Past experience with the cost and risks of technology modernization projects is driving boards and executives to be more selective about allocating capital and has increased the emphasis on the certainty of delivering tangible value. Protiviti’s Jim DeLoach offers 10 questions to guide these tough conversations.
Technology modernization is a topic that has found its way into every C-suite and boardroom. In recent years, significant investments have been made by companies recognizing a need to modernize to avoid losing market share to “born digital” entrants to the market. Banks and insurers, for example, were concerned that failure to modernize would result in loss of market share to fintechs — indeed, a competitive threat that framed a potential winner-take-all scenario.
More recently, however, the narrative has shifted, with less emphasis on hype and FOMO (fear of missing out). In financial services, the “winner takes all” view has softened as fintechs carved a role in the market that did not crowd out incumbents, largely because they did not want to be regulated. Their choice to coexist with incumbent financial institutions lessened the threat. More broadly, for companies across all sectors, the initial return on investment (ROI) associated with new technologies underdelivered, elevating healthy skepticism. And, most importantly, the cost of capital has gone up, raising the hurdle rate for all investments.
Thus, CEOs, executive teams and boards are now faced with evaluating investments in transformation programs amid a new narrative. Proponents of technology modernization, digital transformation and strategic IT initiatives need to articulate a stronger, more compelling business case for delivering value with less risk.
Of course, there are costs associated with failing to modernize. A global survey of more than 1,000 CIOs, CTOs, CISOs and other technology executives and leaders revealed that 70% of organizations view technical debt as a major drag on their ability to innovate. Over time, this leads to inability to execute strategy, increased operating costs, lost revenue, poor customer experience, inability to retain and attract top talent and the attendant effects of losing competitive advantage, market share and shareholder value. Thus, both sides of the coin are relevant.
10 important questions about technology investments
Accordingly, an evaluation of the organization’s framework for navigating technology investments relative to other business priorities is in order. What is needed is a framework that emphasizes maximizing value and minimizing financial risk. Nothing new about that, but leaders and directors may benefit from considering the following questions that underpin a practical framework that is fit for purpose in today’s investment climate:
1. Do we have a clear understanding of the lessons learned from our modernization investments over the past five years?
Understand the extent to which promised returns were delivered and, most importantly, why or why not. What is working, what is not? Can we do better? Over and over, management must examine and adapt. Best practices and mistakes should be identified through a post-mortem and improvements made to the business case development process and project management approach.
2. Have we balanced our long- and short-term perspectives?
The long-term narrative should define the direction of IT investments, address emerging technologies that could create a need for modularity and flexibility and envision what the enterprise is expected to look like in, say, five years. It provides a contextual framework for evaluating whether proposed modernization initiatives and technology partnerships are directionally compatible with the strategy and vision going forward. In the short term, management should articulate principles that enable business agility and continuous modernization, such as modular architecture for ease of updates, support for agile deployment, real-time and event-driven processes to enhance responsiveness, scalable and secure architecture, a unified data repository to establish a single version of the truth, a seamless customer experience-driven environment and compliance sensitivity.
3. Do we have the right partners?
Senior leaders and directors should consider being more selective in evaluating whether the technology in question fits a use case for modernization and how that decision is supported. Most importantly, they should understand how and why a particular vendor is selected. For example, the company may have a single cloud provider or a hybrid environment. Many organizations have discovered — some the hard way — that choosing among cloud providers like Amazon Web Services, Microsoft Azure and Google Cloud Platform can be a complex task, as each offers unique advantages and has different approaches with respect to similar issues. Because they may or may not align with a company’s specific needs and strategic objectives, it is important to understand these differences and, importantly, what specific services the company needs. The key is to balance a vendor’s innovation path with the company’s overall strategy. If they are incompatible, a change in vendors is needed.
4. Do we have the right skills, and are we connecting with the business?
Building capabilities without the skillsets needed to leverage modernization investments and maximize their value over time is a common issue. Internal resources are especially important when embracing a tailored approach for modernization. Global capability and delivery centers can be useful in deploying the organization’s entire technology talent pool so that there is cost-effective collaboration across geographies. Transforming the company to a product- or platform-centric organization can break down silos and facilitate resource mobility. Large-scale reskilling and training programs may be necessary. External resources can be hired to bring to bear specialized knowledge that address internal gaps. As for connecting with the business, one study noted that 74% of organizations that have started a legacy system modernization project failed to complete it and that one of the largest obstacles to a successful modernization project is a disconnect of priorities between technical and leadership teams. It is imperative that this issue be ironed out before commencing a tech modernization project.
