ROI remedy: How hybrid by design can improve business returns on your tech investments
- This is the second in a series of reports on how to design and implement your organization’s “Great Tech Reset”, using a method we call hybrid by design. In this installment: how hybrid by design improves business returns on your tech investment.
This is the second in a series of reports on how to design and implement your organization’s “Great Tech Reset”, using a method we call hybrid by design. In this installment: how hybrid by design improves business returns on your tech investment.
This is the second in a series of reports on how to design and implement your organization’s “Great Tech Reset”, using a method we call hybrid by design. In this installment: how hybrid by design improves business returns on your tech investment.
ROI remedy
C-suite leaders continue to navigate a period of intense digital transformation and pressure is high to prove the value of the IT investments. Demonstrating ROI that goes beyond cost savings—the kind of results discussed in boardrooms—matters more than ever.
It’s a tall order in any circumstance, but especially because the average organization spends just 23% of its tech budget on efforts that actually produce business income. That is a very small slice of the budget pie from which to produce impressive ROI. And 72% of executives say that improving ROI on tech investments by at least 25% is a critical business objective.
Hybrid by design offers a solution. Organizations that apply hybrid-by-design principles to IT programs can generate over 3x higher ROI over five years. Not only do hybrid-by-design users see higher returns, they also are positioned for extensive business value amplification through generative AI.
Now is the time to take an honest look at your tech investments, program design, and portfolio. Involve both the technical side of the house—and the business side. Better yet, bring them together, because lackluster ROI is often the result of disconnects between the two. Building a hybrid-by-design foundation for generative AI creates a tech reset to bridge that unproductive divide once and for all.
“There’s always pressure to showcase ROI. Show me a CEO who’s said: ‘Increase my cost and my complexity.’”
–CIO, Digital Banking, UK consumer credit organization
Our research identified three things every leader needs to know about using hybrid by design to improve ROI:
1. Anemic tech portfolio investments drive weak ROI.
2. Your default setting for tech program design is killing your ROI.
3. Tech sprawl creates an agility gap.
And three things every leader needs to do right now:
1. Manage your IT spend as an investment portfolio instead of a ledger of expenses.
2. Aim for the bullseye—a streamlined program, in lockstep with the business, for higher impact.
3. Turn small wins into big ones, using a flywheel to gain momentum.
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Originally published 18 June 2024
1. Learn now
What you need to know
Anemic tech portfolio investments drive weak ROI
Technology portfolios can be anemic for many reasons. But one major driver is tech spend that is anything less than intentional. It’s very easy to get into autopilot mode and that’s when ROI suffers.
Organizations could significantly improve their IT program ROI by committing to a hybrid-by-design journey. IBM analysis of more than 50 client organizations shows 3x higher ROI from IT programs over five years when organizations adopt hybrid-by-design principles. But they can’t do that with the anemic tech portfolios that still exist in most companies today.
A closer examination of tech spend highlights the key obstacle, which is that a significant portion of an organization’s IT budget is being consumed by maintenance and operational costs. About half of overall tech spend—47%—is dedicated just to keeping the lights on. Almost 19% goes into SG&A (Selling, General, and Administrative) functions like human resources and finance, with another 11% funding initiatives to optimize the IT function. What’s left for initiatives that move the business forward?
Just 23% of the tech budget remains to invest in performance improvement for areas that actually produce business income.
It’s time for a tech reset—time to make the IT portfolio work harder for the business.
- Managing IT as a cost center leads enterprises away from higher ROI on IT investments. The issue isn’t just the size of the budget; it’s how much of the budget is available for projects and technologies that directly drive better business performance—growth, productivity, customer satisfaction, and more—and right now, it’s not enough.
- But when leaders consider the IT portfolio as a group of investments tied to specific business outcomes, funding for critical and innovative projects can be prioritized alongside other business strategies. Lift in ROI comes from deliberately allocating tech spending that is biased toward business returns.
- This is where the “by design” part of hybrid by design works. The intentionality inherent in hybrid by design forces hard decisions, moving IT investment from scattered to streamlined. For example, when large new tech programs get launched, they typically compete with nine similar programs and have six different program sponsors. Paring that down to essentials will free money that can be invested in the highest value initiatives.
