The U.S. is currently experiencing a challenging economic slowdown as the Fed raises rates to battle inflation. Various reports confirmed that the inflation rate in the U.S. reached a record high of 9.1% in June 2022 - the highest point since 1981. Though the inflation rate dropped to 8.5% in July 2022, consumer prices remained unchanged during the month period.  

While it is still debatable whether the U.S. is already in a recession, the decline in GDP rate during two consecutive quarters and the potential for further decline has forced tech leaders to undertake cost-cutting initiatives. Unfortunately, Information Technology is one department that always comes under scrutiny whenever budget optimization is being discussed. For example, many tech companies including giants like Microsoft and Meta (formerly Facebook), resorted to stringent employee layoffs to cope with the slowing market. A report by Crunchbase suggests that about 39,000 tech workers had lost their job as of late August 2022.  

Impact on the digital transformation market

The advent of the digital revolution in the past decade and associated benefits like improved agility, cost efficiency, and enhanced opportunities made digital transformation a top priority for all enterprises. For instance, the global digital transformation market stood at $737.88 billion in 2020 and had massive growth projections for the next forecast period. However, the recent slump in the country's economic stance has hindered this forecast growth.  

A survey by Morgan Stanley projects that only 10% of CIOs plan to increase their spending on digital transformation in 2022. It is a significant decline compared to the 2021 projections. The statistics suggest that enterprises are slowing their digital transformation plans to cope with unfavorable market conditions.  

This may be a big mistake!  

It is a no-brainer that digital transformation is the need of the hour and goes a long way in modernizing infrastructures and improving operations. However, certain benefits associated with digital transformation make it particularly relevant for businesses during economic slowdowns.  

 

Nine potential digital transformation projections

Of particular interest during an economic downturn will be those digital transformation projects that can cut your costs, provide a very fast break-even, and drive a large ROI.  

The following list of potential projects identifies some of the low-hanging fruit that can help you through the current economic difficulties.  

1.  Cloud Migration 

On-premises servers, applications, and data that have not been virtualized continue to be a major opportunity for cost savings. Replatforming (with O/S, DBMS, or middleware version update) or direct rehosting are relatively easy and low-risk approaches for cutting costs in a matter of weeks. In our experience, the respective cost savings can exceed 40%. Moreover, refactoring applications to take advantage of native cloud capabilities can result in much larger savings, although the investment and time-to-payback required are significantly larger.  

In addition to migrating from on-premises to the public cloud, migrating from one public cloud to another public cloud can result in significant run cost savings. For example, a manufacturing company migrated 35 GCP instances to the Azure cloud. The project was completed in 6 weeks and resulted in over 10 percent run cost savings. An assessment is certainly important, however, in determining whether the target cloud capabilities are equivalent to or greater than the source cloud and whether cost savings will be realistic.  

2.  Software-as-a-Service (SaaS)  

SaaS provides cost, maintenance, and mobility benefits when compared to on-premises versions of the same software. One way to ensure cost savings is by smooth scaling of costs in the face of increased or decreased numbers of users. This contrasts with cost step functions necessary in on-premises environments to increase necessary hardware for supporting larger numbers of users and hardware investments that are not easily eliminated to support lower numbers of users. Similarly, SaaS may provide significant maintenance cost savings resulting from the elimination of the effort of regularly applying patches and occasionally updating software versions.  

3.  Software License Optimization  

Although one could argue that Software License Optimization is not inherently a digital transformation project, it is listed due to its high importance in connection with cloud migration and SaaS. Software licensing in the cloud and SaaS world is frequently complex and the use of experts in this area can be extremely helpful. In our experience, high-quality Software License Optimization can save around 20% of the software licensing costs.  

4.  Data-Based Decision Making  

Accurate, well-presented data helps in cost-cutting through operational efficiencies, product transformation, employee empowerment, and customer engagement. Business runs on good decisions and reasonable risks. Thus, investments in data clean-up (typically automated Extract-Transform-Load) and data visualization can aid large-scale cost reductions. At the same time, investments must be calibrated during economic difficulties. An assessment by data experts can identify the low-hanging fruit, such as BI modernization, that can make a tangible difference with minimal investment.  

