Hitting Reset: digitisation and technology debt

S&S ORANGE PAPER

HITTING RESET DIGITISATION AND TECHNOLOGY DEBT

Create and deliver new strategies during a downturn for Boards and Private equity.

By Martin McPhee and The CIO 4.0 community

Hitting Reset

EXECUTIVE SUMMARY THE GAME HAS CHANGED Business leaders pride themselves on their ability to pivot and course-correct in times of crisis and economic turmoil. But we need to get real, there isn’t a private equity (PE), Board, CEO or management team that has experienced the cumulative health, financial and operational challenges that we faced in 2020.

As my old mentor and friend, John Chambers, then Chairman and CEO of Cisco, reminded us constantly, “In times of market turmoil focus on the market transition.” When a transition occurs, you focus on the transition, not the events – if you focus on the events, you’re looking backwards. Sounds easy but it’s hard to do.

Today we are in a massive market transition. Some companies are actually thriving and posting improved profits and market share. However, the majority inevitably have had to lean into these challenges by slashing costs, reducing headcount and halting investments to conserve cash.

But to thrive, companies need to make more fundamental changes and focus on the transition. That’s because if business models and mindsets don’t shift, those costs will just creep back.

Over two-thirds (68%) of businesses are now in the process of reimagining their long-term plans.1

THE FUTURE IS UNCERTAIN It’s hard to predict how the crisis will play out over the coming months. We’re all caught up in an unpredictable disease and need to learn how to live with it if we are to improve our financial and operational health, profitability and market share to thrive in the face of adversity.

Even without a pandemic to contend with, organisations have faced another looming threat: the world of Industry 4.0 and digitisation.

New innovations driven by advanced technologies – like artificial intelligence, machine learning and analytics – have been infiltrating organisations for years. The pandemic has only accelerated adoption as organisations embraced tools, like video conferencing, to maintain personal contact with colleagues and customers in a socially distanced world.

It is imperative that all Boards and PE companies review their investment theses, revising them for this market transition and establishing milestones for the next three, six, and 12 months. This has significantly changed plans for many assets. The guiding principle, in all cases, is not just to survive the crisis but also to use the market transition to strengthen the competitive positioning of portfolio companies.

Sullivan & Stanley

TECHNOLOGY ISN’T THE ANSWER - OR IS IT? Today the lines are being blurred between business and technology change. It’s driven by this market transition placing greater pressure on the business to deliver unique, compelling and relevant user experiences to deliver growth, profitability, operational effectiveness – and at its most extreme, corporate survival.

So often technology is viewed as the cure for anything because it promises greater efficiencies, productivity, cost-savings, insights, speed… But technology is inherently valueless unless it does something to drive top line revenue, provide greater customer service or deliver operational efficiency.

“COVID-19 accelerated the digitisation of customer and supplychain interactions, and internal operations by three-four years.

And the share of digital or digitally enabled products in an organisation’s portfolios has accelerated by a shocking even years.” 2

Despite some individual successes, change remains difficult to pull off and few businesses manage the process as well as they would like. Organisations face a perpetual challenge to understand change – not just what is occurring, but also what the implications will be.

PUT YOURSELF IN THE PERFECT POSITION In this paper we continue to explore how to create and deliver new strategies by prioritising three key areas within the market transition: 1. Develop a new IT investment playbook: show you understand the realities of the current market and include a range of cashflow scenarios that enables meaningful comparison.

2. Understand and articulate tech debt: take a ‘zero-based approach’ to minimise tech debt, and create differentiation by elevating aspects of data to create group-wide efficiencies.

3. Deliver results at speed: manage down tech debt to open up capital for investment in innovation, and deliver short, sharp transformation projects with clear ROI.

McKinsey: 84% of transformations fail.3 Gartner: tech debt is 40% of the balance sheet.4 Standish: 52% of companies spend 180% of their budget on transformation, with 30% not reaching completion.5

Hitting Reset

DEVELOP A NEW IT INVESTMENT PLAYBOOK RE-EVALUATE THE ASSUMPTIONS When the business environment changes, the first step should always be to understand the realities of the different business simulations and how they may look now. Revenue, the stability of the supply chain, general operations, and liquidity needs could now be two-three times worse than previously assumed.

Beyond survival, the next core challenge is how to ensure the business, or portfolio company, are positioned and prepared to benefit from a recovery.

Lockdown showed us that the world can literally change overnight, so the old ways of embarking on a large transformation that end in a big reveal in three-five years’ time, just isn’t feasible anymore. Instead, organisations must break change down into smaller milestones for the next three, six or twelve months to deliver regular and predictable value.

CREATE A RANGE OF CASHFLOW SCENARIOS Meaningful comparison is critical to enable the business to evaluate different digital initiatives and IT strategies against other investments. Rather than present a couple of options, the CIO must present the PE and Board with a range of cashflow scenarios – including ‘do nothing’ and best-case scenarios – highlighting the type of impact.

