You can't run a company without technology, but you can't invest in technology without the blessings of the finance department. And thanks to the stagnant economy, the pendulum of power between Finance and IT is swinging decidedly toward the chief financial officer's door these days.
"The power dynamic in the C-suite really does change when the economic times are difficult," says Bob Martins, a CFO partner at Tatum LLC, an executive services firm headquartered in Atlanta. "And right now, any kind of spending decision requires much more scrutiny."
All of this means that now is an excellent time for you, as an IT manager, to hear what Finance has to say. Computerworld asked several CFOs what message they'd most like to get through to their top technologists.
Say Goodbye to Bells and Whistles
During better economic times, Don MacKenzie, CFO and chief operating officer at Accounting Management Solutions Inc., could be persuaded to buy a more expensive system if it offered nice-to-have usability options or extra functionality.
But these days, the age-old battle between cost and functionality is being won by cost. So when the Waltham, Mass.-based professional services firm needed new customer relationship management software, MacKenzie told his CIO at the outset, "Maybe we don't need the Cadillac. Our problem might be better solved using a Chevy solution."
MacKenzie expected the CIO to deliver an analysis that looked at several systems -- something he has always done, in good times and bad -- detailing how much each one cost, the features offered and what type of ROI each one could be expected to deliver. But MacKenzie admits that given the financial pressure, the weight was almost all on the cost side of the equation.
"I'm not suggesting that there wouldn't have been a financial analysis [in the past]," MacKenzie continues, "but the focus then would have been more on functionality and on [the software's] tie-in to other applications. That might have overridden the financial considerations."
These days, that's not the case. One of the options the CIO presented was "a 300-pound gorilla with all the bells," MacKenzie says, "but we went with one that was a lot cheaper."
Play With the Toys You Already Have
Tibco Software Inc. in Palo Alto, Calif., has made significant investments in IT in the past, including the acquisition of an ERP system. So before Executive Vice President and CFO Sydney Carey opens the coffers to buy more hardware or software, she wants to make sure that the company is making full use of its current resources.
"The recession has focused us more on the fact that we've made investments," she says, "so we need to ask, 'Are we really getting all we can from them?'"
Hint: CFOs Like Cloud Computing
Perhaps you've already discovered this, but cloud computing (including software as a service) is a CFO-friendly topic.
CFOs like the pay-as-you-go economics of cloud computing because it keeps cash in the bank longer, notes a Forrester Research report.
"To a CFO, IT capacity or an application purchased from a cloud service provider is an operating expense that can be scaled up to meet a rising business need -- or turned off when the need evaporates. The same system hosted in the corporate data center is a sunk cost that includes a capital expenditure that must be carried on the balance sheet as an asset that loses value as it depreciates," the report explains.
Forrester says that because of the difference between capital expenditures and operating expenditures, cloud computing yields the kind of financial benefits that CFOs value:
* Better cash flow. The company avoids taking on debt and writing a big check upfront. Instead, checks are written monthly or quarterly.
* Lower financial risk. With a cloud-based system, you pay only for what you use, and you can terminate the contract. An on-premises system means spending money upfront for benefits that may or may not materialize.
* Greater financial visibility. A cloud services provider can tell you how much it will cost to add a user or process an additional transaction. Many IT shops would be hard-pressed to do the same for an on-premises system.
* Healthier return on assets. Cloud costs are incurred in the same time period that the value is delivered, so the balance sheet doesn't carry an ever-depreciating capital asset of hardware and software, which lowers the increasingly important financial metric of return on assets.
In a recent survey of 481 CFOs in the U.S., about half said they already have some IT activities occurring in the cloud. The survey by Duke University and CFO magazine found that 83% of the CFOs expect their companies to rely on cloud-based services in the next three to five years.
Specifically, Carey explains, "we needed to leverage our systems, automating or integrating or getting the right information to the right people at the right time to make decisions" -- but without making any more big investments in infrastructure.
