How Can You Prevent Operational Costs From Limiting Innovation?

Emmanuelle Hose, Group Vice President and General Manager EMEA, Rimini Street

How you analyze the fortunes of the construction industry in 2021 could depend on whether you are a “glass half full” or a “glass half empty” person. Certainly, growth in the sector has been impressive even if it has slowed in more recent times[1], but if you agree with the McBains Managing Director the industry is now in a “downward spiral.”[2] The supply chain delays, rising prices, and staff shortages have been well documented, but CFOs in the construction industry still need to plan for the future and modernize their businesses despite squeezed margins limiting resources. According to our sponsored 2021 survey of global CFOs, almost a fifth (19%) of respondents from the construction sector say digital transformation is their number-one corporate priority, with a further 40% placing it in their top three. So how do they remain laser-focused on future investments while dealing with the acute financial pressures they are currently facing?

The industry has already been doing a lot to embrace innovation. In the study, construction CFOs said they saw the most value from mobility (43%), remote working applications (40%), and the Internet of Things (35%) when investing in technology in the last three years. However, in the current market context it is becoming harder to find the resources for major investments such as craneless construction or more “everyday” process improvements like implementing artificial intelligence (AI) for predictive maintenance planning. The Internet of Things (IoT) is already being adopted on construction sites, but in combination with AI it is offering far more sophisticated solutions for managing health and safety, planning time spent on a job, and mapping out how best to efficiently lay cabling in a new building. All these exciting solutions cost money, and there are already significant investments in existing technology systems, which affect how much budget is available to invest in shiny new things.

This relates to a well-known concept in the IT industry called “keeping the lights on.” Many of our clients come to us struggling to balance their IT budgets between maintaining these systems and investing in innovation. For many, they are spending 90% of their budget on ongoing operations and enhancements, including their ERP systems from Oracle or SAP, leaving very little left to transform operations. As construction companies consider their long-term innovation strategies, the discussion should not just be about how best to adopt next-generation technologies, but also how best to increase the share of budget available for innovation by driving great efficiencies.

So perhaps counter-intuitively, rather than viewing technologies such as AI as the key to competitive advantage, CIOs should also examine their existing investments. That means core back-office applications like ERP. They may not be the source of innovation for your organization, but they could become the sources of funding for innovation.

Hurry up and change

This is important in the construction industry, because CIOs have little time to ponder the best way forward. There is growing pressure to deliver a return on this investment quickly. More than half (52%) of construction CFOs in our survey expect to see evidence of return on investment (ROI) within one to two years when evaluating technology investments. If CIOs are to deliver such rapid ROI, it makes it even more critical to free up more budget for innovation. The goal must become shifting spend to a 60-40 ratio, where 60% is focused on keeping the lights on and 40% on innovation. This means CIOs must deliver against two goals: they must demonstrate that investing in new technologies will deliver a quick ROI and justify the investment spent in existing systems to ensure that it has not become a money pit for valuable resources that could be used elsewhere.

The cost of change

The difficulty for CIOs is that many enterprise software vendors argue modernization requires customers to move away from their existing enterprise applications to adopt cloud-based software-as-a-service (SaaS) equivalents.

However, if CFOs are expecting IT initiatives to deliver ROI in one to two years, this could be a highly risky, disruptive, and costly strategy. For example, moving to a cloud version of an existing ERP platform can require a complete reimplementation, which will see existing customized functionality disappear as vendors typically only want you to use vanilla versions of their cloud-based applications. In terms of transformational benefits, it is critical to weigh the risk of losing the stability and established functionality of a long-standing back-office application such as HR, financials, or supplier and inventory management, against the change management process required to get staff accustomed to a new way of doing business. It will require new resources and skills, all added expense. With the margin between profit and loss so tight, does it merit such investment? Can you “hand-on-heart” say that upgrading your ERP system will truly be a source of innovation?

The third way

Rather than viewing your ERP as the source of innovation, you should view it as the potential source of funds for innovation. When thinking about the desired 60:40 split, this means the priority for your existing business application should be optimizing these environments to improve the efficiency of business workflows. Indeed, in our survey, CFO respondents said they most want CIOs to focus on IT projects that optimize existing technology investments. Conscious that CFOs expect ROI in short order, optimizing existing systems can deliver value more effectively with less disruption to critical business processes. For example, one of our UK public sector clients chose to stay on the existing version of its enterprise applications rather than go through a costly and disruptive upgrade. This is allowing the organization to leverage all of the existing licenses it has paid for to create a consistent operating environment and a better user experience.

Third-party support can be a key enabler of this approach because it gives Oracle and SAP licensees the reassurance of high-quality support and allows them to optimize their existing applications without being forced to follow the vendor’s roadmap for product upgrades in order to maintain full support. This approach also means in-house IT teams can rely on their third-party support partner to run their ERP system and plow the ensuing savings and freed-up resources into digital transformation. It also opens up more choices in terms of how CIOs transform their IT systems, most importantly giving them time to carefully plan the best approach for modernization that suits their business, rather than being forced to adopt what the software vendor thinks is the right approach.

In the next few years, fine margins will be a constant topic for debate among construction industry professionals. For their part, CFOs and CIOs in the sector will have to prioritize where to invest and where to cut back. Given the urgency to answer these questions to protect competitive advantage, it could be tempting to rush into decisions, but we would argue you need to weigh the cost of disruption caused by adopting new cloud-based applications versus optimizing existing IT systems. It could be the difference between having the resources to invest in innovation or continuing to struggle financially and operationally in highly volatile market conditions.

Learn more about how we’ve helped construction firms worldwide to meet their ERP modernization needs: Click here




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