Taking control of growing technology costs

Technology costs are currently growing faster than many organisations’ revenues or budgets and we think they are about to accelerate further.

Globally, technology costs are trending at around 8% p.a. [source = Gartner, April 2024], fueled by priority initiatives in data security and business productivity and further exacerbated by a stubborn skills shortage.

The arrival of AI is set to make costs grow even faster. The higher energy consumption, high-end processing power and the need for new specialised skills are expected to be reflected in service costs. At the same time, cyber threats continue to rise and these digital business risks must be tackled with constant investment. Where can organisations find levers to manage technology budgets when everything feels so essential?

Cost visibility is declining

In our new report, Building Technology Cost Intelligence in the Enterprise, we worked with the ADAPT research team to better understand how CIOs and CFOs are measuring the value technology spend brings to their business. We found that:

• Cost visibility is declining – only 53% of business and IT leaders felt they had adequate visibility versus 73% two years ago;
  
  
• 65% of leaders say they can’t effectively demonstrate the link between spend and business value;
  
  
• 67% of leaders believe they are unable to act effectively to control costs.

Only through a clear sense of value can we make important decisions about what is working, and what is not. This information is required to focus our efforts in the right areas and close the gap between cost and perceived value.

Levers to control costs

In recent years many organisations have successfully reduced cost through offshoring (‘labour arbitrage’) and transitioning to the cloud (‘infrastructure arbitrage’). With most of those benefits already captured (and in some companies they continue to be disputed) and the growing scale of the cost challenge, we need to look at new cost and value levers to control costs.

The next wave of actions to reduce cost can be achieved through:

• Tougher prioritisation of which activities and services we invest in – that means deep understanding of the business and customer value they generate;
  
  
• Redesigning how we deliver work so that cost is reduced, flow speeds up and the quality of its impact improves;
  
  
• Workforce partnering: move from procuring inputs – days of effort – to partnering with scaled technology specialists for economies of scale, capacity flexibility, technical capability and incentivisation around business value outcomes;
  
  
• Architectural simplification: tackling the long-standing technology complexity so business capability can be delivered faster, safer and cheaper.

Changing the economics of technology

Cognizant observations derived from working with large enterprises, and analysis of work suggest most organisations are a long way off achieving their full potential around the economics of their technology. By ‘economics’ we mean not only cost, but value and speed, with the relative importance of these being very much dependent on each organisation’s context. We see a typical gap of between 30% and 50% between what companies are achieving today and their potential. Organisations that have a streamlined architecture and advanced ways of selecting and delivering work are much closer to achieving this potential.

For example, Cognizant worked with two very similar organisations where change was required to meet the same industry compliance standards. While the scope was identical, and the businesses offered effectively the same products in the market, one organisation spent twice as much on the project than the other. The overspend was approximately half due to their ways of working, and half due to architectural complexity that stemmed from an historic de-prioritisation of tech debt.

The goal of simplifying architecture is nothing new. In the example above, the organisation realised it was encumbered by complexity, but it didn’t truly understand the size of the cost and change burden it resulted in. It also hadn’t taken a focused, systematic, root cause analysis approach to tackling it. Where we have had success, it has been by identifying the blockages to simplification, and then industrialising the process to break down and remove them. Often, they aren’t technical, but rather are about systematic decision making and risk management trade-offs. Where they are technical it might be about developing factory-like processes to migrate data or refactor applications.

Is the answer more technology in your business?

We encourage technology leaders to think bolder, and beyond the current envelope of their technology. With ever growing AI and automation opportunities, how might the overall scope of cost be considered? Technology costs are typically only a fraction of overall business operating costs. By investing more in technology, and understanding the impact on business value, can we reduce the overall cost burden of an organisation and shift to AI driven business operations to achieve efficiencies?

Critically, to embrace more technology in a business’s products and operations will require trusted insight and collaboration on surfacing cost vs. Value, to convince leaders across an organisation to confidently shift their budgets.

Engineering a modern organisation

Cognizant has a number of approaches to helping organisations better understand their costs but, importantly, also their value impact. New tools, new ways of working and more insight-driven decisions can substantially change the economics of your technology footprint and roadmap.

To learn more and read the report on cost intelligence, click here.