What CFOs need to know about information technology
Effective governance of information technology is about straightforward, clear questions and frank, uncluttered answers.
CFOs often find themselves responsible for their organisations IT function. Others will be controlling their accounting IT capability. Either way, it can be a daunting responsibility. And even where CFOs arent directly accountable for IT, they cant afford to ignore it.
In a networked, connected and digitised commercial world, information technology (IT) has become the backbone of business.
As Harvard Business Schools Professor Emeritus Richard L. Nolan puts it: 'The role of IT is expanding both deep within organisations and across organisations. The notion of a firms boundaries has changed. Companies have become more permeable, and decisions affect entire networks of companies. Meanwhile, every organisation today is absolutely dependent upon IT.' (A Committee of Ones Own. Richard Nolan. CIO Insight 1 February 2004.)
Nolan observes that senior management is not really up to speed on its degree of dependence on IT, or on ITs impact and strategic potential. 'Its an accident waiting to happen. Someone needs to intervene.'
Further, were all aware of major IT projects that have turned to be spectacular failures. According to KPMGs latest global survey of IT projects confirms that the problem isnt going away.
Over the 12-month period covered by the survey, 49 per cent of respondents had experienced at least one project failure.
In the same period, only two per cent of organisations achieved their targeted IT benefits all of the time.
Eighty six per cent of organisations lost up to 25 per cent of targeted benefits across their entire IT project portfolios.
In the words of two Harvard Business Review authors, IT remains an expensive mess. 'Orders are lost. Customers call help desks that arent helpful. Tracking systems dont track. Indeed, the average business fritters away 20 per cent of its corporate IT budget on purchases that fail to achieve their objectives, according to Gartner Research. This adds up to approximately US$ 500 billion wasted worldwide.' (Fixing the Corporation - IT Disconnect. Charlie S. Feld & Donna B. Stoddard. Harvard Business Review 15 March 2004.)
The research organisation, META Group, says that 70 per cent of IT departments are still perceived as cost centres rather than value centres, and 52 per cent of CEOs question the value their IT departments deliver.
A performance issue
KPMG believes IT is a key performance issue for all organisations.
In part its a communication issue. Chief information officers (CIOs) and other IT professionals simply dont speak the same language as their CFOs and executive management.
Discussions on the subject are often disjointed and muddled by unclear messages. IT professionals find themselves disconnected and isolated from their CFOs and other senior executives.
As a result of this communications gap, the business value created when a well governed IT function is aligned with overall business goals goes unrealised. The idea that IT is a black hole into which capital simply disappears is perpetuated.
CIOs and IT professionals must take much of the blame. They slip into technical discussion with their non-technical colleagues when simple, declarative sentences about costs, benefits and progress will suffice. They sometimes lack training and experience in finance and business management.
On the other hand, CFOs dont demand plain English from their IT executives and fail to clearly articulate how they define the value they expect from their investment in IT.
A way forward
As noted above, someone has to seize control of the IT agenda.
CFOs often assume this role by default. They have to start figuring out how to measure and demonstrate that the IT function adds value to the business. It boils down to delivering a real, measurable return on IT investment.
The process will be encouraged by the adoption of such measures as scorecards to assess internal customer service, a regular and vigorous review of IT projects, the use of updated industry benchmarks, assessment of performance against service level agreements with customers and portfolio management tools that identify overlap and under utilisation.
More generally, CFOs should understand how value is derived from the use and management of IT. They need to be presented with understandable metrics that measure this value. The reality is that many CFOs, and their boards and CEOs, can neither define nor measure IT value. When value cant be defined or measured, a business almost always fails to maximise the return on its IT investment.
Accountability is another critical issue. CEOs, CFOs and other senior executives are making increased commitments to achieve business results through IT investments, but are not being held fully accountable for the subsequent outcomes. IT governance practices still focus on making commitments, and less on ensuring these commitments are kept.
(According to KPMGs IT project management survey, in 87 per cent of cases sponsoring executives or business unit heads were being held responsible for the achievement of IT project benefits. Yet individual performance plans were tied to project outcomes in only 23 per cent of cases.)
If theres a simple message about IT, its that it neednt be and shouldnt be complicated. IT should be managed in the same way businesses manage finance, marketing, production, human resources and other business functions. It shouldnt be a special case.
Six golden rules for getting value from your IT investments
Manage to achieve Establish an integrated, end-to-end governance framework driven by top management, starting with a business case and ending with the measurement of value created.
Prioritise to realise Establish an enterprise-wide process that objectively and continuously evaluates projects to maximise and realise the value from IT investment.
Align and adjust Aim to clearly align all IT initiatives with business strategy and, where appropriate, adjust to maintain alignment or reinvest funds elsewhere.
Safeguard value Control benefits leakage by clearly defining what value you expect to receive, how you will get it and when you will get it. Reassess regularly throughout the life of the project.
Hold to account Clearly define individual accountabilities for realising benefits, including the integration of proposed benefits with operational plans and budgets.
Invest in people and processes Recognise project disciplines, acknowledging the link between strategy and project execution. Develop capability, capacity and risk models to match organisational maturity and culture.
