Many CFOs believe that, following an investment in building an application, most digitisation costs will have been covered. Wrong! Uncover the hidden costs.
What does good budgeting matter?
In our previous blog about the roadmap to digital transformation, we discussed the steps that make up the digital transformation, and what factors to account for. From a budgeting perspective, it is important to know that a digital transformation often starts from a certain challenge. For example, an organisation’s business model no longer suits client needs, or it may want to cut costs based on predictive data. In such cases, it is important to have a solid business case that includes the costs for the continued development, maintenance, and management of digital products.
What costs to account for
Within IT, cost control as well as correct forecasting and budgeting play an important role. Many CFOs believe that, following an investment in building an application, most digitisation costs will have been covered, and that additional budgeting future budgeting will not need to make additional provisions. Nothing could be further from the truth, however.
Investing in an application is only the first step; in the following years, its maintenance will also play an important role. From a budgeting perspective, the fact that application’s annual maintenance will require a reserved amount of 15% of the initial investment must be taken into account; for many CFOs, this is an unpleasantly surprising cost item.
As systems become more established, IT system complexity with also increase. This increased complexity leads to an increase in the number of failures as well as in an increase in maintenance costs. In addition, not all technologies are infinite; the sector is characterised by a high rate of innovation, causing an increase in the amount of customised work needed to keep the applications running as time goes on. Another possibility is for a certain technology to become obsolete and lose its place in the mainstream, resulting in third-party support dwindling over time. The lifespan of the average application is 10 years – at which point, even though an annual 15% was spent on maintenance, it will lose out to a ‘new build’.
Then, there are the costs of continued development. On average, a company spends 5% of its turnover on IT annually. This percentage is strongly linked to organisational type, business size, degree of digitisation and, of course, the industry. For example, the percentage is 2% for retail and 10% for governments. These costs result from changing user requirements. You start your digital transformation with a speck on the horizon, plan your roadmap with your partner, and then begin rollout. But your roadmap may change based on use, client, or employee input, as well as situations like the Coronavirus pandemic or the arrival of new competitors. Over time, new issues begin to present themselves, and the application will no longer meet client/market demands. The circumstances will simply have changed. Think, for example, of a problem a client may have when placing an order. This demands an investigation into what is going on, and how it may be resolved.
Unfortunately, it is all too often that we see a lack of a good business case where the digital transformation of the business model is concerned. Establishing a speck on the horizon and the road to reaching that target are especially crucial to a successful transformation – particularly in budgeting terms. For example, what is the digital product’s earnings model? What does the business case look like? How long until you see a profit? What do you want the product to earn at each year of its life? It is important to find a partner who is willing to join you in thinking about ideas that need to be developed, who is able to assess this vision with you, and who can offer quality advice on multi-annual costs.
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