How IT can work for you: Costs and benefits of technology across Last-Mile Distributors
Technology costs in emerging markets
10 years of change in 1 year of crisis. That’s one remarkable figure quoted in the latest McKinsey report, which looks to identify how the COVID-19 pandemic has impacted companies' digitisation plans. Across the board, respondents “recognize technology’s strategic importance as a critical component of the business, not just a source of cost efficiencies”.
The transformative power of technology, be it through modern fintech options or turnkey solutions, has completely revolutionised emerging markets, and unlocked many previously unserviceable business opportunities. The challenge for founders, C-level employees, and investors, is to know what % of their budget should go towards IT (Information Technology) and how they can get the best value for money from their service providers.
Solaris Offgrid and Enable Digital have partnered to run market research into the current state of the market, and to understand the value that organisations in emerging markets place in their IT. This research is sorely needed - current data and models are often based on developed markets, and trends that are clear in Western Europe, North America, or Asia-Pacific, may not hold true in Africa, South America, and other emerging markets.
Given the considerably different operational and financial realities, and the infrastructural capabilities of the countries themselves, digitisation takes its own unique flavour in emerging markets. In addressing the extremely price-sensitive markets at the Bottom of the Pyramid, it is necessary to adjust their entire company organisation and capital expenditure accordingly. Thus, whilst spending $50 per user per month would be common and acceptable in Western Europe, it can be seen as inappropriate in markets where the unit economics are already challenging.
Commonly quoted is that SMEs (<$5m yearly revenue) on average spend 6.9% of the budget on IT and technology (IT Spending and Staffing Benchmarks 2020/2021). However, other places suggest that the global average for all companies is 3.3% (Technology budgets: From value preservation to value creation - CIO Insider). Under what metrics can investors and the operating companies themselves judge what is appropriate?
With the below findings, and the attached data, we aim to empower organisations to make more informed decisions around their IT and technology, and to provide valuable insights as to the impact their IT should be making. We also aim to challenge common narratives and hesitations around spending on IT.
Top 5 learnings
This survey was run in June 2021, and takes data from over 40 respondents from across the Energy Access, Healthcare, Sanitation, and other related sectors.
1) IT leadership both provides and requires a sense of direction
4.6x more likely to be strategically led:
Teams who have invested in IT Leadership (either through a CIO or Head of IT) are 4.6x more likely to have at least a general sense of direction, if not a formalised strategy, on how IT will help their strategic outcomes. Only 15% of those without this leadership share that confidence.
Our survey explored how the highest level of IT representation impacts other aspects of organisational maturity and spending. Unsurprisingly, those organisations who have a Chief Technology/Information Officer (CTO/CIO) role were much more likely to have a formalised strategy, which includes a budget provided and milestones set for its tracking. Those organisations who did not have this level of representation, for example where the highest level was a Customer Experience/Support Lead type role, were much more likely to have only a very simple or indeed no IT strategy at all.
In our experience, a formalised IT strategy makes sure that resources are used efficiently, and it aligns with the operational strategy to make sure it can be executed.
In contrast, we've seen companies without a formalised IT strategy wobble between building and buying software. Software developers built solutions that the operations soon replaced by a purchased solution. Other custom-built solutions were built haphazardly and did not integrate well with existing systems. The IT department wasted time and money setting up unused solutions whilst operations were frustrated and hindered using sub-par solutions. Ultimately, the business was delayed and even impaired from introducing new products, and could not expand to new geographies because the software did not support the functionalities reporting capabilities needed. All of this could have been mitigated with a clear vision on the company's IT strategy.
A good IT strategy defends and supports the operational strategy: Software can make sure that operational processes are executed the way they are outlined by the COO, instead of each individual doing this their own way. This has many benefits including when upscaling, but also when it comes to fraud detection.
Moreover, we have seen several times that companies with a well formalised IT strategy were eligible for additional investments, grants, or "Technical Assistance" from investors. Indeed, investors are often happy to invest additional capital in a company for IT when they know the capital is used well. To many, a good IT infrastructure is an asset.
Formulating an IT strategy is important for a company's development as it translates how its workflows and processes can be designed to be strong, agile, and scalable, and how adaptable they can be as the company grows. By effectively leveraging opportunities that technology can bring, such as unlocking new market segments, or decreasing costs through more effective supply chain management, organisations can cause noticeable and significant changes in their bottom line business effectiveness.
Used effectively, this IT strategy can have a huge impact not only on the day-to-day operations of an organisation but also on its likelihood to raise funds. Explicitly put, the potential of a company to deliver a social and economic impact at scale is only as strong as its organisational vision. This vision is what IT should be defending and delivering. Indeed, this IT strategy must be driven by and stem from the overarching business strategy, and it should provide the key understandings of how technology is perceived and used within the company. Our survey suggests that companies who have this CTO/CIO role are better able to combine these high level business goals into a formal IT strategy.
2) IT seniority and leadership affects budgets - both in size and types of spending
A consequence of having a CTO/CIO role in your organisation is the increased likelihood that a greater budget is allocated towards IT and technology. This makes sense - an IT representative at board level will probably lobby for greater spending on IT, not to mention the additional salary costs associated with a C-level employee.
Additionally, it may also be that companies who have a CTO/CIO are more likely to be driven by technology at a more fundamental level. Interestingly, when we look at what the IT budget is spent on, we can see that SaaS solutions are the number 1 expensive only when a CTO/CIO is present. Otherwise the primary expenses for a team led by an IT lead or Customer Support department are consultants or IT staff payroll; indeed in these cases SaaS is never mentioned as a key expenditure element.
We believe that this is because CTO/CIOs tend to be more experienced and understanding of the power of technology, and hence they are willing to pay more for effective software solutions as they recognise the ability of them to facilitate the work being done.
There are a wide array of different services and subscriptions that come under this category - for example hosting costs on AWS, subscription fees to Angaza/PaygOps, or Xero, etc. That this category only stands out for companies with CTO/CIOs is revealing, because it shows that they recognise the importance these types of SaaS solutions hold. In contrast, organisations who do not have this seniority may be missing out on the value these solutions can bring.
3) As companies grow, so does their IT spending
If we take the 7% expenditure on IT mentioned before as a baseline, we observe that 75% of all respondents are under-spending on their IT. This trend is particularly evident in smaller companies (those with fewer than 20 employees, excluding sales agents), amongst whom 83% allocated less than 7% of their overall budget towards IT.
As companies grow and mature, their budget lines adapt and change their shape. Whilst early-stage companies often face cash-flow constraints and so have to prioritise purchasing inventory, as they get larger this dynamic changes and a greater proportion of the budget can be allocated towards activities that are more strategically minded. This includes increasing their investment in IT and technology, because they understand that investing now will allow for greater returns from the increased effectiveness of operations, greater market opportunities now available etc.