Typically, these fall into two categories: 1. Disruption: using digital tools and technologies to completely change the business model.

2. Enhance: using digital tools to simplify and improve how things are currently done.

Sullivan & Stanley

BUILD THE RIGHT FOUNDATIONS To thrive within the world of Industry 4.0 and digitisation, organisations must consider how transformation initiatives can accelerate their competitive positioning.

Strategy: establish new initiatives that ensure tight alignment between the business and IT. Not only does this reduce risk, simplify operations and connect disparate data sets, it also leads to better provisioning to maximise the impact and ROI. Architecture: address legacy issues, like tech debt, which continue to generate unnecessary cost for the business. Then agree on a consistent data model to improve data quality, address inconsistencies and enrich data with external sources for better decision making.

Talent: align incentives to encourage the team to focus on longer-term feature delivery, prioritise and plan projects based on the business value they deliver, and support the team with documented processes and access to the right digital tools.

BONUS TIP Focus on how IT investments can help the PE and Board to answer questions that are already being asked about the people, processes and technology.

Identify three-five key business questions and prioritise them to build a compelling playbook around completing these short, sharp projects.

Hitting Reset

Sullivan & Stanley

UNDERSTAND & ARTICULATE TECH DEBT PRIORITISE TECH DEBT TO STOP IT UNDERMINING EVERY EFFORT As change initiatives become more digital, technology is the core driver of value for the business. But despite modernising IT, companies face a hidden threat that undermines their efforts: tech debt.

In PE terms, tech debt refers to the off-balance-sheet accumulation of all the technology work a company needs to do in the future. And it’s one of the first areas to be reviewed when making investment decisions.

Every business has tech debt. IT infrastructures evolve over time as organisations continually bolt on new systems, applications, platforms and products to tackle the latest challenge/ opportunity. The problem arises when poor management of that tech debt impedes the company’s ability to compete. When integrating new products becomes prohibitive, costly and dis-jointed, tech debt holds the business back, preventing it from making full use of advanced analytics to improve decision making and slowing down every aspect of agility.

TAKE A ‘ZERO-BASED APPROACH’ TO TECH DEBT As with financial debt, a degree of tech debt is an unavoidable cost of doing business, and it needs to be managed appropriately to ensure an organisation’s long-term viability.

Understand the tech debt that exists in the business today and how to minimise the cost of managing it. Show the PE and the Board: z z z z z

The size and value of the current tech debt.

The impact it’s having on the business.

What’s currently being done to manage it.

What it takes to reduce it.

How that will be managed over time.

Hitting Reset

TACKLE TECH DEBT IN 7-STEPS The best organisations manage tech debt through a strategic process, similar to the one they use in managing their financial capital structure:

1

2

3

Start with a shared definition of tech debt

Treat tech debt as a business issue, not a technology problem

Create transparency to value the debt position

Business and IT leaders must agree on what constitutes tech debt – for example, the negative impact of technology on the business, including rising costs, slower time-to-market and reduced flexibility.

Use dashboards to show how tackling the debt is clearly linked to strategic priorities, such as simplification and risk reduction, and the profit and loss statement.

Link each app to 100% of the resources it consumes and the business purposes it serves.

Think about classify them as ‘buy’ (to invest in and grow), ‘hold’ (to leave alone), or ‘sell’ (to wind down).

4

5

6

Formalise the decision-making process

Dedicate resources to tackling tech debt

Avoid a big-bang approach to writing down all debt

Create a clear, mutually agreedupon set of rules and principles that allows IT and the business to work together, align them on decision making, and address any conflicts of interest.

Allocate funding, mobilise people and send a clear message that addressing debt is a strategic priority because it gives the business greater agility.

Dedicate a portion of the IT budget to pay down debt consistently, predictably, and over a strategic time horizon.

7 Shift ‘bankrupt’ areas to a greenfield stack When a division’s tech debt exceeds 50% of its tech asset value, the risk and cost of existing systems start to outweigh their benefits. Think about shifting it to a new, more manageable project.

BONUS TIP: Embed tackling tech debt into business-asusual by building measurements into financial models, tools, and databases across the business.

Sullivan & Stanley

DELIVER RESULTS AT SPEED STRATEGY + EXECUTION = RESULTS Successful digital transformation is never guaranteed. We can’t ignore that despite facing the most volatile, complex and disruptive landscape in recent memory, some sectors – like online retailers, supermarkets, cybersecurity and IT vendors – experienced enormous growth.

So what can we learn from them?

Successful transformation is dependent on balancing the dynamics of the velocity of change with the high stakes involved. It requires: z Commitment and focus to drive performance improvements. z A strategy that aligns transformation with the current environment. z Upgrading tools to create new capabilities and strengthen worker’s skills.

Approaching a transformation with a traditional ‘big reveal’ approach doesn’t work. Listen to the business, clarify the overall business strategy, define the capabilities needed at the enterprise level and develop a clear and simple IT strategy.

“I do not believe you can do today’s job with yesterday’s methods and be in business tomorrow.”