- Large enterprises with fixed budgets often struggle to adapt to changing circumstances. Unsuccessful plans might be kept on life support due to pre-allocated resources or lengthy decision cycles, getting in the way of activities that might be more lucrative.
- Combining the agility of startups with the resource stability of large organizations can create IT investment processes that foster adaptability and continuous improvement.
- Put another way: In smaller, fast-paced, entrepreneurial environments, plans need constant evaluation. The market provides immediate feedback, forcing swift adaptation and termination of non-performing initiatives. The agility inherent in this dynamic is a strategic advantage.
- “Each time you scale, you should test ROI again. If you’re making improvements on that, then continue. If you’re not, then it’s a question of finding the reasons why that’s happening.”—CTO, UK consumer and industrial electronics provider
What you need to do
Manage your IT spend as an investment portfolio instead of a ledger of expenses
If you look at a typical IT budget report, you’ll just see a long list of expenses. But when you look at an investment portfolio, you’ll see a set of strategic business objectives and the portion of investments that directly support each one. In order to better tie your tech portfolio to business returns, three actions rise to the fore:
- Develop a data-driven view of your portfolio. Understand the key data that drives your business and track it over time. For example, if total cost of ownership (TCO) is a metric you’d like to improve, a data-driven view will allow you to make tradeoffs that are necessary to move the needle. That’s because not every application will have a lower TCO on its own, given current-state architectural deficiencies, but the data that helps you decide where to invest and where to cut will help lower TCO in the aggregate, and that is the overall goal.
- Educate board members. Tech-savvy (or at least tech-competent) board oversight is crucial. Increasingly, U.S. companies are establishing a standalone science and technology committee; 15% did so in 2023 compared with 9% five years prior. Educating board members enables them to view technology not as a cost center but as a contributor to the business outcomes, strategies, and aspirations discussed in their annual reports and shareholder meetings. They’ll require this understanding to confidently approve strategic tech investments, particularly now as gen AI moves so quickly to become part of the fabric of the enterprise. And over time, you can turn them into ambassadors for your tech portfolio.
- Be opportunistic with modernization. Don’t feel obligated to adopt a one-size-fits-all approach to modernization—you don’t have to have a complex center of excellence for everything. Instead, be opportunistic and pursue quick wins as long as they align with your overall IT strategy.
2. Leap forward
What you need to know
Your default setting for tech program design is killing your ROI
Better program design leads to better ROI—execution matters, good early-stage design drives successful execution.
Lingering disconnects between business objectives and IT investments add time and expense to already cumbersome tech program design processes. For instance, prioritizing the newest technology over strategic business needs—focusing solely on “bells and whistles”—leads to projects with limited impact and wasted resources.
These types of initiatives often languish in development without clear business plans, creating opportunity cost and hindering overall progress.
What would help unlock business improvement and drive growth? A unified understanding of IT’s role in business improvement. For example, 72% of execs say that improving ROI on the tech budget by at least 25% is a critical business objective. Yet, 71% of executives say the lack of a clear, shared vision for how IT can drive significant business performance improvements is a strong impediment to higher tech ROI. The desire for improvement is there but no one is creating the shared vision that enables that improvement. It’s not just the IT department’s job to initiate. Leaders from IT and business need to make shared vision a priority.
Adding to this, two-thirds of executives say inadequate line-of-business leader demand for higher ROI proposals also strongly impedes higher tech ROI. While reasons for lack of demand vary, only 12% of new tech program ideas come from lines of business. It’s no surprise, then, that only 18% of large new tech programs tested more than one critical business assumption before launch. Given that a typical enterprise requires more than nine months to design, plan, and launch a new program, there is significant investment going into resource- and time-intensive projects that have very little connection to business value.
Tech programs in the gen AI era
As gen AI becomes a staple in your IT repertoire, hybrid by design helps speed the transition.
Why? Because the evolution from gen AI pilots to production adds complexity. Generative AI faces challenges linked to distributed or heterogeneous environments. Data governance is complicated by workflows across the enterprise that run on different IT stacks. Scalability and replicability are harder in a heterogenous environment. And while gen AI creates more value across enterprise data assets, to have AI embedded everywhere and appropriate orchestration of distributed data, you need a hybrid-by-design approach.
It’s a virtuous cycle. Gen AI accelerates hybrid cloud by better managing complex environments and hybrid cloud accelerates generative AI with open-source tech, enterprise-wide data plans, and more.