Another area for data-based cost savings involves use of AI and machine learning.  Although some projects may be viewed as too speculative during an economic downturn, targeted use of predictive analytics for churn analysis (especially in insurance and telecommunications) and fraud analysis (especially in banking and finance) can result in huge corporate savings and may be much easier to justify. 

5.  Site Reliability Engineering & Proactive Support  

We all know that maintenance and support services are enormous costs for IT. The concept of Site Reliability Engineering (from an overall perspective) and Proactive Support (from a user support perspective) builds reliability into software and operations. This type of application modernization allows you to save money on software maintenance and answering user support calls. Given the large share of the IT budget consumed through software maintenance, service desk, and deskside support, the cost savings can be quite significant to almost all IT departments.  

6.  Application Maintenance Right-Shoring  

Application maintenance consumes a sufficiently generous portion of IT budgets that even modest percentage savings on it can translate into large dollar sums. If you have not yet achieved an optimal balance between on-shore, near-shore, and off-shore support, a vendor with - expertise in these three models and experience in making them work together can provide significant cost savings. When viewed from a digital transformation perspective, these savings, typically on legacy application maintenance, can help fund new digital transformation projects.  

7.  RPA and Intelligent Automation 

Automation of manual processes can typically reduce errors by 90% and ensure major cost savings. RPA (Robotic Process Automation) is typically used to automate structured, rules-based back-office processes.  Intelligent Automation goes even further by combining RPA, artificial intelligence, and machine learning to automate unstructured processes and develop its own logic over time. Even the simpler RPA can drive huge savings.  For example, one of the top U.S. banks automated the manual processing of checks and loans. Through an RPA solution, errors were reduced, processing time was cut by 95%, and cost savings were enormous. RPA and Intelligent Automation can be treated as free-standing projects or as part of broader application modernization initiatives. 

8.  VPN Replacement  

Virtual Private Networks (VPNs) have been traditionally used by companies for the relatively small number of employees on business trips or working after hours at home. Following the pandemic and the emergence of the hybrid workforce, remote working has become a primary means of doing business in many companies. With this transformation, the role of VPNs has changed and become more important. Unfortunately, VPNs are expensive and do not always ensure optimal security. Replacement of VPNs with a Zero Trust Network-as-a-Service (NaaS) approach can quickly transform your old, perimeter-based network security to the new world of mobile devices and clouds while providing better security at a significantly lower cost.  

This is, of course, only one example of security cost savings.  More broadly the Ponemon Institute has found that the average cost of a data breach in 2022 is $4.35M.  This includes lost business, detection and escalation, post-breach response, and notification.  While certainly this does not justify unlimited cybersecurity spending, judicious spending to protect against common threats like phishing and ransomware should be viewed as cost savings rather than a business expense. 

9.  Customer Experience (CX)  

We all understand the huge positive impact of customer experience on customer retention, brand loyalty, cross-selling, and upselling. - However, the negative side of CX is sobering. According to PWC, even if people love your company or your products, 59% will walk away after several bad experiences, and 17% will walk away after just one bad experience. Given the high cost of customer acquisition, investments in high-quality SaaS-based contact centers and underlying networks should be frequently viewed as cost saving and profit-producing activities rather than as cost-increasing measures.  

So where do you start?

A good first step to start with is identifying by category where you spend the biggest parts of your IT budget. At the same time, you can also look at areas where the business relies on expensive manual processes. Both can serve as great starting points for deciding on operational efficiency and cost saving projects. At the same time, make sure and include on your list the easiest and fastest cost-saving items, like cloud migration.  

And what about digital transformation innovation projects?

The list focuses primarily on cost-saving digital transformation projects. However, be aware that for most companies, this is not 2015 when digital transformation was available as a source of major competitive advantage. Today, investments in digital transformation are critical for keeping up with the competition or even not falling significantly behind your competitors. This means that investment in digital transformation may be a source of survival and crucial even during economic downturns. 

##

ABOUT THE AUTHOR

Dutt Kalluri - Chief Digital Officer and SVP at Celsior Technologies

 

Dutt Kalluri is an executive-level technology leader and a proponent of digital transformation, with over 25 years of experience in transforming IT and operations for global enterprises. 

His digital transformation experience includes aligning business and technology strategy, defining organizational models for agility, technology architectures, data management, emerging technologies, and operational excellence. 

He led various transformation programs for large global clients across industries including financial services, insurance, aerospace and defense, Retail & CPG, manufacturing.