Business team with puzzle pieces

Risk, Innovation and Cost Considerations

In the current economic climate we’re all being asked to go back to our parents generation and ‘make do and mend’.  Even with the supposed green shoots of recovery being discussed by our political leaders, it’s hard to see how the large capital expenditure projects from 5 years ago will get funded today.  So even though the competitive landscape will relentlessly move on, the idea of replacing all your business applications as part of a strategic plan will probably fall on deaf ears.  I still remember an ex-manager of mine saying that every time I said “strategic project funding”, to him it just meant that it was going to cost the company money.

For most companies their applications and systems do an OK job of running the business.  They probably have done so for the past 10-15 years as they’ve been customised to suit your bespoke business processes.  The problem today is delivering that next 10% – 15% of functionality required to get the business back to being market leading again.

As your business has changed, new systems have probably been bolted into the application eco-system, creating an evolved architecture. Evolved, or accidental architectures usually end up constraining their hosts, as the cost of development, maintenance and testing grows ever larger, leading to paralysis in the delivery capability of your team.  This application spaghetti is often the main reason IT professionals favour a rip and replace strategy.

However, this technology driven change approach is not necessarily the right one. In order to assess the value of making fundamental changes to the application’s ecosystem, one should look at the three core aspects of Risk, Cost and Innovation.

The Rip and Replace approach may deliver lots of Innovation, but is it worth the Cost and Risk?  Maybe you should look at ways to capitalize on (parts of) the existing systems and make them easier to integrate and change, and less expensive to run.

Depending on the profile of your business you may want to maximise some of these aspects at the expense of others, but this is a business, not a technology decision.  Only once the blend of these parameters is agreed can a technology change program be considered.

Business Focus:  Revenue and Profit

When evaluating change, the commercial drivers will either be to increase revenue or reduce costs (notice that I’m staying away from using the word strategy at the moment).  Therefore look for opportunities in your company where technology can help to improve the bottom line.

For example, the Internet can provide a very cost effective way of reaching into new markets, even more so with the recent popularity of mobile commerce in the consumer market place.  But it does require that organisations are able to connect their core backend systems in real time to a web presence or EDI capability.

Look to drive efficiencies through your organisation by reviewing working practices, the workflow of your systems and by delivering self service, as these activities target the underlying profitability of your business.  Each functional area within the business has its part to play.  In order to improve the bottom line of the business, the focus needs to be on improving customer service while lowering the cost-to-serve. For example, consider the cost difference between someone in your Accounts Receivable department spending 15 minutes on a call managing an invoice query, and the same customer reviewing their account via the web. Multiply this effort by many thousands of customer queries a year and the efficiencies are obvious.

When considering internal applications, workflow is critical.  People often create their own undocumented workarounds to inefficient business systems.  These activities can become so entrenched that people stop thinking about improving things. You can probably optimise the processes, although only if the underlying systems are flexible enough to support the change program.

Blending Innovation, Risk and Cost

Delivering Innovation in core business systems is essential in order to drive growth or profit; it underpins any organisational change program and is required to take advantage of new thinking, business practices or technology platforms.  Without it your business risks falling behind in the market place as your competitors drive forward.

With dramatic change there is also increased Risk and although some of this can be mitigated, it can’t be removed completely.  When focusing on Risk management the challenge is to balance the rewards of change with the potential downside.  Risks can manifest themselves in a number of ways: from not being able to transact business because a migration went poorly, through to not being able to complete your change program in time, causing lower profits or perhaps being in breach of new government legislation.  Risks also have a positive slant such as the risk of not changing when your competitors are.

Cost is, again, a 2-way street.  We tend to think of Cost in terms of containing capital spend, for example for implementing a new solution.  However, you must also consider the Cost of missed opportunity and missed revenue because you didn’t implement the solution.

When taking a strategic view, I finally dared to use the word, you can establish the profile for your business and create a general approach.

I like to illustrate this with the profile of a mid-sized insurance company when faced with:

  • The need to launch new insurance lines quickly
  • Having to improve the workflow of their business systems
  • Reducing the cost of staff training
  • Improving the internal and external perception of their systems

Although our example insurance company ranked Innovation as High, the most important measure was Risk and that any activity shouldn’t put the business at Risk.  When they were looking at a change strategy for their core insurance application, there was a conflict between the requirement for high levels of Innovation in a short timeframe and the Risk of breaking the business.  Because of this, a rip and replace strategy on the existing systems was not seen as appropriate.

Other reasons included:

  • The business must be put on hold while investigating, selecting, analysing and delivering the new system which prevents any innovation for months or even years
  • The implementation of a vanilla package typically delivers a backward step in functionality as it usually needs to be re-customised to your bespoke business practices.  Addressing this then takes more time and resource.

The table below outlines the options that were then considered by the IT management team when evaluating a blended approach.  Your perspective may well be different.

Fig. 1

Innovation Risk Cost
Business As Usual Low High * High **
New Package Med/High *** High High
Modernise / Extend High **** Low Low/Medium
Modernise / Migrate High **** Med Med

*  High Risk to the business as it may hit a wall when IT can’t react fast enough to the changing business landscape
** High Cost to the business due to cost of lost opportunities, e.g. not being able to create new lines of business
*** Innovation might be low for several years, because while a new package is being implemented, improvements to the existing system are typically put on hold.
**** Innovation where it matters most

By mapping the business interpretation with the IT view they were able to select Modernise / Extend as the most suitable approach for their core insurance platform.

If you do this at a departmental level you can use the results from Fig. 1 in order to select the most appropriate approach to each area of systems.  The following table provides an outline of this insurance company’s view on how to approach the change program for their entire application ecosystem.

Fig. 2

Back Office System 1 Modernize/Extend
Back Office System 2 Modernize/Migrate
CRM No change
Personnel New package
Finance New package
Distribution No change

The usual ‘your mileage may vary’ statement must be inserted here as the profile of this insurance company may well be different to your employer.

So with the high level approach agreed for each functional area, the next challenge is to get the money in place from your sponsors and the timeline agreed for your change program (don’t call it a strategic change program).  And that’s a whole other Blog!!

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