“IT teams, when they talk to businesspeople, use a lot of technical jargon and acronyms. They talk technology. They talk products. They don’t talk benefits. They don’t talk business lines. And they don’t talk ROI. You get an IT person to talk to a businessperson and the businessperson is only interested in the bottom line. But the technical person will be trying to introduce the latest and greatest technology and all the ‘greatest things’ that the technology can do. But what can it really do for the business in terms of impacting the bottom line? This is where there’s a disconnect between the business and IT.”
—CIO, construction and real estate company, Singapore
What you need to do
Aim for the bullseye—a streamlined program, in lockstep with the business, for higher impact
Aim for the bullseye—the set of business IT investments that deliver the highest ROI. To get there, gather data and base your decisions on solid analysis—and avoid investing too much in anyone’s pet projects.
- Don’t let your data get cold. Measure consistently. Regularly measure performance of your tech program, using metrics tied directly to business outcomes. Continuously refine and optimize, reallocating resources to initiatives that demonstrate the greatest ROI and strategic impact.
- Focus on a few business-critical plays. It’s tempting to be everything to every key stakeholder. But you sacrifice success when you do so. Design a tech portfolio that favors business-critical plays—those in the bullseye—because it conserves resources and strengthens impact in the most important areas.
- Enlist executive champions. Without executive sponsorship, it can be difficult to move business teams from the status quo. Identifying and reaching out to executive champions and sponsors who will help lead discussions on what needs to change, future requirements, and more will speed your journey. Champions help you create and maintain that ever-important linkage between the business value chain and your IT blueprint. Use data-driven storytelling to speak their language, showing them how programs will help them meet their business objectives.
3. Look ahead
What you need to know
Tech sprawl creates an agility gap
“We have too many projects.”
“We’re using too many tools.”
“Why do we have so many disparate environments with their own tools?”
“We don’t apply enough rigor in selecting the best bets.”
Any of these sound familiar? If so, you’re likely experiencing tech sprawl. And you’re not alone. Most organizations that have moved to hybrid approaches have done it by default.
As IT teams try to enable capabilities, over the years organizations end up with multiple tools and disparate experiences. When this happens, IT velocity slows—and so does business agility. In a hybrid-by-design approach, enterprises work toward consistency of both the developer experience and the ops experience. This is essential because as business leaders look for rapid time to market, consistency of experience helps—disparate experiences slow down time to market.
Optimizing ROI on tech investments comes from focusing on a few critical plays, as well as delivering fast cycles of performance improvement. But sustained execution is key. Quick wins that fade over time don’t move the needle. After investment decisions are made, 80% of executives see value in identifying better ways to fund agile roadmaps for program execution.
It’s not easy for today’s CIO and CTO teams, particularly as they try to design a hybrid environment for generative AI workflows. Execs, on average, have been offered 32 gen AI use cases from their vendors. Of these, 64% have the potential to drive competitive advantage. But to get to that competitive advantage, you need to tame your tech sprawl and set teams up for agility.
What you need to do
Turn small wins into big ones, using a flywheel to gain momentum
As you design new programs to hit bullseye ROI, restrict your portfolio to a few programs. Then manage your portfolio as a “flywheel” that sustains itself with “early and often” ROI that activates and modernizes IT assets to directly support execution.
- Focus on the finish line, not the fantasy. Spreading scarce funding across dozens of “strategic” objectives and expecting high ROI is fantasy. But using a deliberate hybrid-by-design flywheel, you must make hard decisions about the objectives you want to support. Design a flywheel to cover your major objectives, so they feed each other and create sustained value over time.
- Measure velocity. The target for multi-year ROI needs to be balanced with continuing to build the positive momentum required to get there. Measure and manage flywheel velocity. Even if every spin of the flywheel delivers value, simplifies the tech environment, and generates funding for the next spin, everything depends on how fast the flywheel spins. To add speed, you need shorter decision cycles. Define the decisions required to keep the flywheel moving and how those decisions will get made. Get all flywheel sponsors to agree on who has decision authority and how quickly decisions need to happen.
