Supercharging the CIO’s Business Transformation Agenda with Perpetual Innovation Funds

According to a 2018 State of the CIO study, “88% of CIOs say their role is becoming more digital and innovation focused.” In other words, most CIOs surveyed indicated they are shifting from being stewards of systems of record and transactions, to leaders of systems of engagement and insight.

That shift in role of CIOs is a complete reversal from what had become the norm following the Great Recession of 2008, when IT departments were commonly seen as cost centers because cash was essential for survival. The focus was on cost savings, and IT was often limited to one or two major projects that survived budget cuts.

IT has shifted its attention

Today, the conversation is categorically different. IT is the growth engine and conversations are now squarely centered on growth and efficacy. It’s about customer engagement, new revenue streams, customer retention, and getting things right the first time.

IT leaders are using the latest technologies to improve processes; enhance interactions with customers, employees, organizations and systems; and enable new business models to compete and deliver value. Leaders are improving customer and employee experiences, patient outcomes, connecting supply chains, simplifying processes, reducing cycle times and raising the quality of their products and services. This is the essence of digital transformation.

These latest technologies that are transforming businesses include sensor systems that produce vast amounts of data, applying advanced data analytics and machine learning on that data, deep neural networks for image and pattern recognition, natural language recognition for conversational interfaces, robotic process automation for connecting systems and blockchain for tracking and tracing assets and actions.

With all of these enabling technologies, the primary challenge is not determining what is possible, but how to fund all that is now possible.

Create a funding pool for transformation

While we’ve all heard “80% of IT budgets go to keeping the lights on and 20% to innovation,” the reality is that 20% is often consumed by efforts related to keeping the lights on as well. But most CIOs and IT leaders who are successful in accelerating business transformation have this in common: they have a specific perpetual innovation fund allocated to drive meaningful change across their organization or for their products and services. To develop a true innovation fund that impacts business transformation and supports the digital agenda, CIOs need to exercise discretionary control by identifying and allocating dedicated funds to a specific charter.

At CIO 100 2018 we asked a room full of IT leaders for a show of hands of which companies had an innovation fund used to accelerate their digital agenda. Only one attendee raised their hand. This company would set aside 10% of their budget towards transformation and reported achieving incredible results with those funds.

Potential funding sources

The block grant approach is a common way innovation funds are established and maintained. However, it does require the highest-level executive support to initially allocate and continue to grant ongoing funds. While block grants are by far the easiest way to source an innovation fund, not everyone enjoys that level of C-suite support, and that’s where IT leaders are getting creative. Here are some ways — both one-time, project-based event sources as well as ongoing, perennial sources — which can be used to establish a funding pool when there isn’t a money tree to easily shake.

Project-based sources:

1. Reducing current infrastructure costs and license fees through legacy system conversions, such as mainframe conversions to x86 hardware and moving workloads to cloud-based systems. This is among the easier funding sources, as it is typically within the control of the IT leader and can be clearly benchmarked.
2. Automating processes and testing and introducing conversational interfaces such as chatbots and virtual agents. This is also an easier source, as it is typically within the control of the IT leader and can be easily measured.
3. Co-investing with partners on common objectives to share the cost of projects, offsetting planned budgets which can be diverted.
4. Diversifying labor sources in different geographies, contractor vs. full-time, fractional employees and crowdsourcing. Just be aware of the productivity dips that can occur. A longer-term benchmark may be required.
5. Application Management Outsourcing and Continuous Digital Modernization. Gaining control of application sprawl and driving substantial savings by YoY productivity improvements and application portfolio pruning. This is a systemic process to retire, replace or resize, particularly if there has been a merger or acquisition the application portfolio and continually drive out costs that can be reinvested in innovation. Another byproduct is legacy applications are modernized which enables better leverage of modern technologies and provides a better user experience.

Perennial sources:

6. Block grants, as mentioned above is a good funding source. Depending on organizational structure, there may be discretionary levels and a variety of sources of funds. Some Board of Directors are getting involved and approving the redirection of funds for transformation and innovation. They’re also holding leaders accountable for the productive use of these funds.
7. Incremental return of investment (ROI) or investing any additional savings gained above projected ROI into an innovation fund. Again, this requires an accurate baseline and accountability on sandbagging practices.
8. Percentage of revenue. This method sets a predefined percentage of revenue (say 2%) to the innovation pool. The drawback to this is that it can be seen as revenue from one business subsidizing or funding innovation in another area. Proceed with caution when proposing this as it may require more political capital.

In each case, all or a portion of the savings produced can be pooled for the next transformation activity on the agenda. This may take some creative negotiating by those who are expected to apply all savings directly to the bottom line. Additionally, an important aspect to consider is the critical need to accurately baseline the spend and measure the actual savings that can be redirected into the funding pool.

Once an organization creates a fund, there are some nuances to governing it and keeping it going and ensuring executive and employee alignment, but we’ll save that discussion for another time.

Discover how you can establish a steady stream of resources to accelerate innovation and growth by creating a funding pool for digital transformation.