Webinar key takeaways I Getting a grip on technology expenses

Key takeaways, frameworks, and tips from the webinar that took place on the 28th of February, 2024.

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Mar 04, 2024

If money is the fuel, technology is the engine for growth and operational excellence

In this article, we will go through the key insights and takeaways from the recent webinar, called “Getting a grip on technology expenses”.

The challenge at hand is finding the balance between driving substantial growth and effectively controlling expenses within budget constraints.
The problem we see across many companies is that technology—despite its evident impact—remains a subject relegated to the basement rather than the boardroom. Most executives, trained for different things, struggle to understand the unfamiliar language of technology. What adds gasoline to the fire is a lot of opposing opinions around this topic and bloated costs.

Watch the full webinar here:

The framework to discover opportunities for technology

Technology is never a goal in itself but serves as the infrastructure for your mission-critical business operations and your growth ambitions.

It unlocks the opportunity for new scalable revenue streams across the commerce, content, and community flywheel to differentiate and keep customers in.

How to discover these opportunities for scalable revenue streams?

First, it is essential to understand the difference between software companies, which sell digital products through digital channels, and software-driven companies, which sell physical products through digital channels. Understanding these distinctions helps clarify the technology stack's role in business scalability.

Scalability and the Cost Advantage

Code or content have zero marginal cost. This means that once a software product is developed, distributing additional copies or serving more users incurs virtually no extra cost. Scalability arises from decoupling the revenue and cost lines. Revenue increases, but costs flatten out.

Through the use of technology, digital products and channels can significantly increase revenue potential without proportionate increases in production costs.

Fundamentally, two dimensions exist: the product and the channel, each capable of being either physical or digital. Let’s plot this on a grid:

That’s why pure software (top right quadrant) or software-driven (bottom right quadrant) companies enjoy a distinct advantage due to the negligible marginal cost of digital products, contrasting sharply with traditional businesses like restaurants, where each new sale incurs additional costs.

Proper management of the technology stack can flatten these costs, as demonstrated by companies that maintain their systems efficiently, avoiding the need for complete rebuilds and mitigating the chaos of "spaghetti code."

Examples digital commerce companies that use technology for their advantage
Apple creates a diverse range of physical and digital products to enhance cross-channel experiences. The company operates across various sales channels, both owned and external.
GoPro markets cameras along with digital subscription services.
Smaller entities like Spinoza exemplify how exclusive, immersive experiences, both online and offline, can generate scalable revenue through a mix of digital products (app) and physical products sold via digital channels.

Choose your path: will you innovate like Netflix or risk obsolescence like Kodak?

Technology investments are not merely expenses but strategic levers for achieving business objectives.

The key is to align technology investments with the business strategy, ensuring that every euro spent contributes to the company's overarching goals.

Your tech stack is not static and will never be ‘done’. Every company has a technology stack; however, most treat it as a single project. Technology requires an ongoing process and maintenance.

However, as the business grows, tech stack costs flatten out:

Source: Forrester & NRF https://nrf.com/research/2020-nrf-forrester- research-global-retail-market-size-and-forecast-report

How to know whether to invest or divest in technology?

First, it is crucial to understand that technology has the potential to bring value in the following key areas

Customer experience
Operational excellence
Management insights
Growth potential

More specifically there are strategic levers that technology should deliver on:

The first three are the most obvious ones. Is technology providing the company with amplified efficiency, enhanced customer experience, and improved information quality for decision-making? If this is not happening, you should consider divesting in such technology and look for alternatives. Further domains to consider are the expansion into market reach, innovation, and security, which can further provide a competitive advantage.

How to calculate the total cost of ownership (TCO) for technology?

Consider the 6 main areas that add up to the TCO:

Essentially, these costs run through the stages of technology adoption: initial set-up, recurring operational and maintenance costs, team training and development, indirect costs, and even disposal costs. Take into account all these areas and the costs they incur.

Keeping the costs in line: align organisational structure with technology strategy

Conway's Law, which Conway & Co has been named after, emphasises the alignment between organizational structure and technology stack.

Three categories of technology to consider when structuring your alignment plan are:

technology stack: the most important one. Systems that support day-to-day operations of your customer journey.
data stack: essential for insights but does not provide direct customer value.
tool stack: systems that are not integrated, such as your email provider or an HR system. It’s frustrating when they don’t function but they do not directly impact customers.

While your technology stack directly provides rails for the customer journey, the tool stack is important for all the supporting functions. Therefore, technology essentially is reflected in the team structure too:

Tech infrastructure, together with your team, will either enable or block your growth ambition.

• Open a new country? → Requires software

• Sell via a new channel? → Requires software

• Expand the catalogue? → Requires software

How to visualise your tech infrastructure to identify opportunities?

