hung joins the Kofax team to share insights on:
What’s driving the need for AP automation today
The results organizations can expect to achieve from AP automation
Methods for implementation and key technology levers to consider
Operating models for success
In addition, Bob Monio from Kofax discusses how companies of all sizes can now embrace modern tools to automate a majority, if not all, of their invoicing and payment processes and reach positive ROI almost immediately.
The stakes for businesses have rarely been as high as they are now. The global pandemic is upending companies’ existing mindsets, strategies and investments. It’s leading to new decisions about actions and strategies that must occur at the same time but appear contradictory. This causes a lot of confusion for people in enterprises as well as the enterprise vendors. The contradictions and confusion can fuel tensions.
What’s the remedy for this predicament? Before I answer that question, it’s important to understand the underlying factors driving the predicament.
Not surprisingly, we’ve been flooded with questions about the implications of COVID-19 on the IT services industry over the past two months.
Let’s take a look at the two most prevalent questions.
How are IT contracts being impacted?
Financial distress – such as a dip in revenue generation and restricted cash flow – is forcing enterprise IT to review their IT contracts. Clients are exploring three options:
Putting non-critical projects on hold
Deferring payments to keep critical projects running
Their preferred option is putting non-critical projects on hold. Clients are triaging to keep their business-critical functions – like transactions systems, call centers, datacenters, and supply chain systems – running. However, they’re putting non-critical engagements, such as new application development and feature upgrades, on the back burner.
Second in order of priority is deferring payments. We’re seeing deferral requests increase in frequency, especially in distressed industries such as travel, transportation, hospitality, and medical devices. And we’ve seen payment terms going up to 180 days in a few situations. However, an early trend that will soon establish itself as the IT industry norm is balance sheet (or cash pile) financing; vendor balance sheets have started to play a role in enabling billing deferrals and “deploy now pay later” models. For example, Cisco has set up a US $2.5 billion war chest leveraging its balance sheet to help some of its clients defer payments until 2021.
Our analysis shows that vendor balance sheets, both tech products and IT, are healthy. For example:
IT vendors’ (HCL, Infosys, TCS, Wipro, etc.) balance sheet assets over liabilities ratio ranges from 1.3x to 3.5x
Tech vendors’ (Adobe, Amazon, Microsoft, Oracle, etc.) balance sheet assets over liabilities ratio ranges from 1.1x to 3.4x.
And there is evidence that they may dip into them to help their clients out.
The third in priority is seeking discounts. We’re seeing anecdotal evidence of clients seeking discounts on contract value and in a few cases extending up to 50 percent of the annual contract value. But to clarify and qualify this:
The discount discussions are largely focused on time and materials (T&M) projects. Few are around fixed price and managed service engagements, which form a larger share of revenue profile for large IT vendors
And this means that smaller IT and staffing vendors – for which T&M constitutes larger share of the revenue profile – are going to be impacted more than the large IT vendors
Most importantly, we’ve seen enterprises being very flexible and collaborative with their vendors – working closely with them to keep initiatives running.
How will enterprises prioritize and fund IT initiatives during this crisis?
Enterprises are currently preparing their playbooks to navigate the ongoing recession. It’s important to note that recession does not mean that IT initiatives will be broadly deprioritized. Depending on the impact they see on their overall business and their anticipation of recovery, enterprise executives will triage their resources (cash, talent, vendors) to keep critical initiatives running.
Here’s a look at the framework we’re using to help buy-side clients prioritize their decisions:
Rescue business critical initiatives most severely impacted by the recession through financial engineering and aggressive cost takeout
Revitalize revenue-generating business functions that can gain from automation usage and cloud-driven agility
Reinforce the lowest impact portions of the revenue profile through M&A and product launches
Restructure those portions of the portfolio – such as vendors, locations, and talent – that already had redundancy and concentration risk issues
In the coming weeks, enterprises will be using this framework to:
Triage between critical and non-critical IT spends
Build their blueprints for how they will reallocate budgets and engage with vendors
Identify new scope and financial models on which they’ll engage their vendors
Watch this space to see how this playbook evolves. If you have any questions or ideas on other approaches, please write to me at [email protected].
Only when the tide goes out do you discover who’s been swimming naked. — Warren Buffet
COVID-19 has impacted all businesses – but even in this difficult time, some have outperformed their peers within the same industry. In this webinar, we’ll discuss the characteristics that have allowed some companies to emerge from the COVID-19-shocked economy better than their peers, including how they’ve been able to ramp back up quickly.
We’ll also cover in detail how you can deploy business models that will be responsive to the new post-COVID-19 normal and can withstand future economic downturns.
You’ll get answers to questions such as:
What key attributes are enabling some companies to bounce back quickly from our current economic downturn – faster than their peers?
What characteristics will enable some companies to thrive when the economy recovers?
What steps should you take now to begin accelerating your digital transformation?
How should you approach modernizing your legacy systems?
How does your sourcing model strategy play into your ability to achieve agility and flexibility?
The crashing global economy caused by the COVID-19 pandemic now wreaks havoc on businesses. But the pandemic eventually will end, and there will be compelling opportunities at that time. As I explained in my prior blog, companies need to take steps now that enable them to accelerate through the pandemic curve so they can grab opportunities when the pandemic ends. In this blog, I’ll detail how to establish the necessary infrastructure that enables surviving a recession and thriving after the pandemic. This infrastructure is a top priority.
The pandemic is causing a pause in commercial activity for the next few months. But once the pause is over, the underlying fundamentals for moving to digital at scale are still positive. And it will happen quickly at that point – for companies that have the infrastructure for high velocity and productivity.