Myth: IT investment must be cyclical | KPMG | AU

Myth: IT investment must be cyclical

Myth: IT investment must be cyclical

The reality: Software providers are now focused on cloud services, which offer continual capability upgrades and the latest security features – so incremental investment is a much more aligned approach.

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Windmill at night with stars in the sky

For many years, there has been a ‘Big Bang’ mindset to how enterprises invest in Information Technology (IT). It is typically a large financial outlay, every few years, with the decisions on product choice often driven by the IT department of the business.

Brad Miller, Partner, KPMG Enterprise has seen many organisations take this approach – treating IT like they treat other infrastructure in the business.

“They look at ROI [return on investment] over multiple years, so the mindset is: if you’ve built the system, how long can you run it? And can you minimise the total cost of running it over time?,” he says.

However, as IT is constantly advancing, and the demands placed on it from the organisation, customers and markets keep growing, IT can’t be treated like any other capital expenditure.

“This approach has led to a chronic underinvestment in IT. If you’ve just spent a large sum of money on IT, the view is: ‘I don’t want to discuss IT again for another 5 years.’ If we look at the pace of change with technology, 5 years is a huge timeframe in terms of the innovation you might miss out on,” he says.

A move to incremental investment

The way technology providers are offering products has moved on one-off product deliveries to offering continually evolving cloud software – known as Software as a Service (SaaS). The beauty of SaaS is that you pay as you need more capacity – and you’re constantly provided with the latest upgrades.

“Before you were saving for a rainy day to do the ‘technology transformation’. Now, organisations are moving to a subscription-based IT service model; it’s not a lump sum, it’s incremental over the lifetime of the use of that system – however long the contract is,” Miller says.

The advantages are obvious, however there is one downside, or perhaps an opportunity, that you must address.

“You’re going to get more features and functionality, but at the same time so is your competition. So, you have to think about how you leverage that. You have to ask, am I on top of what this asset can do for me and how it’s evolving? Am I evolving my business to take advantage of that?,” Miller says.

The value of being ahead

For businesses that are happy with one off investments in IT, and don’t see immediate value in shifting to a regular investment and upgrading approach, Michael Alf, Director, KPMG Enterprise, says it’s worth looking at the competitive environment.

“Businesses may say, ‘We’re making a lot of money, we’re growing at a steady rate. There’s no urgency’,” he says. “But look how quickly the marketplace can change, and one example in Australia is the official arrival of Amazon. Suddenly you have a new trader, which even established businesses recognise could disrupt their segment of the market, or make them obsolete.”

Alf says situations like this force enterprises to look hard at what differentiates their strategy. Having the latest technology enables you to be ready to step up and compete – or perhaps even tap into platforms like Amazon to help reach new markets.

Miller adds, “Maybe they’re not necessarily going to disrupt you, but what if they’re a channel to market for you? You need to be able to figure out how you’re going to do business with them.”

It doesn’t have to be giants like Amazon that could show up your technology capabilities – it could be smaller players who start fresh with the most advanced cloud platforms.

“In our experience they go straight to cloud. There’s never a doubt, it’s just how IT operates now. Some have aggressive growth plans over a few years, so they go straight to cloud so they can scale up – they pay for what they use,” Miller says.

An answer to growth

Ultimately, every business is looking to grow, and sticking to an old method of investing in technology is unlikely to help facilitate that in today’s environment.

“For established mid-market companies that have hit a plateau, there’s an opportunity to recognise that cloud technology and this new investment and delivery model is going to be an enabler to achieve that next level of growth,” Miller says.

Another reason enterprises can avoid upgrading their technology is the fear it could dull their point of difference, so we explore why this isn’t the truth in: Myth: Cloud-based processes dilute differentiation.

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