Gartner, Inc. predicts that through 2007, 65 per cent of enterprises will grossly mismanage complexity and risk, stifling productivity and earnings, and inflating costs by at least 25 per cent.
Information technology (IT) continues to be one of the least understood and most mismanaged areas of many businesses, even though it is one of a company's top five expenditures. Inability to meld IT organisation, systems and technology, and to directly link these to a company's strategic business drivers to produce results is one of the major reasons why large, complex mergers or acquisitions often fail to deliver on their promised synergies.
Additionally, in today's regulatory environment, CFOs must pay close attention to the return on investment (ROI) of IT expenditures since they are personally accountable for accurate financial controls in their organisation - including IT financial controls.
Specifically, CFOs must be concerned about Sarbanes-Oxley compliance. Organisation not only need to support increased controls around the flow of financial information to their quarterly statements, as well as who does, and doesn't, have access to this critical data - but they also need to have controls around large-spend areas, like IT.
If a costly IT project goes astray, like an enterprise resource planning (ERP) implementation or an extranet build-out, this can clearly hurt an organisation's bottom line. This can be problematic for the CFO who must attest to the controls in place that should help prevent a large implementation blunder.
Identifying the real problem
How can CFOs ensure IT and business strategies are aligned? What can a CFO do to support IT during these times of Sarbanes-Oxley compliance and minimise IT-related business risks? By requiring the IT organisation to operate like other business units and drive three business imperatives into the organisation:
Understand the real IT spend. Many companies simply do not know in any sort of detail or with accuracy what IT assets they own, where those assets reside and how much it costs to fund them on an ongoing basis. IT assets can include hardware, software, networks, services and people.
Accurately measure IT performance and business value. In addition to the typical operational metrics, IT metrics need to be value-focused, performance-based and improvement-oriented.
Focus on leveraging investment cycles and the power of standardisation across the enterprise. This entails driving significant costs out and economies and efficiencies in. CFOs must champion working closely with their chief information officers (CIOs) to make these strategies a reality. Only then will they be able to break through the mystique surrounding IT and ensure they are getting the most out of their technology spending, while minimising key IT-related business risks.
Further analysing IT spending
Getting to the bottom of total real IT spending and fully understanding it is often a grueling, time-consuming and relentless activity. However, establishing the proper baseline, and incorporating costs in the IT organisation and those in the business units, are the most important first steps toward managing IT as a business.
IT spending typically falls into five categories - some involve both capital expenditures and the costs of ongoing operations, services and maintenance, whereas others involve only the costs associated with ongoing operations, services and maintenance. These include:
the IT infrastructure, which might be considered the utility aspects of IT
PC-specific functional and business-unit software tools
server- or mainframe-based legacy functional or business-unit applications
new functional and business unit applications just coming online, but not yet operational or mainstream
new functions and business-unit application projects.
CFOs can help CIOs build a focused and relevant IT chart of accounts to aggregate and array specific relevant IT management data like separating IT costs from business costs and quantifying the shadow spending in IT across all operating units.
Ruthless prioritisation: CIO-driven 'tough love'
During times of transition, costs become a particular focus, and ruthless prioritisation in the IT environment becomes a necessity. As its fundamental objective, this causes a reduction in the number of IT priorities and total IT spend to levels that a company can afford. The CFO should determine who owns and executes each item of this spending; direct accountability is crucial. Focusing time on total and lifetime spend is critical, as well. In fact, ruthlessly prioritising focuses business units and users on living within their means and dealing with austerity. It is a form of CIO driven tough love.
Focus on outcomes with the right metrics, not process
Transparency and visibility are all about value and performance. But measuring IT performance and its overall value to the business is, at best, a difficult process. In too many companies, IT metrics focus on operational, technical and transactional components - such as 'uptime' programming productivity or helpdesk transactions - and whether projects are moving forward on time and within budget. Unfortunately, these 'shop-floor' type metrics do not, by themselves, get at the heart of what the executive team needs to know about the IT organisation. In fact, because such metrics often look good on paper, they actually may be masking problems.
To achieve consistently high performance and value, executives need to be able to measure how effectively the IT organisation is positioning itself to be used by its constituents as a driver of business value.
IT metrics need to be value focused, performance-based and improvement-oriented - and not only production-based. The metrics must help to identify root causes and drive specific actions and behaviours within the IT organisation and positive, cooperative remediation efforts between IT and the business units. To ensure this, the fundamental principles of IT metrics and performance measurement for continuous reporting include:
ensuring that, in addition to operational IT metrics, focus is placed on relevant IT management and control and IT business value metrics
placing particular emphasis on the importance of IT business value metrics to ensure that a meaningful, constructive dialogue is established between the CIO and the other executives
applying an integrated approach to IT metrics so the CIO is constantly aware of management's priorities
establishing ownership at all appropriate levels of IT metrics and ensuring that they are transparent and fully communicated across the company on an ongoing basis
focusing on creating and maintaining a culture of accountability and performance within the IT organisation
Leveraging investment cycles and the power of standardisation
Even in organisation that prioritise IT investments in accordance with the guidelines described above, many IT leaders operate in a capital expense environment in which they are constantly working up an economic justification for each expenditure. This cuts into the time they have for understanding how the IT strategy meshes with the business strategy and for effectively managing the IT organisation.
To move to a normal cost model of IT expenditures, IT costs - in a business planning sense - need to be removed from the capital expense ledger.
Also, removing IT spending from the vagaries of business cycles normalises the rate at which cost increases occur.
The objective is to make IT spend as stable and efficient as possible. This can be accomplished by:
eliminating 'start / stop' investment cycles that create an inability to maintain a steady state and normalise IT spending over time
focusing on total IT spend over time vs. specific spending at a point in time - understanding the full downstream impact of all current actions
Managing IT as a business
IT has increasingly become critical to a company's success. If technology is to fulfill its promise and provide maximum benefit to a corporation, it must be managed in the same way as any business unit - with careful attention to people, priorities and performance, and with an integrated series of proven and tested fiscal and managerial disciplines.
CFOs have the responsibility and accountability to help their companies effect change in the IT organisation, especially as it relates to institutionalising fiscal and budgetary management and performance measurement principles within IT. By driving the organisation to fully understand real IT spending, focusing on the business value of IT and leveraging investment cycle and the power of standardisation, they can be assured the their organisation is getting the most out of technology spending while, at the same time, minimising its business risks.
CPA Australia thanks Financial Executive International for permission to reproduce this article, which is copyrighted by FEI and the author, from their Financial Executive magazine of July / August 2004.
Mark D. Lutchen is partner and practice leader for PricewaterhouseCooper's IT Business Risk Management Initiative. As the former global CIO, he was responsible for reengineering, reconstructing and integrating the firm's worldwide IT systems during its massive late 1990s merger. He is author of Managing IT as a Business: A Survival Guide for CEOs. For information, contact itbrm@us.pwc.com.
