Thoroughly Modern: A Wealth Of Funding Options Makes It Easier To Take On Modernization
November 9, 2020 Jeff Lovette
Investment in IT is being driven by a new conversation – the value-aligned technology stack. The pandemic/recession is triggering the need for coordinated, business-led technology strategies that bring costs under control and harvest more value from technology to transform the business. Even before the events of 2020 began to play out, it wasn’t always easy to get funding for key IT initiatives, and now, as the world tries to come to grips with our new reality, it may seem even tougher. But it doesn’t have to be that way.
From a business sense, three key notions stand out from our client conversations: adaptability, agility, and modernization. Clients have seen just how quickly they need to change, how rapidly they must face new challenges and invent almost overnight a capacity to overcome them – or even profit from them. This need for adaptability and agility has been highlighted repeatedly as companies quickly move employees to a work-from-home environment, set up new online methods of doing business and evaluate business opportunities for the upcoming year.
And many of our clients have the same lament: this all would have been a lot easier if our IT was up to date. Modernized systems make adapting so much easier. When all of your in-house apps have a graphical interface, they can be accessed from anywhere. And applications that have a modern architecture can be connected together to create new workflows with very little effort. Modernized databases are highly secure while being more accessible and user-friendly, lending themselves to easy self-reporting. These IT advantages have not been lost on business leaders.
My Kingdom For A Modernization Budget
And yet – there’s the budget. The advantages of modernizing – and the ultimate cost of not modernizing – are evident. “If it ain’t broke…” is a fine philosophy, until it’s broke. Then you’re in trouble and have to scramble and potentially make poor decisions. But the fact is, modernization is not free; it has a cost. Thankfully, there are options, and we’ll look at three of them. First however, two key points:
Analysis and planning are paramount: Business and IT have not always been aligned. Over the past eight months, business and IT have begun to re-sync, and realize the value of their symbiotic relationship. Fresche has been working with IBM i clients to analyze their business, IT, current situation and future goals, and then we make recommendations for moving forward. As Chief Revenue Officer at Fresche, I’m often involved in this Discovery service, helping to bring key stakeholders to the table for modernization workshops. And I’m constantly amazed that the Discovery is often the first time that a client’s IT team, business leaders and C-level have come together in the same room and put all of their cards on the table in a formal, detailed fashion.
Alignment with business goals is key: Funding for modernization is much easier when the business sees clear results and can calculate an ROI. It’s important to make alignment and gradual IT modernization an ongoing function. It shouldn’t be a one-time thing. You do not modernize once and then forget about it for 30 years until it’s crunch time again. An element of modernization needs to be permanently baked into your business-IT relationship, and can even be funded from the OpEx budget as a low-cost, modernize-as-you-go program.
Let’s take a look at three modernization approaches that incorporate different funding strategies.
Approach One: Traditional Modernization – CapEx, Quick Completion, ROI at End
A traditional modernization approach is mostly funded from the capital expense (CapEx) budget rather than the operational expense budget (OpEx) and sees a significant upfront investment in fees for new software, modernization tools, perhaps new servers and the intensive ramp up period that gets the project solidly underway. These projects typically have a modernization partner who does much of the heavy lifting, with the client assuming a significant role in testing before roll-out.
This approach is ideal for clients who have sufficient CapEx budget, who have undertaken a thorough planning and analysis exercise and who have buy-in throughout the company (IT, business, C-level) to get the project done and rolled out. The size of the project is immaterial, but this model nonetheless tends to lend itself to larger projects, such as large-scale application conversions. The following diagram provides a sample view of a traditional project from an activities and costing perspective:
Key to this project is buy-in throughout the company. Traditional modernization projects typically see no ROI before the big bang deployment at the end of the project, so everyone needs to be on board and disciplined. Fortunately, in our experience, these projects tend to be the quickest and so have the lowest total cost.
Approach Two: Modernization As A Service – CapEx/OpEx, Periodic ROI Helps Boost Funding
Modernization as a Service (MaaS) can be funded either through the CapEx or OpEx budget or a mix, depending on the size of the project. Key to this project model is that the project is broken down into smaller steps that can be implemented progressively, so that the ROI provides a source of funds for upcoming project stages.
Normally, the MaaS model begins with smaller projects that can provide quick wins. Simple projects such as green screen modernization transform business applications and make them accessible to a wider audience. These types of projects immediately demonstrate the usefulness of modernization and a digital transformation strategy.
ROI calculations can play a key role. For example, with a green screen conversion you can usually calculate the time required to perform a function with the old screens and the GUI-enabled screens. Multiplying the time reduction by thousands of operations per day quickly establishes the dividend that modernization provides, which builds confidence in the program and provides budget capacity for the next stage in the project. Other quick wins could include implementing descriptive names for database fields and streamlining workflows with quick Service Oriented Architecture (SOA) projects.
Smaller projects may be all that are needed. But they typically lead to phases with larger projects, such as language conversion or a complete database migration, which ultimately pay dividends in a cheaper resource pool, easier integration and much greater business agility.
