Digital transformation

Growth plans in the software industry rely on cloud, according to Forrester. The consulting firm analyzed the last five years of earnings reports and other data from six major vendors, Adobe, IBM, Microsoft, Oracle, Salesforce and SAP.

“The ongoing shift to the cloud remains a key initiative, at least for now — especially in laggard categories like enterprise resource planning,” the report said.

Enterprise customers have had to adjust to cloud-based software and usage-based pricing for CRM and ERP solutions, as well as for supply chain and human resource management tools. “There isn't a whole lot of ability to avoid SaaS in most major categories of enterprise software,” Liz Herbert, VP and principal analyst at Forrester, told CIO Dive.

The shift from licensing software to pay-as-you-go SaaS models isn’t nearly as painfully disruptive as migrating from one enterprise system to another. But enterprise customers do have complaints.

More than 4 in 5 technology buyers are dissatisfied with their selected vendor, the report said. Cost is the top reason, according to Herbert.

“We rarely see the cost go down over time,” said Herbert.

Almost three-quarters of SaaS providers increased their prices over the last 12 months, according to Vertice data. Cost increases are baked into the SaaS model. Most vendors offer initial discounts that lift after a prescribed period. 

Enhancements and new capabilities, like the generative AI tools most major providers have added to ERPs and other enterprise solutions, can bump up the cost as well, although many vendors use tiered pricing that lets companies pay only for what they choose.

Eagerness for innovation can drive companies to avail themselves of added SaaS features, a dynamic software giants are leaning on to drive growth, the report said. Productivity gains, agility and better customer-facing technology are the rewards that justify the expense.

“In enterprise software, it is not very common that you save money,” Herbert said. “But customers are getting a lot more by moving to these leading-edge SaaS products that can offer AI and continuous innovation.”

Doubling down on Microsoft, Salesforce, SAP or any other big provider inherently leads to some vendor lock-in, especially given the difficulty of enterprise migrations. But the stability of a large vendor, the breadth of offerings and the investments those companies make to bring the innovations to their platforms is hard for enterprises to resist.

Forrester recommends CIOs should assess individual SaaS offerings within the context of a vendor’s overall portfolio to determine whether the service is critical to the vendor’s business and whether or not the vendor is investing in complementary products.

Despite enterprise transformation ambitions, more than half of companies have found no improvements in financial performance driven by digital investments in the last two years according to a KPMG survey of 400 technology executives in the U.S.

Roughly two-thirds of IT executives are expected to do more with smaller budgets in 2023, compared to 2022, according to the report. To achieve short-term ambitions, more than half of execs identify AI as the most important technology. 

Leaders say workplace and cultural issues block enterprise transformation, with collaboration rifts, a skills gap and a risk-averse culture as chief contributors to the problem.

In tech overhauls, buy-in represents two different types of commitments: a financial and a cultural one.

Before digital tools can hit the enterprise tech stack, the financial outlook needs to show how the purchase will return on the investment. When tools are live, users within the enterprise must be committed to making the most of the technology.

Failure to realize the financial upside of transformation investments is partly a function of timing, according to Atif Zaim, national managing principal at KPMG.

“We expect to see significant profitability and performance gains as many leading organizations enter into the later stages of digital transformations undertaken in recent years," said Zaim. "It is critical that CEOs not take those gains for granted."

Despite the lack of direct financial improvement for more than half of respondents, digital transformation investments had a positive impact in certain areas, according to the survey. More than half, or 57%, of U.S. IT leaders said the investments exceeded their expectations when it came to increasing employee productivity and raising employee satisfaction.

For CIOs looking for ways to convey the long-term value of IT investments to broader leadership, metrics are critical, according to Julian Hamood, president of cloud solutions provider Trusted Tech Team. 

"In a lot of SaaS applications, you can actually display the time and money saved," said Hamood. "Which is extremely helpful when providing cost analysis to a director of IT, CTO, CFO, or CEO."

Organizations looking to maximize ROI from digital investments and thrive in the long term, should put in place strategies and structures to promote transformative innovation throughout the organization, Zaim said in an email. 

"CIOs must take a holistic approach, and work to break down functional siloes that can hinder enterprise-wide transformation," Zaim said. "It is common for companies to prioritize digital transformation in certain functions over others, resulting in a capability and experience gap that can be noticeable to customers, stakeholders, and internally."

The pandemic might have given managed service providers a boost, but a competitive environment is adding pressure on market participants to offer a wider mix of products and services, including those which speak to broader sets of business problems. 

