New terrain

New terrain

Financial management is one of the fundamental roles of the contemporary IT director. MIS finds out how your peers are working to become as proficient on the balance sheet as they are with managing people and technology.

The view of technology departments beavering away in the basement on arcane projects, outside of annual budget constraints and beyond the knowledge of the finance department, is rapidly dissipating as IT is forced to become a profit centre. In reality, the financial department has probably been as phobic of the unintelligible acronyms of the IT world as the IT department has been of their cryptic number crunching clique. Now both disciplines are being forced to speak a common language - the language of business.

Increasingly, IT managers are expected to make financially based decisions despite the fact they often don't have a formal financial background. Simply knowing enough to financially manage your own operations and report on costs doesn't cut it any longer. IT, like other management areas, is being forced to move up a level.

When filling senior IT appointments, the human resource department often looks for CV evidence of business acumen, someone with a broad range of management and technology skills who can easily relate at board level.

"For an IT director simply having a casual understanding of financial matters is not good enough. They should have a better than average understanding," says Toyota Financial Services development group manager Glenn Armishaw.

Being busy is no excuse. "There can never be too much communication between IT and finance; there's a definite need for these two areas to be in sync." He suggests IT directors should be well versed in wider business issues and drivers and even have a seat at the executive table where those issues are discussed and decisions are made.

"The board wants to know you will deliver the desired outcome through prudent use of the company's resources. Showing an appreciation of the 'business drivers' will help develop trust in your judgment, give credibility to your proposals and prove you are more than one dimensional," says Armishaw.

Decisions by spreadsheet

An understanding of accounting and finance is vital to anyone making IT decisions based on business requirements. That understanding, says Armishaw, includes:

Whether to own or lease assets and the impact of that decision based on profit and loss statements and balance sheet.

Timing of investments in hardware and software and the impact on balance sheet and P&L and provisioning for expenses.

Building business cases in terms of returns, pay-off periods, opportunity costs, understanding time, value of money (e.g. present value versus future value) feeding into the business case.

Management of day-to-day expenditure and project expenditure including distinguishing between capital cost and expenses and when these costs will impact on P&L.

Determining cost of ownership.

Armishaw says understanding leads to better outcomes and helps ensure the whole company is working toward a common goal. "It's also an opportunity for CFOs to understand what the geeks are up to and the issues you face."

However, even with a full understanding of spreadsheets and budgets there's a danger the "bigger picture" may not be factored in. "Many areas such as customer satisfaction, market perception and positioning, and even staff satisfaction, are hard to measure but remain valuable aims."

For example, the initial decision of Toyota Financial Services to provide an extranet to its dealers required Armishaw to take a step back. "The initial costs versus measurable savings and efficiencies in a shorter time period didn't stack up. But in terms of the bigger vision of what we wanted to achieve and stand for with our customers and staff, it was a 'no-brainer'."

Ian Rae, Auckland City Council chief information officer, says one of the weaknesses with IT is that it can tend to focus on cost only rather than reporting where the value lies. "Take the time to express your IT operation in business outcome terms. This will describe the value of IT to the organisation and make the connection between IT cost and IT value."

When presenting a business case, there are always competing demands for investment. "It is important to clearly communicate why your area above others is worth progressing," he says.

"You're not taking a proposal in front of the board to waste their time. The decision they make should be based on your recommendation. Develop a concise reporting framework that presents the business case and the value it will return to the organisation as well as the cost. In fact, I replace the term 'business case' with 'value case'."

Demands on IT directors and managers are becoming pressing and diverse as IT&C becomes more fundamental to day-to-day processes. "It's about IT directors or CIOs bringing a complete management toolkit to the role rather than the traditional IT expertise."

Business acumen pivotal

From 2004, Rae began taking on some finance-related roles, which forced him to look at his own skills. "IT management requires better people skills or the ability to deal with human resources, marketing ability, and above, all an understanding of financial requirements and business acumen."

He set aside time to understand different finance models in the IT world including what is right for the organisation. "I have been keenly involved in developing value case models and producing sound recommendations for the organisation to make investment decisions on."

Rae says it's important to clearly identify 'total cost' including any project costs and consequential operating costs which will all contribute to the financial picture. "This will affect the period before any financial return is available to the business."

The business case, he says, should also recognise both strategic value and financial worth, and IT directors should build a case that clearly identifies how outcomes contribute to the betterment of the business. "The skill is in developing the right weighting criteria to ensure each area is represented correctly in any assessment."

The pressure is always on for accurate forecasting. "Reports should be able to alert you quickly to any variances in actual versus forecast. Smart systems will push information at you for your attention based on triggers and thresholds," says Rae.

Visualising business links

David O'Reilly, chief financial officer with Ballance Agri-Nutrients, believes CFO and CIO roles are similar as they both touch points across the organisation and deal in enabling information.

It was an ability to visualise business activity linkages and translate these into systems and processes that initially led to his involvement in IS.

He says a CIO with a good understanding of the financial dynamics can prioritise IT investment and development effort and be aware of how and where to translate key financial trigger points into tangible benefits. The CIO also has a better chance of making a business case that gains support and approval.

These are points, he says, for CIOs to consider:

Margin improvement: What does it mean in terms of impact on net profit and earnings per share?

Revenue gain: How much goes to the bottom line and where does IT functionality assist? It could help by facilitating a larger deal, more efficient order capture and processing and targeted promotions through better analysis.

Cost savings: The ability to achieve this through better procurement and working capital management in addition to the more obvious direct operating cost area.

Cash flow generation: Through enhanced net profit, and/or receivables and inventory management.

