Financial challenges
The financial effect on a business is all too apparent, whether it’s the effect of the rise in an interest rate in the US or the price of crude oil. The change in the value of the USD against the GBP determines the profitability of a company when it announces its results in USD. The value of a stronger USD gives a business greater purchasing power. In this section, we are going to understand the cost challenges businesses face.
CapEx versus OpEx
As is commonly understood, CapEx or Capital Expenditures (CapEx) derives from the purchases an organization makes that are for the long term or where the return on investment is seen over a long period of time. Conversely, Operating Expenditures (OpEx) are those expenses that are derived over a short period of time, that is, which are accounted for on a day-to-day, week-by-week, or month-by-month basis.
As consumers have adapted to the pay-as-you-go model of paying only on consumption of a service, the same has now happened with organizations where technology has moved rapidly in providing businesses a pay-as-you-go model for using traditional IT services heavily dependent on CapEx, and they can now be seen as IT as a service. The challenge here for organizations is to adapt to a differing financial model and accounting principles, along with managing those services.
Maintenance costs
The support and maintenance of infrastructure, whether bricks and mortar or hardware and applications, draw similar parallels. Both require constant maintenance, upgrades, and expansion as the business grows.
For IT applications that are at the core of supporting the operations of a business, two key challenges are always at the forefront:
- Keeping the existing systems going
- Adapting to new technologies without affecting the business
The question arises at what point do you stick to what you know and continue investing in existing initiatives and at what point do you divert and start to change the focus to new technologies?
The cost of living
It would have been unthinkable only a few years ago if the cost of living was quoted as a factor affecting decisions taken by the C-Suite. However, in recent times, it’s seen as the measurement of everyday items, such as fuel, energy, groceries, mortgages, travel, and many other things.
What is the cause of this cost-of-living crisis? The slow emergence from COVID-19 impacted supplies of raw materials and thus caused a surge in costs. The geopolitical impact in Europe of the war in Ukraine impacted energy supplies from Russia. The effects of Brexit affected imports from EU countries and compounded the already depressing situation regarding the surge in the cost of living. All of these things converged, creating a crescendo of uncertainty, and limiting the already regressed business recovery.
The CPI inflation forecast published by the UK government’s Office for Budget Responsibility provides an insight into the inflationary impact on the economy:
Figure 1.1: Inflation forecast in the United Kingdom issued by the Office for Budget Responsibility
The forecast nominal and real average earnings growth published provide an insight into the average earnings growth impact on the economy:
Figure 1.2: Earnings forecast in the United Kingdom issued by the Office for Budget Responsibility (https://www.instituteforgovernment.org.uk/publication/spring-statement-2022/cost-living-crisis)
Lack of investment
To some, a lack of investment in talent and innovation to support a business is an existential threat to its very survival. Looking at the last 3 years of the pandemic, the overnight adoption of remote working was like the flick of a switch. If your workforce is not ready to adopt change due to a lack of investment, then challenges are compounded. Similarly, if your organization is not set up to adopt new innovations, it will cause a huge upheaval when change is forced upon the organization. We have seen this with many tech companies that started sending thousands of laptops to their employees to cater to remote working. See this link to read more about it: https://www.zdnet.com/article/coronavirus-how-we-got-10000-staff-remote-working-from-home-in-just-one-weekend/.
The lack of the right talent has been steadily building up for years, and organizations are continually battling with attrition. We are now entering a digital era of accelerated change and organizations need to counter that with the right talent investment, not just in complex low-touch tech skills, but also basic tech skills just to keep up with all of the changes, such as working remotely and interacting using remote PMO tools such as Jira, Mural, Slack, and so on. If you don’t keep up with change, then there is every chance the organization will fall further behind, due to not reacting to demand and changes in technology focus, and not harnessing new talent with the skills required.
The failure to innovate will almost certainly leave many organizations behind. The ONS carried out a survey on the impact of the coronavirus pandemic and other events on UK businesses and the economy. This survey was based on responses from the voluntary fortnightly business survey (BICS) about financial performance, workforce, prices, trade, and business resilience. The following figure shows the stark reality that up to 26% of businesses were either temporarily or permanently closed. It can be presumed that some of those closures were a result of inaction, lack of innovation, inflexibility in business processes, and a lack of agility in technology:
Figure 1.3: Impact of COVID-19 on businesses (https://www.ons.gov.uk/businessindustryandtrade/business/businessservices/bulletins/businessinsightsandimpactontheukeconomy/8april2021)
The lack of investment in people and technology go hand in hand, and during times of economic, political, societal, and technological changes, it would be an unthinkable decision to not innovate and include technology within a business model, alongside the right talent to help accelerate the change from survival to prosperity. The COVID-19 pandemic is just one example of the myriad of challenges that impact businesses and how those challenges are met is the key to success. The number of businesses impacted by COVID-19 was beyond anyone’s imagination. Almost a million UK businesses were at serious risk of bankruptcy before April 2021. See the report by Peter Lambert and John Van Reenen here: https://blogs.lse.ac.uk/businessreview/2021/02/02/a-wave-of-covid-related-bankruptcies-is-coming-to-the-uk-what-can-we-do-about-it/.
Recession
There is not a single person today who has not experienced a recession. The reality is that recession will impact every single person in some way, and this includes businesses. If you take the current economic situation in the United Kingdom, the country is facing its highest inflation since the conversion to decimal currency back in 1971. We are all experiencing the impact of inflation, with increased prices of basic consumer goods, including energy prices, along with higher interest rates.
Pensions and investment portfolios have most likely been impacted by inflation and the threat of a recession, and this is yet another challenge for businesses when they must cut back to survival mode as they brace themselves for a sharp decline in consumer confidence and spending. As a result of a recession, unemployment goes up because businesses have to cut back their workforce in order to manage the challenges of reduced consumer spending.
Return on investment
For a business to invest in any opportunity, it must consider the return on investment (ROI). However, it’s important to first understand the expected outcome expected of the ROI. Here are some focus areas for a C-Suite to look at when considering ROI:
- Better customer experience and satisfaction and improved customer service and support
- Increased usability leads to increased sales
- Increased user satisfaction
- Improved/automated business processes
- Better access to data insights
- Improved digital executive dashboard
- Better forecasting
- Improved software vendor support
- Reduction in vendors and smoother service delivery
ROI is usually a metric that is used to understand the profitability of an investment. However, when it comes to understanding ROI in technology and solutions, it relies on measures made up of several other KPIs. Here are some examples:
- Revenue enhancement – where the investment results in increased sales
- Cost reduction – faster MRP runs and a reduction in operational and maintenance costs
- Cost avoidance – fewer outages and increased productivity
- Capital reduction – a shift from CapEx to OpEx
- Capital avoidance – divest investment from fixed assets
Accuracy cost estimation
Estimating the cost of a project or service being delivered is one of the most important functions in IT. The impact of a wrongly estimated IT program not only hurts the business financially but diverting key resources to the project means the loss of time on other initiatives, which would have otherwise driven growth.
With failed, overrun projects drawing away investment and resources away from the business, the challenges of cost estimation are largely centered around people, processes, and technology:
- Data-driven insight is critical to estimating the cost of a program
- Process adoption opportunities that would lead to greater returns and profitability
- Estimation requires strong and timely alignment across stakeholders
- ROI – time spent and the value generated in spending time on estimations