Small-scale, boutique managed service providers, which still occupy the lion’s share of the market, have long been known for offering clients a plug and play approach to technology. In essence, traditional MSPs typically helped firms onboard new technologies and offered support along the way. 

But analysts and companies say that dynamic is shifting, with increased competition from big-four accounting firms and consultancies delivering a broader span of service offerings and new demands from clients to realize efficiencies from AI and automation rollouts.

“What many of these smaller [MSPs] are going to have to start thinking about … is some kind of competitive differentiation that would be around a specialty of some sort, whether that's just moving up the stack away from basic network management and device management to playing a bigger role in business applications and in business outcomes,” said Carolyn April, senior director of industry analysis at CompTIA.

April estimates that about 90% of MSPs fall into the small-scale “boutique” category. 

With the popularity of cloud-based, SaaS applications, big-four accounting firms and other large consultancies swooped into the MSP market with a pitch that they could help clients go beyond technology onboarding and maintenance and tackle bigger business problems. 

The growth of managed service offerings from these firms has pushed smaller players to take a broader approach, including recruiting skills that go beyond technology onboarding, maintenance and support functions. More recently, these firms are recruiting for employees who have a mix of technical skills and industry-specific expertise centered around solving bigger business problems.

Traditional MSPs zero in on business processes

MSPs say they’re doubling down on efforts to recruit employees that can offer clients skills tied to wider business processes. Westwood, Mass.-based MSP Lydonia Technologies said over the last 18 months it has steadily increased the proportion of employees with business process and consulting backgrounds.

One-third of the firm’s 43-member team are business process experts, up from 20% 18 months ago, said CEO Kevin Scannell, who founded Lydonia in 2019. 

The skills shift is a response to the changing relationship between business and technology, particularly recent advances in AI and automation, he said. Clients are looking to delegate more tasks to digital workers through automation. Employees, as a result, need to understand how technology integrations fit into bigger business processes. 

“A lot of it has to do with the changing environment,” Scannell said. The increased adoption of automation technologies, coupled with labor shortages, means firms are looking to digital workers to carry out certain tasks more cheaply and efficiently, he added. 

Lydonia said it competes with big-four firms by working to enable client’s employees to work autonomously through low-code or no-code platforms, instead of being indefinitely dependent on consultants.

Another factor pushing boutique MSPs to recruit more broadly is the need to hire technical experts who have the capacity to understand how different tool sets interact with one another. 

New York-based Reveal Group, founded in 2005, operates a consulting services arm alongside its MSP practice. Though the firm has always hired business-process experts, for the last two years it has focused on recruiting employees with a combination of technical and business process skills and experience. 

The increasing demand to use AI to improve client business processes is a major factor behind this strategy shift, the company said.

“We're seeing a shift from looking for people that have extensive programming backgrounds to people that have more of a solution or a solution architect mindset and can really comprehend how technologies are going to be working together,” said Nicolas Payeur, a principal at Reveal Group, which has 70 employees. 

The objective, he said, is to find people who can grasp technology implementation in the context of a broader set of business issues, “versus being at your desk and doing coding for a specific product.”

Others are looking for recruits who can offer an overarching, non-technical approach to business problems. 

Accelirate, a Sunrise, Florida-based MSP, which has 340 employees globally, said since the pandemic the firm has been recruiting team members from other fields who acquired technology skills later in their careers. 

“We have shifted to a more of a personality search,” said Gabriela Enriquez, chief human resources officer. The company is prioritizing problem solving and customer service orientations over strictly technical know-how, which has resulted in the recruitment of former teachers and financial advisers who later acquired technology expertise.

Larger players respond

To be sure, larger market participants in the MSP field are also employing a “connect the dots” approach to the recruitment of technical specialists. Global IT services firm Genpact said the adoption of generative AI is a boost for managed services, amping up the business case to hire specialists comfortable with the technology and who can also use it to optimize business processes.

“Generative AI has given a boost to managed services,” said Sreekanth Menon, VP and global leader of AI and ML services at Genpact. Recruiting for technical and business process skills was equally important for the company, he said.

Generative AI is nudging managed services owners at the firm to look at all of their operations through an AI lens, as opposed to embedding it in pockets or specific projects, he added.

Similarly, PwC said it’s aiming to recruit “wide and deep,” for its managed services practice, a strategy to continue to attract technical and business domain expertise through hiring efforts as well as acquisitions. 

PwC’s talent pool, according to Nikki Parham, a partner and U.S. managed services leader at PwC, covers all areas of business outcomes and processes, including cloud and digital. The evolving needs of the industry dictate that the firm requires technical alongside broader, business-process skills, she noted.

