26
Apr
CFOs are finding themselves increasingly responsible for the IT function. Getting on the right side of technology has become key in the CFO role. But too often, CFOs find the IT department unable to articulate how IT activities transform into business value. They focus on the different things; tech costs are monitored but not necessarily ‘managed’’, and the tug-of-war between IT and finance over budget allocation is a constant challenge. To overcome these challenges, we have put together a few tips to help CFOs to be more tech literate when trying to better manage IT budgets and costs.
As a CFO, one critical question you must ask yourself is: How effective is our current IT governance framework?
IT governance is a process that shows how you direct and measures IT investments against business objectives at your company, demonstrated in documentation form. It provides a set of checks and balances that consider an array of options, evaluate risks, ensure compliance, and eventually drive a pipeline of well-crafted actions.
One typical example of how IT governance can make or break your organisational growth is the budgeting process. Every year, each department provides a wish list of things from IT. However, many of these items relate to maintaining market relevance or customer experience. If you spend a large portion of the budget on systems and infrastructure that is customer-facing, you could have little left for the core processing or business system that is badly in need of a fundamental overhaul. Your executive team may want to purchase that latest technology to beat the competition, whilst the IT governance process duly followed may lead to the opposite conclusion.
We recommend reading and following one of these IT governance frameworks:
Before making a technology investment, CFOs need to carefully consider all hard and soft benefits and the accountability matrix for how these will be realised and tracked.
ROI (Return on Investment) and TCO (Total Cost of Ownership)
Both metrics offer valuable insight, but they answer different questions and need to be used together.
With the adoption of cloud technology, IT is commonly delivered as microservices, with IT costs now typically small and variable. CFOs need to have transparency on costs and values, including those that are marginal to be cost-conscious while pursuing business value and competitiveness.
Opex? Or Capex?
With the adoption of cloud technology and Infrastructure as a Service (IaaS) and Software as a Service (SaaS), or even Hardware as a Service (HaaS), IT spending has been shifting from Capex towards operational expenses (the OpEx model).
However, deciding to use OpEx or Capex isn’t a one-size-fits-all decision. Your decision on which spending model will depend on corporate policies, cash availability and business goals. Most organisations also find that their capital expenses decline once they change the cost structure to OpEx. Their operational expenses also fall because of increased efficiencies and a reduction in unnecessary effort. So, simply turning capital expenses into operational costs could be a mistake – it’s about finding the right balance for your business needs.
Use Lean Management principles and Agile Approach for IT
One of the biggest frustrations IT has with finance is when they’re asked to reduce costs to a bare minimum, which significantly restricts its ability to grow as a critical business enabler.
To build a better integrated IT and finance function, the CFO would probably ask: “How can IT deliver as much value as possible with the resources they have at their disposal?” Building on enterprise Lean principles, Lean IT focuses on achieving operational excellence through improved agility, service quality and process efficiency. Instead of just cost reduction, Lean IT looks at the big picture and “doing more with less” by optimising IT operations and processes through the systematic elimination of waste throughout the value stream.
Manage projects in a modern agile approach. Place high-risk decisions and activities early in a project’s life cycle. Agile projects are two times more likely to succeed, and it is a lot more effective in controlling risk.
Extend the financial planning and analysis capabilities to the IT function. Meet regularly with your CIO or IT Managers. Help the CIO to build transparency and accountability into the IT function. Communicate with them openly and challenge them in professional ways if necessary. As your IT knowledge grows and your relationship with the CIO or IT Manager becomes more collaborative, you are likely to discover breakthroughs together.
Three critical questions to discuss with your IT
When building a business case for any new tech or establishing good governance for your IT functions, chat to your network of independent technology professionals to ensure your project assumption is neither conservative nor risky. They can also help you ensure your business case clearly states the purpose and objectives and if the project aligns with the strategic goals.