That meant working with the CIO and the IT staff to get more value from the ERP system. Carey had the IT staff add business process management software and other programs to the ERP front end to make the company's order fulfillment system run more efficiently.
Although the software additions did require some in-house development, they represented a quicker and cheaper investment than buying and rolling out an entirely new system. Yet the results were significant: Carey says the department that handles orders has been able to increase accuracy and double the number of transactions handled each quarter without adding staff.
Know What the Business Needs Now
Being aware of the company's business strategy is always a priority for IT managers, but in tough times, it's imperative for IT to be up to date and ready to help with corporate changes on an almost daily basis, CFOs say.
For example, Teknor Apex Co., a custom compounder of advanced polymers in Pawtucket, R.I., recently completed a major acquisition, and CFO Jim Morrison says he had to make sure IT understood the challenges the merger presented.
His message to IT: Bringing the new acquisition into the fold is your No. 1 priority for the foreseeable future. For six to nine months, IT will be "pretty much consumed" with the acquisition -- indeed, "the whole company will be," says Morrison. The acquisition illustrates the need for the IT department to help drive forward the company's strategy and be able to rapidly adjust priorities as the strategy evolves. To be sure, Morrison supports his CIO's road map of long-term strategic initiatives intended to increase efficiencies and save money, but he also needs IT to be able to shift resources as corporate events warrant.
Tatum's Martins agrees. He says a CIO needs to understand his company's short-term financial situation, its near-term tech requirements, and its current risk-tolerance level -- as well as its future vision. Understanding all that, he says, will help a CIO better identify and prioritize the projects that mesh with the company's immediate needs.
Show Me an ROI That I Can Trust
Martins advises CIOs to look beyond price tags and projected savings when they're making a case for a tech investment. He says those figures aren't really enough to calculate the true return an IT investment will generate. "I see ROIs all the time that can have a wide range of values depending on how you work your assumptions," he says.
How to Sell IT Projects to the CFO
Most CFOs still see IT as a black box -- they have limited visibility into the value that IT creates for their organizations, says Gregg Rosenberg, managing director of the IT practice at The Corporate Executive Board, a research and advisory services company.
So it's no wonder that IT managers have a tough time persuading their CFOs to spend money on new technology today, Rosenberg says.
By making changes in their pitches, IT managers can overcome that roadblock and get the CFO's stamp of approval for more projects, Rosenberg and other consultants say. Those changes should include reframing proposals and spending requests to highlight the business value that technology creates.
In a white paper, Rosenberg suggests that CIOs should take the following steps to get their economic houses in order and make it easier for CFOs to see the value of the services that IT provides to the business:
* Find out the business objectives of the stakeholders.
* Allocate all IT costs to a set of services that the business wants.
* Hold IT service managers accountable for controlling the costs of the services they provide.
* Define units of service in terms that the business understands, and show how changes in IT service consumption affect costs.
* Reward IT staffers for lowering the total cost of service.
* Set the prices for IT services to support overall business objectives, such as cost predictability.
* Invest in IT asset management for making resource allocation decisions (not for reacting to audits).
Most of all, CIOs should communicate using the business metrics -- like "decrease unit costs" -- that really matter to the company's leaders, says Saby Mitra, an associate professor in the College of Management at the Georgia Institute of Technology.
--Mary K. Pratt
Martins, who works in the Washington, D.C., area as interim CFO for a government contractor and as a financial adviser to two other companies, says CIOs need to include more details in the ROI figures they present. For example, he says, if a $500,000 investment helps generate $2 million in revenue, the ROI needs to account for the revenue that would have been earned anyway.
And IT managers also need to identify the risk associated with each investment.
"If there's a $500,000 expenditure, you have to consider the magnitude of success, the probability of success, and the risk if you don't succeed," Martins explains. "Because if you properly discount the probability of return but don't factor in the cost of risk, then you're not really presenting an accurate ROI."