Normally, under MaaS, license fees for modernization tools are costed as a percent on top of the services rendered, so there is no large initial outlay. However, as confidence in the program builds and larger projects are started, costs can begin to rise. The following diagram provides a sample view of a MaaS project timeline for one of our clients:
This approach is an excellent way to generate internal funding when there are competing interests for budget allocation across the organization. Even though, as we noted at the top, the business side of most companies has a renewed interest in IT, it can still be difficult to acquire sufficient budget for modernization projects. Being able to generate some of the budget through ROI on smaller modernization projects can provide the support you need to get the level of buy-in required from the business.
Approach Three: Fixed Monthly Fee – OpEx, Agile Approach, Go/No Go
Every company is in a unique situation and needs to find a modernization and transformation approach that suits its goals. While the number of possible options is almost endless, the chosen path often depends on a company’s time frame and budget constraints.
For many companies, cost certainty is an absolute requirement, so the fixed monthly fee model is an ideal choice and can sometimes be paid from the OpEx budget. In our experience, this model provides the utmost in cost certainty, especially since it provides an ability to pause the project. For this reason, projects are kept relatively small with progressive deployment.
In some sense, this approach is similar to Modernization as a Service, including having the software licensing invoiced as a percentage over time, but with absolute predictability for cost. Risk averse companies who have little experience with modernization tend to choose this model. The agile approach helps ensure that projects advance with any periodic adjustments required to keep them moving toward their stated goal.
With cost certainty, however, comes a few disadvantages. For example, these projects typically take the most time to complete and ultimately cost the most money – if the entire modernization program is carried out to completion. The following diagram provides an idea of the timeline and cost:
Mix And Match: Modernization Is Not A Zero Sum Game
When evaluating which modernization approach would be best, organizations might feel as though they fit into or have to choose one specific model. This is not the case. Fresche clients typically have horizons for modernization projects within their digital transformation program, with some projects more critical than others. Each project or program can follow a different model and be costed from a different portion of the budget.
In Fresche’s Discovery service, one of our key efforts is to help clients identify needs and separate their modernization program into appropriate streams or paths and find the project and funding models that make the most sense, given the urgency of their goals and their budget constraints. We put together an article some months back that talks to a variety of modernization options for companies that rely on IBM i applications. There are some good examples on different approaches and strategies in there.
In thinking about client stories, there is also a good example with a company that is modernizing in several concurrent streams – MedAxiom. They are the developer of MedAxcess, the most powerful cardiovascular-specific database and web-based analytics tool in the United States. Fresche has helped MedAxiom develop their mobile analytics, implement a portal and become proficient at Agile development – all different modernization initiatives that progress at their own pace.
CapEx Or OpEx?
One of the decisions that companies increasingly need to make revolves around using the CapEx budget versus the OpEx budget. CapEx and OpEx are – and should be – both be part of IT spending, especially when it comes to planning modernization and a complete digital transformation strategy. Every company needs to examine its IT operations and determine what parts would benefit most from each spending model. There may be many factors – the size of the business, an organization’s tax structure, availability of skilled resources, the need for agility – that can sway the decision.
In many organizations, it has always been possible for IT departments to move a portion of spending between CapEx and OpEx, but traditionally, managers have been encouraged to favor CapEx over OpEx, often for tax reasons. However, with the growing availability of remotely hosted systems, Modernization as a Service (MaaS), Software as a Service (SaaS), hosted application providers and Cloud providers, and driven by the need for transformation, an OpEx model begins to make more sense, especially as you gradually modernize. In fact, moving some parts of IT to OpEx can actually be the start of a modernization program.
The benefits of modernizing by moving to hosted systems and expensing costs to the OpEx budget are attractive to a growing number of companies. Among the benefits are servers and software that are always up-to-date, high scalability to handle growth, reduced resource use, lower cost as there is typically no large initial fee, and overall, a reduced reliance on dated technology that is inflexible and puts both IT and business in a straitjacket.
Analysis, Flexibility In Funding, And Buy In
The keys to a successful modernization: thorough analysis and planning help you understand where you need to go; flexibility in choosing your modernization options and funding models ensures that you get exactly what you need at an appropriate price; buy-in throughout the organization ensures that IT and business are on the same page, and that modernization ROI is up to expectations and occurs on a predictable timeline.
I would be happy to talk to anyone looking for options and creative ways to get modernization and transformation off the ground. Feel free to reach out to me personally at firstname.lastname@example.org, or contact any of our strategists at email@example.com.
This content is sponsored by Fresche Solutions.
Jeff Lovette, Chief Revenue Officer at Fresche Solutions Inc. As Chief Revenue Officer of Fresche Solutions, Jeff provides guidance to Sales, Marketing, R&D and PSO to ensure a coordinated and successful go-to-market effort. His extensive experience in the software industry has been integral to Fresche’s growth over the years and its ability to maintain high profitability. With his capacity for nurturing and growing key partnerships and other industry relationships, Jeff continues to expand the company’s footprint globally.