- Horatio

Nelson Jackson

Hitting Reset

COST-CUTTING VS. INVESTMENT The best PE know that you can’t drive competitive differentiation if you’re just cutting costs. To be successful, you need an IT investment strategy that focuses on how to manage down the tech debt to free up capital that enables the business to look at innovation.

Explore how to transform every element of the business – from the underlying tools to the working processes, back office functions and even the customer experience. Consider how everything could be changed/improved to drive greater efficiency and the natural balance of cost cutting vs. investment emerges.

DELIVER SHORT, SHARP PROJECTS WITH CLEAR ROI We need to deliver at speed – but we also need to deliver with accuracy if the transformation is to be successful. Therefore, you cannot rush into the first task. Instead, you must consider how to deliver predictable value to the business that aligns with the continuous market changes.

Centre the change on what we call the ‘Steel Thread’ – a guiding principle that breaks down complex transformation into manageable steps that develop a clear and simple IT investment strategy. With each step you can apply the data, insights and lessons learned to determine the next set of changes and deliver regular and predictable value to the business – at least every 90-days.

BONUS TIP Don’t get tripped up by labels like ‘Industry 4.0’, ‘digital’ or ‘transformation’. Follow the same principles that apply to all PE investment decisions and develop a new strategy that focuses on the market transition, improving ROI and demonstrating the ability to execute.

Sullivan & Stanley

Hitting Reset

GIVE CHANGE A CHANCE Change is hard because people are creatures of habit, fear the unknown and don’t want to embrace new ways of working. Change is hard because it’s risky with no guaranteed outcome – only the knowledge that most transformations fail. And change is hard because of both conscious and unconscious bias.

Many transformation projects fail for the simple reason they never had a chance from the start. It’s very easy for individuals to follow the group and say they’ve bought into change, but even the tiniest doubt is the reason the change will fail, because the business embarks on its transformation with a disconnected team. Over time, the conscious and unconscious bias picks away at the plan and creates a ripple effect across functional divisions and management layers, which breaks the business apart.

To stop this from happening, the business must assess whether it’s ready for change – and if not, identify the practical steps it needs to take to get into the right position.

USE TOOLS THAT SELF-ASSESS READINESS FOR CHANGE Openness is hard to achieve when people are worried about hurt feelings, egos and office politics. But focus on whether the business as a whole is ready for change, and it removes the personal element – instead creating an open forum where every potential problem the business might encounter during its transformation is highlighted. As well as identifying areas where the PE and Board members might not be as aligned as they perhaps believe they are.

We designed the ChangeReady6 assessment for this precise reason. It predicts the likelihood of success by answering questions around six core areas:

z z z z z z

Strategy Leadership People Customer Delivery Value

If the business is not ChangeReady, we can help identify and prioritise areas for improvement before the business wastes valuable time and money. In just 90-days we can provide a complete breakdown of everything the business requires to ensure it’s in the best position possible to embark on its transformation.

Sullivan & Stanley

BECAUSE CHANGE IS HERE When the game has changed, it’s time for organisations to hit reset. The future may not be certain, but organisations have the opportunity to get themselves in the perfect position to embrace change.

Develop a new IT investment playbook, which re-evaluates previous assumptions and creates a range of cashflow scenarios to help the PE and Board make better decisions. With the right foundations in place, the business is set up to thrive in the face of adversity.

Understand and articulate tech debt to stop it undermining business-as-usual. Take a ‘zerobased approach’ to managing the debt down by tacking it in seven-steps: 1.

2.

3.

4.

5.

6.

7.

Start with a shared definition of tech debt Treat tech debt as a business issue, not a technology problem Create transparency to value the debt position Formalise the decision-making process Dedicate resources to tackling tech debt Avoid a big-bang approach to writing down all debt Shift ‘bankrupt’ areas to a greenfield stack

Deliver results at speed by balancing the need to cut costs through managing tech debt and free up capital for investment in new initiatives. Then deliver these through short, sharp projects with clear ROI. But it all starts with the organisation being ready for change, because even with all the will in the world, if the business isn’t ChangeReady the project is doomed for failure.

References 1 https://enterprise.verizon.com/resources/reports/future-of-work-reimagining-business-as-usual.pdf 2 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-overthe-technology-tipping-point-and-transformed-business-forever 3 https://www.mckinsey.com/business-functions/organization/our-insights/how-to-beat-the-transformation-odds 4 Gartner study (pay wall) 5 https://www.projectsmart.co.uk/white-papers/chaos-report.pdf

Hitting Reset

READY TO HIT RESET? If you’re ready to create and deliver the right strategies for the Board and PE during the downturn, sign up for our ChangeReady6 assessment.

All we need is 90-days – within seven-days we will confirm the likelihood of your transformation’s success.

21-days later, you’ll have a plan for any remediation actions to ensure you’re ChangeReady and in the best possible position to successfully embrace change.

Be the change agent that makes a difference.

Get in touch: hello@sullivanstanley.com

Sullivan & Stanley