He cites a case he has knowledge of but didn't work on directly, where an IT department implemented a $2 million CRM system that was approved without calculating the whole range of costs associated with it or how much it would generate in returns.
The company ended up with a system that did half of what it was expected to do but cost twice as much as anticipated -- all just as the economy tanked and the company's market shrank.
"It's been a significant drag on that company's performance," Martins says. Further, it limited the company's ability to generate new business at a crucial time. With more-accurate pre-investment projections, the company might be in a better place today -- or at least it would be using a less expensive CRM system.
Emphasize Short-term Benefits...
Breslin Longstreth wants his CIO to seek out projects that deliver benefits quickly.
"It's all about the short-term and medium-term returns," says Longstreth, senior vice president of finance at A Place for Mom Inc., a Seattle-based service that helps people find care options for elderly parents.
Case in point was the company's decision to revamp all software licenses, standardize equipment, and upgrade and integrate phone and computer services. Longstreth says the company was looking at a six-figure investment to get the project done -- he declined to disclose the actual price tag -- but found that the ROI would likely be realized within a year.
"We move quickly if we think there's a strong, quick ROI. If it's not obvious, we're probably not going to do it," says Longstreth.
He says A Place for Mom, a private, $50 million operation, is growing so quickly that it's hard to predict what it will require from IT beyond the next few years. That's one reason he encourages his top IT person, the vice president of development, to think about projects with quick returns.
By the Numbers
What CFOs Worry About
Is there something IT can do to ease your CFO's mind?
CFOs' top macroeconomic concerns:
1. Weak consumer demand
2. The federal government's agenda
3. Intense price competition
4. Credit markets/interest rates
CFOs' top internal concerns at their own companies:
1. Maintaining profit margins
2. Cost of healthcare
3. Difficulty forecasting results
4. Attracting and retaining qualified employees
Base: 481 chief financial officers in the U.S.; multiple responses allowed.
Source: Duke University and CFO magazine, December 2010
Top risks in the next five years:
1. Financial exposure
2. Supply-chain/logistics disruption
3. Legal liability, reputational harm
4. Technology failure
5. Security breach
Base: 168 senior finance executives; multiple responses allowed.
Source: CFO Research Services and Liberty Mutual Insurance Co., June 2010
The economy is another reason, Longstreth says. Although the company is financially healthy, he says he doesn't want to risk leaving it cash-strapped by investing in technology that has a long-term ROI.
"Making a bet on something with a return three to five years out has too much risk right now," he says.
...But Don't Abandon Long-term Investments
Even with the economy in the dumps, Teknor Apex's Morrison wants his CIO to continue proposing projects that will help the company reach its long-term goals.
"If there's a project needed for our strategic well-being, I don't necessarily [want IT to] put it on a back burner because the economy has taken a downturn," Morrison says.
As a private company that's not driven by quarterly performance, Teknor Apex has the luxury of being able to focus more on long-term results, Morrison acknowledges. But that doesn't mean he can fund IT projects that don't support the corporate agenda -- especially in today's economy.
"Outside of upgrades of hardware, everything we do from an IT perspective is put forth as either being strategic in nature or increasing our efficiencies," Morrison explains.
When the market went south in 2007, Morrison says, the company reduced its head count by 5% to 10%, but at about the same time he OK'd spending $150,000 for software for the credit department. "It was probably one of the best projects we ever did," he says, explaining that it allowed the company to reduce staff in the credit department while improving performance. As a result, the new system paid for itself within two years.
Morrison says those are the kinds of technology investments he'd like to see IT managers bring forward.
"We look at IT as an enabler of a lean company. I don't think there's a function that doesn't feel that the IT systems are absolutely essential to their performance," he says. "So we give them what's needed. They just have to show there's a good return."
Pratt is a Computerworld contributing writer in Waltham, Mass. Contact her at email@example.com.
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