As Dick de Leeuw said in our Expert Interview, it’s crucial to visualise the tech systems that are used in the company. If you include them all, the number will be very high (i.e., Dick has counted 55 systems that are used at MR MARVIS).

Visualise your tech stack through layers:

The red blocks in this visual are elements that are the most visible and where most of the attention is focused. They are usually the debate centres. But as you see, the overall IT landscape is significantly broader. Essentially, you cannot control what you cannot measure. So the starting point for every technology strategy is a clear understanding of the purpose and performance of every system in your stack.

Take technology seriously for strategic value creation with a seat in the boardroom.

Without technology, no revenue is generated, no growth initiatives, operations halt, there’s no inventory visible, and no dashboards for management.

Once the tech systems are visualised, it’s time to talk about what changes and strategic decisions you can consider for improvement.

Simplification: the direct route to saving on technology expenses

A fundamental strategy involves simplifying the business model to reduce technology stack requirements. For example, this could mean:

Limiting operations to fewer countries or sales channels;
Reducing the product catalogue to streamline offerings.

Simplify to amplify
Simplify your business and streamline processes to lower technology requirements.

Such measures directly decrease the complexity and, consequently, the demands placed on the technology infrastructure. However, by no means are we stating that everything has to be simplified. While intricate setups may be costly, they can offer value - like an exclusive service that sets your brand apart but demands a complex technical backbone. On the other hand, some cumbersome processes may be expensive without adding value for customers or internal efficiency. In this case, we advise divesting in them.

Your options to discover technology cost centers

We will cover the potential cost centres to consider in the next chapter but here are your options to discover the unnecessary technology spendings:

Conducting Technology Audits: Engaging external experts to assess the technology and process efficiency, identifying redundancies and underutilisation.
Negotiating with Vendors: Leveraging the continuous nature of SaaS relationships to renegotiate contracts for better terms.
Outsourcing: Considering partial or complete outsourcing of non-strategic technology stack functions to reduce complexity and operational overhead.

Overview: top IT spending clusters

Referencing Gartner report, IT spending is categorised into ten clusters ranging from platform management to payment processing, highlighting the interconnectedness of technology across various business functions. This categorisation aids in creating a comprehensive overview of IT expenses and identifying areas for optimisation.

3 pieces of advice for reducing technology spending

Advice #1: Review the buy or build decisions of the systems in your tech stack

To make the best use of technology, avoid being unique.
When you are small, bend your processes to your systems.
When you are large, you can start bending the systems to your processes.

To determine whether to purchase or construct systems, evaluate their strategic significance to your company. The system's role in delivering customer value should guide your decision. Systems crucial to creating customer value are best developed in-house rather than outsourced.

Example: Uber's core strategic asset is its ride-selling platform, which the company developed itself. On the other hand, payment gateways, while vital, may resemble those found in other applications, making them suitable for procurement (e.g., Stripe PSP).

Advice #2: Simplify your technology stack by unifying of replacing specific systems

These six elements define the best technology stack for your company. However, business complexity is the most important and must be mapped first.

01 Complexity of the business
02 Revenue size of the business
03 Future ambition of the leadership
04 Digital maturity of the current team
05 Budget and willingness to invest
06 Current systems in the stack

To effectively manage the technology stack, it's crucial to consider:

Business Complexity: Aligning the technology stack with the business's size, ambition, and digital maturity.
Operational and Marketing Efficiency: Utilizing a composite front end to reduce development costs and increase market agility through reusable digital components.

Advice #3: Limit development costs by implementing a composable front-end for your teams

Many companies invest significant development hours in creating custom landing pages, only to use them once. This expenditure often proves wasteful. To effectively handle such operations at scale, a shift in this approach is necessary.

An alternative is building a library of reusable components that can be customised without development intervention.

This is how a regular website development flow often looks like:

This is what it looks like with a composable website system:

Don’t build a custom website, but create a design system in code with components that you can reuse.

Building a library of UI components that grows over time and compounds your learnings from experimentation.

In summary

Recognise technology as a strategic asset. Not just a cost. It means bringing the decision-making from the basement to the boardroom.
Proper management of the technology stack can flatten its costs, as exemplified by software or software-led companies.
To understand if you should invest or divest in technology, determine whether it delivers on strategic levers like productivity, customer experience, or decision-making.
Visualise tech stack for clarity: Clearly map out technology components for better management and stakeholder involvement.
Your company structure will be reflected in the technology stack you have. It helps aligning your teams with the technology they need.
Complexity is the cost centre of the technology stack. Simplify your business to save on technology.
Audit, negotiate and outsource to further save on tech expenses.
To make the best use of technology, avoid being unique. Adopt best practices if you can.
Decide to Buy vs. Build Wisely: Evaluate the strategic value of technologies for optimal investment.
Adopt Reusable UI Components: Implement a composable front-end to save development costs.

Seamless Selling by Conway & Co

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