- Put behavioral economics to use. Nearly two-thirds of CEOs say success with generative AI will depend more on people’s adoption than the technology itself. Flywheels, similarly, are fueled by voluntary behavior. They spin at the speed permitted by the people doing the work. If people executing one step of the flywheel don’t think it’s in their best interests to make the flywheel spin, expect the flywheel to spin very slowly. Or to stop spinning at all. Or worse still, reverse. At every step, ask, “How can we identify and remove disincentives? How can we make it in everyone’s best interests to keep the flywheel moving?” For instance, the current owner of a business application may resist the modernization required to integrate that app with a digital product from the flywheel. Putting app modernization on app owners’ scorecards, however, ensures executives support the effort.
The ins and outs of business flywheels
A flywheel is a good way to deliver better business outcomes at enterprise scale, without incurring the downside of big digital transformation programs.
The term comes from mechanics, where a flywheel is a heavy wheel that generates and transfers energy to other parts of a machine. It takes a lot of force to start a flywheel spinning, but once it’s up to speed, it builds momentum and can continue turning on its own.
Flywheels start with the kind of primary business objectives discussed in the boardroom. But then—instead of the usual linear phases of program design and execution, a flywheel features a cycle of actions where each action builds on the previous and makes the next action easier to accomplish.
For example, the first part of your flywheel might be designing and delivering digital products that improve business performance, even if that improvement is incremental. The second part might be modernizing existing applications to support those digital products. A third part of the flywheel could be taking cost out of IT operations (cutting expenses that aren’t required to support the flywheel) and reinvesting the savings into more product development.
A flywheel forces intentionality in the same way deliberate portfolio and program design do. Using a hybrid-by-design ROI lens, design a flywheel that will not only deliver high value sustainably over time, but help your teams create a foundation for generative AI.
“It’s really important to show a pattern of value, not just returns in the short term. When you invest in enterprise projects like large-scale software deployments, it’s very difficult to say, ‘We saved in year one but then didn’t offer any value to the business past that point.’”
—Director, Information Technology, US industrial company
Hybrid by design in action
- In today’s dynamic market, clear visibility into tech investments is no longer a luxury, it’s a strategic imperative. The Standard, a leading provider of financial protection products and services for employers and individuals, has embarked on a journey to data-driven IT investments that are in lockstep with its business objectives.
- The challenge: Blind spots in tech investment
For the company, keeping pace with industry demands meant embracing digital transformation and strategic acquisitions. However, a crucial roadblock emerged: limited visibility into tech spending. - Relying on legacy systems and spreadsheets for budgeting and analysis, The Standard struggled to differentiate between “run the business” and strategic transformation costs. This data opacity hampered efficient resource allocation and hindered informed decision-making. “My mandate was to build cost transparency that delivers actionable insights and enables faster decision-making while fostering a deeper partnership between IT and business areas,” said Dickson Kasamale, second vice president of IT Finance and Analytics.
- The solution: Transparency through technology
In 2020, The Standard embarked on a strategic shift. They replaced their spreadsheet-driven approach with robust business management software. This solution combined financial and operational data, enabling them to analyze, optimize, and plan tech investments with greater precision. - Furthermore, the implementation of cloud cost management and resource and portfolio management software provided deeper insights into their burgeoning digital investments.
- The results: Unleashing efficiency and agility
The impact was immediate. Increased transparency fostered a stronger partnership between IT and business units. The IT finance team, previously bogged down with data consolidation, could now dedicate 80% of their efforts to strategic analysis and forecasting. - Standardized cost models and investment planning tools empowered leadership to confidently shift funding toward high-impact initiatives, leading to consistent budget achievement.
- Cloud cost management provided valuable insights, enabling product and application leaders to optimize cloud purchases and maximize value.
- Managing geographically dispersed delivery teams across diverse projects became significantly easier. New software streamlined workflows, improved visibility into resource allocation, and facilitated collaboration despite the organizational complexity.
- The bottom line: A strategic advantage
The Standard’s success story underscores the importance of transparent tech spending management. By leveraging the right tools, they achieved: - Faster decision-making: Streamlined data analysis freed up IT for strategic planning.
- Enhanced cloud control: Optimized cloud purchases delivered cost savings.
- Improved resource management: “Our say:do ratio—what we as an IT organization say we will do versus what we actually deliver—increased by 20%, an improvement that goes beyond delivering more; it revolves around shared visibility into commitments, enabling the team to efficiently manage distractions and achieve tasks faster,” explained Kaarina Bourquin, director of Strategy and Portfolio Operations and Technology at The Standard.
