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Every CFO knows how technology spend tends to accelerate, typically faster than revenue growth. Even before this transformative moment with AI, there have always been new applications to adopt, new security threats to counter, and new productivity tools to chase. Some are the typical IT systems that are used to run the business. Others are client-facing products and contribute to revenue. But all face relentless upward pressure, as companies spend to show their customers that they are investing in technology and to keep from falling behind their competitors (or even the appearance that they might be). Costs escalate, and cuts perennially follow.
I have over twenty-five years of experience between advising companies and leading critical technology functions inside the Fortune 500. I have seen the scenario again and again: leadership identifies “bloated” tech spending; leadership initiates aggressive cost-cutting measures; leadership is shocked to find those same expenses creeping back within a few years, if not sooner. I hear similar comments from CFOs across industries: “I don’t want to deal with having the same conversation year after year.”
This cycle raises critical questions: How can companies reduce technology spend in a way that sticks? And how can they optimize these strategies for sustained growth and profitability?
Based on my experience, it all starts by developing a roadmap for strategic technology investment. We first scrutinize all technology spend—including requests from the business and everything that the technology organization says they need. We then carefully consider how that spend ties back to business objectives—i.e., the things that are going to drive revenue, improve margins, and mitigate risk. Executives allocate money based on how business units contribute to the growth and profitability of the organization as a whole. Technology departments do not get to be immune to that. Technology decisions should never be made in isolation. When everyone can be clear about the alignment between technology and business perspectives, then every decision can be weighed against those strategic priorities. The CFO, CTO, and CIO should be in lockstep, nodding in agreement about the way their applications, infrastructure, cloud services, outsourcing, and all other vendors contribute to those priorities. Ideally, this evaluation is a closed-loop process. In each cycle, we measure and confirm that each specific spend accomplished its corresponding business objective. And if it didn’t, there is no blame—we work together to determine what went wrong and what can be done to correct it.
I saw the benefits of a good roadmap recently, with a technology client that had a complex portfolio of applications, and the escalating technology spend to match. As we engaged with them to launch a value creation program, the company established its strategic priorities, and we used that to help them reprioritize their technology initiatives. This deliberate alignment resulted in a 9% ongoing annual run-rate savings, between labor and third-party spend. The company since shared ambitions for stronger growth in revenue, margins, and cash flow over the next couple of years.
That said, some technology spending must happen, even if we can’t draw a straight line to specific business growth and profitability objectives. That includes being attuned to cybersecurity risks, but the aperture is broader. It’s all about the “health and hygiene” of your technology investment, making the necessary upgrades to hamper obsolescence, keeping your technology stack current, and ultimately preventing anything that could pose significant business risks to the company. That spending is strategic in its own way.
But in both categories—spending for growth and profitability, and spending for compliance and security—what makes the optimization stick is defining a clear process for evaluation. The goal is to move your organization to be hyper-focused on strategic alignment and measurement. That includes performance management scorecards that use KPIs to track and manage technology spend, accelerate performance, and implement lean methodologies. Proper measurement requires alignment on monitoring, supervision, and assessment. It is further beneficial to compare your performance against companies of a similar profile as yours, or others in your industry.
The north star of this process is to make sure that technology spend is in the right place and doing the right thing—and not coming back year after year. All that said, we know how things change. Businesses are never static. Priorities can be fluid. Growth itself can be an excellent driver of change. If technology executives are rigorous in working with their finance and business counterparts in establishing spending priorities that clearly link back to business objectives, then even in the face of that change, they will have clear direction on how technology spend can consistently contribute to growth and profitability.