5. Do we buy, build or deploy a hybrid approach?
When it comes to modernizing infrastructure, the decision to buy or build is a critical one. Beyond the obvious factors like the organization’s specific needs, resources, skills and strategic objectives, other considerations include cost, extent of required customization, scalability of design, ongoing maintenance and support and speed to market. In addition, the decision isn’t always either/or. In many cases, a hybrid approach combining purchased and custom-built solutions offers the best balance of cost, flexibility and speed.
6. Can we break down massive investments into discrete components?
Much less willing to cut the $100 million check, companies are leaning more into discrete investments to generate value from smaller increments of work. Breaking down complex projects into more manageable components within the context of the longer-term plan enables project teams to learn and fail fast, focus on the customer, build a superior user experience, invest for flexibility and speed, and think modular and agile. It also helps avoid wasted effort. For example, the physical hardware of the iPhone needed to exist before developers could create apps specifically designed to run on it. Accordingly, technology infrastructure investments must be appropriately sequenced.
7. Do we have the data we need to sustain a strong customer focus?
Companies have learned that to put the customer first, they need real-time data. Without it, how can management know whether the customer experience is achieving the expected results? This is the hard part of fostering sustainable change and must be addressed to avoid making small adjustments in one part of the process that create undesirable impacts on the customer experience in other parts of the process.
8. Are we thinking creatively?
Fostering internal competition among candidate projects encourages creativity and out-of-the-box thinking on framing how and why projects should be undertaken. Stepping out of the confines of the traditional sandbox in which technology executives play can make a difference. For example, some organizations may see the benefit of starting from a digital-first, clean slate to deploy new infrastructure based on modern technologies — separate and apart from the legacy environment — to support new products or markets. This strategy may entail establishing a new legal entity because the complexities of the legacy enterprise may make achieving the full architectural vision too difficult. Some companies that try to transform their legacy infrastructure are losing hundreds of millions of dollars.
9. Have we raised the business-case bar to the right level?
It’s not enough to pursue technology modernization based on the allure of new features and functionality. If decision-makers fail to see clear, measurable value from investments in new tech capabilities, they should select other opportunities that are more likely to deliver value for customers and shareholders. This makes it incumbent on the company’s technology modernization leaders not only to present to the board a compelling business case for a project but also to execute it with precision and a strong focus on delivering to expectations. Business-case development should begin with the premise that an organization (and its investors) can earn attractive rates with an inflation-adjusted bond with minimal risk, and the business case must present the rationale why the ROI expected from the proposed technology investment will exceed these minimal-risk returns. Thus, the business case supporting selected use cases must help answer the why, when and what questions:
- When is the right time to invest? Why do we need to make this investment now? Why not six months, 12 months, 18 months from now?
- What is the opportunity cost of moving forward at this moment?
- Is there an external event driving the proposal? Does it involve an innovation that presents an attractive market opportunity?
- What is the expected outcome and projected ROI, and how long will it take to realize the expected value?
10. Are we undertaking the best approach to modernize?
Once the value proposition is defined and the business case approved, navigating the technology modernization journey requires a meticulously charted course that incorporates due diligence, discovery and the establishment of waypoints to ensure key milestones are achieved. The technology modernization process often involves adopting a standardized approach that addresses specific organizational needs while remaining flexible enough to integrate various solutions. The most common components of a standardized technology modernization process are upgrading to new versions or features of existing software, building new applications from scratch, acquiring new software and migrating data and processes and acquiring another company with a modernized application stack.
With the longer-term strategic narrative and ROI the primary focus for go-forward decisions on technology modernization projects, it is critical to focus on four interrelated drivers that can deliver the expected value — lowering costs, gaining more flexibility and power in deals with strategic vendors, overcoming the inability to build new functionality into current applications and meeting regulatory compliance requirements. These drivers are fundamental to defining and communicating a clear value proposition to executive management and the board.
A tough conversation
Technology modernization can present a tough strategic conversation in the C-suite and boardroom. The discussion boils down to the opportunity cost of allocating capital, a cost that is as high as it has been in 15 years. Consistent with their responsibility to company shareholders, senior management and directors should ensure that the organization defines the overall investment objectives clearly, specifies opportunities for improvement, identifies the right technologies and lines up the necessary resources to undertake the project successfully.
Most importantly, proposed investments in selected use cases presented to the executive team and board must be supported by a compelling business case demonstrating that value and ROI will be delivered, all within the context of a longer-term journey explained in plain English.
Jim DeLoach, a founding 