One obstacle boutique firms may face in attempting to recruit new hires with management consulting-type skills and experience is the ability to match salaries these roles typically demand, said April.

Technologists "who are also good on the business side and able to speak that language, they’re gems," she said. "They can command the terms of their employment that may be over and above what some of these MSPs are able to provide." 

CAMBRIDGE, Mass. — When Wells Fargo announced a deal with Microsoft and Google Cloud to support a decade-long modernization marathon in 2021, it was news. A major financial services company had opted in on hybrid multicloud.

Two years later, the trend has become the norm. Operating in the cloud is more an expectation than an aspiration. Table stakes, as David Linthicum, Deloitte’s chief cloud strategy officer, said in a recent interview.

Wells Fargo has moved on to leveraging cloud to propel deeper digital transformation, Subhadaa Reddimasi, chief architect in the technology chief operating office at Wells Fargo, said during a panel at last week’s MIT Sloan CIO Symposium.

“I’m just really proud of the cloud transformation that the organization has gone through,” said Reddimasi. “I can look back and say, ‘That’s something that we spent time on, and we were very intentional about what we wanted to do.’”

Cloud was barely visible at this year’s symposium. CIOs and analysts mentioned cloud in passing as part of broader conversations about onboarding new technologies, fortifying IT resilience, cultivating tech skills and fostering Agile.

Cloud's absence is not for lack of enterprise appetite or enthusiasm for on-demand infrastructure and “as-a-Service” applications and software. Rather, the dearth of cloud talk shows just how pervasive the technology has become. 

Cloud growing pains

Revenue growth has indeed slowed for the hyperscalers.

After a sprint to cloud, many organizations have paused to catch their breath. Optimizing existing investments and managing variable cost structures through FinOps practices have become enterprise priorities, as concerns about inflation, interest rates and other geopolitical and macroeconomic factors persist.

Yet, the global market for cloud is still on track to reach nearly $600 billion this year, driven, in part, by deployments of new and emerging technologies, such as automation and generative AI.

“There’s been a huge proliferation over the last number of years around cloud and multicloud applications and of individual companies trying to move quickly,” Sam Kapreilian, principal at Deloitte Consulting, said during a panel.

New tools, capabilities and challenges have accompanied that migration. “The result is that CIOs, as leaders in the business, have a lot to manage, and they don't have a good handle on all that’s out there,” said Kapreilian.

From migration to transformation

In the struggle to reduce system complexity and grapple with growing tech estates, cloud has been subsumed into enterprise modernization and digital transformation, classifications broad enough to cover infrastructure, compute, data, cybersecurity and many of the tools and Agile methodologies associated with migration.

“Modernization for us is things like technical debt, getting rid of what’s bad and being innovative and making wise technology decisions so that you can be transformative in how you run the business,” said Tom Peck, EVP and chief information and digital officer at Sysco, during a panel.

As for digital transformation, “That's what our job is,” said Peck, who won the CIO Leadership Award at this year’s symposium. “The big emphasis now is not on whether you're doing or not doing transformation, it’s on the speed at which you're getting things done.”

More than 3 in 5 executives say fear is blocking their organizations' innovation efforts, according to a Miro report.

Specifically, leaders are concerned about making bad investments or choosing the wrong projects as they steer enterprise innovation. Nearly one-third have concerns about hurting their careers or reputations if projects fail.

As adoption of emerging technologies progresses, the majority of leaders say their company is afraid to prioritize breakthrough innovations. More than 4 in 10 see these breakthrough innovations as the biggest threat from competitors. 

As generative AI interest skyrocketed in recent months, enterprise leaders grappled to fit the emerging technology into their innovation plans.

While generative AI investments represent a top priority for executives, concerns remain related to finding measurable value in new technology investments, as well as the cost of deployment, according to PwC data. Executives are mainly worried about potential inaccuracies and associated cybersecurity risks, another study from McKinsey found.

Executives have acutely felt the effects of generative AI due to the speed at which the technology has developed, said Bryan Wise, CIO at 6sense. But, as with any new technology, adoption rates vary.

"You always are going to have your leading edge companies … you're going to have your wait-and-see group and you're going to have the laggards," said Wise.

IT leaders worried about the pace of innovation can find relief in the facts, Wise said.

"You've got to eliminate the fear, uncertainty and doubt, and you really need to go in with the objective data points that you have at your hands to unpack what that fear may be," said Wise. 

Top business challenges that hinder innovation can come from different parts of the organization, according to the Miro report. Technologic, organizational and strategic barriers are among the most common factors.

