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Budget busters: Three ways for CIOs to fund digital initiatives

The business wants IT to innovate, but CIOs find their budgets are frozen. Who you gonna call?

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For years, IT budgets have been squeezed and CIOs are being asked to do more with less. At the same time, digitally powered initiatives are stretching IT departments.

During the recent Gartner Symposium in Barcelona, the analyst firm urged CIOs to reorganise their IT function around products.

Arguably, a product is something tangible – it can linked to the profit-and-loss statement, and has visibility at board level.

Becoming product-focused requires a rethink of the way IT is run, from keeping the lights on to taking ownership of both the initial product development and continued release cycle.

This is the type of activity a software company excels at, given that its business is selling software products.

But getting there requires a leap of faith, a break from the past and, in particular, cutting the chains that bind IT to supporting legacy systems.

A rip-and-replace strategy can reduce cost and is a good option when a contract is up for renewal. For instance, when assessing how to refresh its existing Equalogic SAN, New College Durham decided to swap it for VMware’s Virtual SAN (VSAN) technology.

Converged infrastructure

Some organisations have replaced older x86 servers with converged infrastructure, such as Nutanix. The hyper-converged appliances combine storage and processing in a single box, and are charged on a pay-as-you-grow basis, which enables organisations to start with a small footprint and grow as their storage or compute requirements increase.

Last year, Surrey County Council migrated its datacentre infrastructure to a shared-service, hosted platform based on Nutanix.

Modernising hardware goes hand in hand with virtualising servers and migrating workloads onto the public cloud to free up expensive datacentre resources.

Where appropriate, some organisations take the opportunity to swap on-premise IT for software as a service (SaaS) equivalents. For example, in 2014, the city of Orlando replaced legacy JD Edwards and Infor software with WorkDay for its new HR system. Similarly, HP replaced its Oracle Siebel on-premise customer relationship management (CRM) with Salesforce to support 40,000 staff.

Reducing support costs

If replacing systems is not an option, CIOs can look at how to get the best deal on their existing software. One company that has gone down this route is the $1.2bn US metal buildings supplier NCI Building Systems, which has turned the savings from not renewing a $1m annual Oracle maintenance fee into a $60m revenue stream.

The company runs multiple enterprise resource planning (ERP) systems, mainly Oracle-based, and found it was stuck paying maintenance fees on the unsupported Oracle 10.7 and 11i systems.

NCI had a five-year plan to update its legacy Oracle ERP to the latest cloud-based Oracle Fusion system.

The company’s CIO, Eric Brown, told Computer Weekly: “We had paid maintenance to Oracle, hoping we would be able to do the upgrade to Fusion.” But there was no direct path.

Brown said the company first needed to update its ERP to Release 12 if it wanted to move to Fusion at some point in the future.

But having assessed the functionality of R12 over 11i, he said there was not a clear business case to move to R12 over the next five years.

Brown decided to drop Oracle support and bought a third-party contract from Rimini Street. “For half the price of an Oracle support contract, Rimini can support us,” he said.

Opting for Rimini Street saved NCI $500,000 in the first year of the support contract, money that would have been paid to Oracle.

What to do with an extra $500k

Like many organisations, NCI Building Systems’ budgets are tight. It may not seem a vast sum, but Brown looked at how the $500,000 could be reinvested in a digital transformation, as his budget was not increasing.

“The building industry is not very high-tech, so we looked at how we could transform it,” he said. “Nobody out there had an e-commerce system. We decided to build one in-house.”

The system, called Agora, is used to help builders engineer buildings. Using a Microsoft wizard-like user interface over the internet, Agora produces a bill of materials, a purchase order and the computer-aided design (CAD) diagrams to meet the specifications the builder requires to constuct a Walmart store, for example, said Brown.

The system transfer the order to NCI’s shop floor to manufacture the parts for the order.

Read more CIO strategy articles

  • While CIOs battle with the constant pressure of having to do more with less and yet remain relevant to the business, Gartner has suggested that digitisation should drive renewed focus on IT.
  • Research from strategic advisory service Hackett Group has found that IT organisations are at a crossroads, with CIOs needing to ensure legacy applications and processes that are redundant due to modernisation are retired at the end of the project to fulfil the business case.

Brown said the product had been an outright success. “I was hoping I could get $1m a month from it,” he said. “But we far exceeded that in the first year. The return on investment took less than a month and we made over $60m a year, all from something that cost us only $500,000."

The company has just released an update, offering a white box version that enables builders to embed the Agora system into their own websites. Brown’s IT team does the integration work for these customers.

Brown describes himself as a CIO with a product. “If I was a tech company, I would be selling software,” he said.

The product was created by NCI’s internal IT team, and Brown said the cloud-based software had turned the IT at a bricks-and-mortar company into a high-tech venture. “It is very rewarding for the younger generation,” he added.

Agora appears to have made a big impact financially. The company’s investor presentation, published on 1 September, showed that the building estimation to shop floor automation e-commerce function in Agora had earned NCI $60m in annual revenue, with Agora’s online components purchasing e-commerce function adding a further $10m revenue.

Culling legacy IT costs

What NCI Building Systems has shown is that it is down to the CIO to find the budget to innovate, with few CIOs fortunate enough to have an innovation fund. “You have to be able to come up with your own ideas to free up funds and cash to do cool things,” said Brown.

Experts say IT departments need to look closely at how to reduce the amount they spend on legacy software.

Application rationalisation is one of the best practices CIOs can use to reduce their legacy IT footprint. Someone has to pay for this support and a recent report from Hackett Group urged CIOs to pass the cost of supporting legacy IT back to the business.

One CIO taking this approach is Jim Fowler at industrial giant GE, who has 9,000 applications to support. His strategy is to show the business exactly how much the legacy applications cost.

“When we complete an application portfolio plan, we can show each of our business partners what every individual application costs to run,” he said.

Fowler told Computer Weekly it could be a “real eye-opener” when a business owner learns that the company is paying hundreds of thousands of dollars for applications used by only one or two individuals.

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