Quantifiable outcome on investments: What are the indicators derived from "better quality client service", "integrated business activities", "improved decision making", "enhanced competitive position"?

Like any major investment, information systems need to generate an ROI on combined capital and operating cost.

"By understanding the financial dynamic of the business the CIO can develop indicator KPIs (key performance indicators) before and after an investment to demonstrate results. This is useful if a pure financial return is difficult to isolate," says O'Reilly.

Communicate with the controller

Bartercard IT manager Josephine Dunstan says IT directors should regularly meet with their financial controller to ascertain requirements and expectations and look at overall company performances, financial issues related to IT and review any constraints that may potentially impact the IT department. Likewise, she states, the financial controller should make an effort to become familiar with the IT director's responsibilities.

Dunstan says the finance department is likely to be concerned about the IT department adopting technology too early in the curve. "Constraints associated with adopting technology too early can be higher cost and higher than necessary learning experience with greater capex than needed through being over cautious."

For example, she says, security is a current area demanding greater attention and capital expenditure. So how do you get around that? "Divide your projects into those that are necessary to deliver business benefits or competitive advantage, and communicate this to ensure finance is directed to the appropriate avenues of the business."

When working with the board, she says it's important not to get bogged down with detail. "IT people are by nature detail oriented and must keep in mind that the board just needs a solution and the bottom line. Think about the breadth of the project rather than giving an insular IT department world view. Learn the three Cs, communicate concisely with clarity."

Dunstan says all projects should be considered business projects rather than IT projects and have sponsorship from senior business executives, possibly through a steering committee to ensure top level buy-in. "Always ensure IT is seen as the enabler that enhances the business. Turn it around so the business wants the IT project. Communicate the project and the business benefits consistently to the end users, who will ultimately be involved in the outcome."

What to look for in financial reports

How a company puts together a business case reflect its culture and business philosophy.

"If I'm looking at another company's financial reports, I'm going to be interested in what I can glean about how it operates compared to my operation," says Glenn Armishaw, Toyota Financial Services development group manager.

The balance sheet will give pointers to whether they buy or lease equipment and why; replacement cycles and policies; how much they're investing in infrastructure year on year, and where this is going.

He says the profit and loss statement may give details of costs including depreciation, leasing and rental, maintenance versus development and staff costs. "You might then compare this to your experience perhaps by costs per head, against income and as a percentage of total costs."

The financials may also reveal staff remuneration bands or staff devoted to various parts of the business, for example, the number of seats supported, percentage of staff devoted to support versus development and major projects underway or completed.

Big picture

Then there's the bigger picture stuff. Are they profitable? Do they have a well-structured balance sheet and what part does IT play in that result? For example, is 'advanced IT' leading to superior results?

Armishaw says IT directors should be aware of the differing methodologies for measuring ROI and payback periods including scorecards, risk assessments, impacts on P&L and balance sheets, provisioning, capital cost versus expensed items, opportunity cost, TCO, present values/ future values of costs versus income streams and benefits.

"Avoid giving nasty surprises to the rest of the organisation. Show an ongoing interest in the workings of the wider company and be able to demonstrate that you have considered all the implications including a sound business and technical rationale," he says.

The financial team needs to believe IT truly understands the business needs and drivers of the company, says Armishaw. "I've always found that those in the accounting area are more than happy to impart their knowledge. Sometimes it's a matter of cutting through the jargon to get an understanding of the issues involved, but then you have to ask yourself who could be worse than IT?

"IT has become a critical business function and a major cost centre in many businesses requiring more management resource and accountability than in the past. The challenge is to transform IT from a financial soak hole into an engine of change that knows what is required to drive business forward."

Increasingly, modern businesses insist on knowing the return on investment (ROI) for everything the IT department does; and accountability for the performance of back office systems, networks, telephony, hardware and software sit directly at the feet of the IT director or CIO.

Rather than loose promises and moveable milestones, IT is now required to fit within a detailed business plan and monitored through a series of KPIs to ensure runaway projects are caught before they implode.

Understanding the business, aligning developments that can enhance efficiency and competitiveness with the company's end goals, and being able to communicate that to the people with the purse strings is one thing. Being able to deliver not only on the project goals but the ongoing ROI is another.

The challenge is to transform the perception of IT as the backroom boys who sometimes get it right into a smart, business focused unit whose judgments and recommendations are trusted and welcomed at board level. Instead of holding back on IT projects, an informed management team may end up driving them forward with enthusiasm.

Pointers for the finance-savvy CIO

All projects are business projects: Rather than isolating IT efforts, every undertaking should be related to its business costs and outcomes. Management buy-in should be obtained as early as possible through a thorough business case.

Communicate clearly and concisely:Knowing what you want is not enough, everyone else needs to know. Learn the language of the board, understand the financial imperative and communicate requests for funding based on the business case.

Financial phobia is unacceptable: Any IT director or CIO should have a thorough grasp of budgets and spreadsheets. Costings, pricing and project appraisal and the ability to effectively analyse financial information from both internal and external sources are essential when making sound business decisions.

Spreadsheet as essential reading: The uninitiated should read "accounting 101" books or even an MBA type course and if in doubt, ask. Financial managers are often willing to share and keen to learn more about your department.

Develop an all-round knowledge: Take the time to learn the key drivers of your business, and how each department functions so you can more easily align technology drivers to business goals.

Move from a cost centre to a profit centre: Learn how to transform your department from one that requires financial input to one that creates not only revenues but also value.

Smart IT will produce financial alerts: IT should use its systems to flag budgetary and other thresholds that indicate variances and can help keep projects on time and on budget.

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