"If you don't embrace the change, you will be a laggard," Wise said. "Because this change is happening with or without you."

IT asset managers are shifting their attention from data center and desktop software to cloud-based SaaS solutions, according to Flexera’s State of ITAM report.

Nearly three-quarters of IT professionals responsible for enterprise software use and compliance expect increased scrutiny of SaaS solutions in the next three years, the software company’s survey of 500 IT asset managers found. More than two-thirds are eying public cloud as a source of software spending waste, the report found.

As companies push to optimize IT investments, curbing waste remains a problem. Roughly one-third of enterprise spend across desktop, data center, SaaS and “as a Service” infrastructure is wasted, respondents estimated.

Unnecessary, redundant and uncatalogued tech assets are the bane of enterprise budget hawks. As organizations migrate workloads out of on-prem data centers, tracking down sources of overspending is leading IT asset managers to cloud.

Identifying overlapping software and finding ways to squeeze more out of license use rights were priorities for 2 in 5 respondents.

While tracking on-prem software usage remained the most common responsibility of asset management teams, cited by 7 in 10 respondents, the proliferation of cloud services is driving a realignment in priorities.

Teams are moving rapidly to reign in cloud-based software bloat. Nearly half of respondents expressed concerns about containerized applications deployed in hybrid ecosystems, up from just 28% in last year’s survey. The number of respondents focused on cloud-based software grew by 10 percentage points year over year, to 52%.

The move is a practical and predictable response to an industrywide shift to SaaS and a broad drive to optimize cloud spend, a trend mirrored by changes in organizational accountability structures.

Most of the organizations surveyed — nearly 3 in 5 — have established a central cloud management team. Including an asset management professional on the cloud team has become the norm, according to Flexera.

As cloud cost control strategies are standardized under the banner of FinOps, asset managers are taking note. One-quarter of asset management teams already report interacting heavily with FinOps teams, a category that was new to this year’s survey.

Modernizing IT is meant to rationalize processes, simplify operations and reduce friction. When systems resist integration, it can also lead to frustration and cost overruns. 

Organizations cautiously loosened the purse strings this year, as the macroeconomic environment improved. But investing in digital transformation remains an enterprise priority, according to two reports from analyst firm Forrester.

More than 4 in 5 IT decision-makers expect their organization to increase tech spend heading into 2024, according to the Forrester studies, published Aug. 1. Nearly the same proportion anticipate increased investment in cloud infrastructure and development services.

“Cloud is the essential element of the IT modernization story,” Forrester Principal Analyst Lee Sustar told CIO Dive. “But it's not the only element. People are trying to modernize around [their] legacy applications because they can't replace them.”

Cloud, now classified alongside the on-prem data center as a “traditional” technology by Forrester, has different meanings based on enterprise priorities and the state of the existing tech stack. Efforts to avoid vendor lock-in, for example, or the desire to find the best cloud for a particular job often add unwanted complexity to tangled IT ecosystems.

“People who want multicloud in order to mitigate vendor concentration risk may be willing to accept a degree of complexity,” Sustar said. “Having said that, they want to make sure that the workloads they're putting in cloud are in the right cloud for the right price. Or, maybe it's good enough to run on the data center as it has been for years.”

Rather than adding more cloud, Forrester recommends focusing on interoperability, deploying capabilities to connect existing environments more seamlessly.

Moving data, a cornerstone of cloud interoperability, can be costly.

The cost of shifting workloads between two cloud providers is an issue that has reached beyond the C-suite to the halls of corporate justice. The Federal Trade Commission and British regulators have opened separate investigations into anticompetitive practices in the cloud market, including hefty fees.

Some companies are willing to pay the price, Sustar said.

“Interoperability can be fairly limited, given egress charges,” said Sustar. “But there’s a well-known pattern with AI of training a model on [Amazon] SageMaker and then shipping it over to Azure, where Microsoft Power BI can be used for insights.”

While there are a growing number of managed service provider solutions aimed at simplifying hybrid ecosystems, frictionless interoperability between different cloud providers and with on-prem systems remains elusive.

Partnerships that connect data storage and hyperscaler platforms, like deals Snowflake has with Microsoft and Google Cloud, offer a partial solution, as does the data integration agreement announced by SAP and Google Cloud earlier this week.

Sustar points to the BigQuery connector linking Google Cloud and Microsoft Azure as an example of a promising hyperscaler integration and a potential sign of future collaborations.

“The cloud providers are looking at other clouds that customers might want to use as something to be partially integrated into some of their core management plans, but not extensively,” Sustar said. “Users are pushing for that, but it's not there yet.”