- Stronger IT-business alignment: Transparency fostered collaboration and faster goal achievement.
- IT sprawl is endemic to so many large companies. Thousands of applications, many from a bygone era, can choke innovation and gobble up resources. It’s all too easy for cloud adoption—once hailed as the cure-all—to morph into a tangled web of hybrid-by-default solutions.
- Like many companies, IBM over the years amassed an extensive IT portfolio. About 18 months ago, as leaders looked at the portfolio with fresh eyes, improving ROI was the goal—freeing funds that could be invested in more strategic IT—IT that would help business teams work faster, smarter, and more innovatively. Moving from hybrid by default to hybrid by design was essential.
- Matt Lyteson, IBM’s CIO for technology platform transformation, realized without a solid plan it could be so large a project that there was risk of spinning wheels without true forward momentum. “My first question was: How do I clean up what I’ve got? And how do I map from a ledger view up to an investment view?” Lyteson knew looking at the portfolio from an investment versus return perspective was essential for real change.
- The centerpiece: Application rationalization on steroids
Like a majority of enterprises, IBM had gone through its own agile transformation, which gave our business application teams a high degree of autonomy for how they run their full-stack applications (full stack is the set of software solutions and technologies used to build a platform, website, or application). The result was 4,000 apps, many that were heritage yet critical to running IBM’s business. - The company needed fewer dollars going toward cloud, hosting environments, and networking—and more money going toward transforming business processes.
- “We needed speed, scale, security, and simplicity all at once,” explains Lyteson. “We took the opportunity hybrid by design provides to modernize, rationalize, standardize, and consolidate our business application portfolio. We started with over 4,000 apps. Over 18 months, we’ve rationalized more than one-third of those applications. We’re still on our journey. We want to reduce to a range of 250 to 400 apps total over the next 18 months, by 2026.”
- Transformation, though, has not been limited to the software layer. Just four data centers remain after consolidating from 43.
- Shoulder-to-shoulder: Collaboration with the business
IT teams worked closely with IBM business teams to ensure they prioritized appropriately based on business criticality—and that the train kept moving. Fostering close ties with business units, ensuring alignment and understanding, was critical, all the while emphasizing that short-term adjustments would pave the way for long-term benefits. - High-velocity outcomes
Results have been favorable, freeing up funds to invest in continued ROI and value generation with a flywheel effect. - 90% average reduction in application total cost of ownership (TCO)
- 60% of business applications are using a common CI/CD pipeline to accelerate digital business capability delivery. (A CI/CD pipeline is an automated process utilized by software development teams to streamline the creation, testing, and deployment of applications.)
- 55% reduction in platform operations personnel due to hybrid cloud platform versus discrete public and private cloud
- 62% fewer DevOps resources supporting operation of middleware and operating systems
Making your tech investment work smarter
By adopting an intentional hybrid by design approach, organizations unlock significant business value not just now, but over the next five years, as they build foundations, platforms, and portfolios that will enable generative AI. It means business and IT leaders must work together, though, to align tech investments with strategic objectives.
Among our interviewees for this report, one European lead technology executive summed it up particularly well:
“My biggest takeaway based on my learnings in senior leadership roles over the last couple of years is that you shouldn’t get stuck. Try to create teams that are cross-functional. Don’t look at the ROI for one department; look at the overall business effect. Don’t use technology or IT just for the sake of it, because it is cool, or because everybody’s talking about AI.”
“Do your design-thinking workshops, try and understand the real business challenge you’re trying to solve, work with the business leaders, try to have an influence in the C-suite, and then take the leap of faith and go ahead. Try to prioritize the right initiatives, the bigger ones that will be game-changing, which can transform the industry and have a huge impact. And then just go for it. Put the right team together. Be collaborative. Have the mindset of servant leadership, and go for it.”
Companies can drive digital transformation with hybrid by design, amplify their ROI, and stay ahead of the competition. And digital transformation goes hand in hand with business transformation. The time to reassess, revitalize, and reset your tech portfolio is now, as generative AI makes its mark not only on your IT landscape, but your entire enterprise.
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Originally published 18 June 2024
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