No one wants to hand a blank check over to an IT vendor. But finance may not necessarily fully understand the workings of the technology world, so the CFO might very well end up in such a situation. In an ideal world, CFOs should take all steps necessary to mitigate such risks; but in reality, the difficulties with evaluating IT projects exist, and are in abundance.
“There are many things expected of CFOs today that are not taught in textbooks,” says Ann Nee Goh, CFO of Singapore’s City Developments Ltd. “CFOs, as strategic business partners, have to perpetually learn about IT innovations such as cloud computing, and the strengths and weaknesses of each solution.”
Yet finance has no choice but to engage with technology. As Big Four accounting firm Deloitte notes in a recent report, “IT is typically the largest line item in selling, general, and administrative expenses.” And like it or not, CFOs and CIOs have their work closely intertwined. A Deloitte study suggests that 45% of US companies have the CIO reporting directly to the CFO.
Another 2013 survey, this time by technology market research group Gartner, which involved 237 CFOs and other senior finance leaders in North American and global companies, found that 78% of finance organizations are focused on initiatives around business intelligence, analytics and performance management.
Six out of ten (65%) are focused on ERP and integrated financial management applications while 46% are looking at business process management.
Finance’s Top Technology Initiatives
N = 237. Source: Gartner (October 2013)
Spokes in the wheel
Finance faces multiple issues when evaluating the success level of an IT project. CFOs think along financial lines and may be perceived as thinking along a different wavelength from tech-focused CIOs. Given the myriad facets of technology available to organizations today, these issues look set to evolve in complexity.
Among the spokes in the wheel are missed deadlines and seemingly little ROI achieved. On the other side of the coin, CIOs often find themselves exasperated by cost-conscious CFOs who may not realize – or may not be convinced – that cutting IT budgets could hinder the company’s long-term progress.
Evaluating ROI is a particularly challenging process, says Brian Tsui, a research director at advisory firm CEB. “It is difficult to measure internal system integration, end-user adoption and how successful a company is at managing upgrades to IT. Internal issues like these cause people not to realize the ROI of technologies implemented.”
Looking at the issue from the CIO’s perspective, Gartner advises the IT side to recognize that CFOs are interested in improving business applications through the cloud, mobile and information/business analytics (though not so much through social networking technologies, which are rated as important by only 6% of CFOs in the Gartner study).
“If CIOs do not understand this,” Gartner warns, “then there's a chance that CFOs will sponsor their own initiatives, particularly in the area of cloud for business analytics projects, and not coordinate them with the IT organization.”
According to its study, CFOs are strongly interested in cloud and mobile platforms. “CIOs should use the CFOs' interest in mobile to help build a strategic approach to this technology,” says Gartner. “For example, include CFOs in mobile device deployment to allow access to finance information and analytics.”
The report adds: “CFOs are clearly skeptical about the potential of social technologies, so any investments in this area must be clearly related to business strategies and realizable benefits. In the meantime, CIOs should educate CFOs on the potential benefits of social technologies and monitor developments to identify emerging solutions before they are widely adopted by competitors.”
The ‘I' and the ‘T’ in IT
A key impediment is the lack of a common language between CFOs and CIOs, which often leads to a disconnect, says Deloitte in a recent white paper, Evaluating IT: A CFO’s Perspective. This can hinder an organization from investing in, and subsequently reaping the benefits from, information technology.
Dialogue is a crucial factor in overcoming the CFO-CIO disconnect, says Deloitte, which recommends having CFOs and CIOs establish a lexicon targeted at evaluating how IT creates business value. The conversation should not focus on technology products, but should instead center on how IT improves specific business processes.
A useful way of framing the issue is to make sure that CFOs and CIOs agree on the value of both the ‘I’ and the ‘T’ in IT.
Is the information enabled by technology relevant? Both finance and IT should agree that the information generated results in better process outcomes and decisions. They should ask themselves: Is the information generated by specific systems to support the process timely, accurate, insightful and relevant?
Is the technology that generates the information appropriate? Both sides should agree that the technology:
- Is available and reliable
- Reduces manual effort and truly enables automation
- Allows scalability of outputs, dialing up or down
- Permits interoperability with other technologies at low cost
- Is not likely to be obsolescent before full use
“Once armed with such a shared language, CFOs and CIOs can then start to take a business process-focused approach to evaluating IT,” says Deloitte. “And given that many CFOs typically assign performance metrics to those processes, those measures can become another component of the language needed to assess IT.”
More broadly, particularly for CFOs who oversee IT (a trend that has given rise to the new title CFTO, Chief Financial and Technology Officer), Deloitte says finance should consider asking the following questions:
#1. Have we tested our disaster plan? A disaster plan may look good on paper, but in Deloitte’s experience, few IT departments have fully tested for flaws. CFOs may be surprised by the answer to the simple question: Have we tested the back-up facility?
#2. Who owns the IT budgets? While the technology pertinent to core infrastructure should be IT driven, the application side should be controlled by the business units, says Deloitte. Such a structure will allow for decisions to be processed through an IT governance committee, which can referee disagreements among business units over IT priorities.
#3. Is the release schedule of technology systems readily available? A CFO should have the release schedule of systems handily accessible on his or her computer. After all, such releases can affect everything from hiring new employees to complying with regulations.
#4. Does our vendor-management strategy guard against the loss of critical knowledge? Always keep in mind that vendors have access to critical company knowledge once they install and manage your systems. They may be essential to the IT strategy, but companies need to ensure that vendors do not derail that strategy.
#5. If you outsource technology, have you built a project management capability to control it? Outsourcing technology creates the need for project management in IT and requires applicable funding and oversight. Project management is needed to not only ensure projects are not being delayed or stalled, but also to hold vendors accountable for delays and cost overruns.
Two levels of governance
A clear, organization-wide governance model for IT spend decisions is also useful, says Deloitte. With all the appropriate stakeholders roped in, better resource allocation, joint ownership and commitment to the execution of IT projects can be achieved.
The governance structure should have two levels, Deloitte suggests. The first level should be for strategic IT governance around long-term strategic initiatives. The second level should focus on individual projects.
The first level should address how IT will support the business in the future and enforce discipline around large-scale IT investments that will give the company competitive advantage. Responsibility for this level of governance should be shared between businesses and the CIO, with the CFO demanding accountability from all units.
To assess the effectiveness of the first level of IT governance, CFOs should be guided by the following questions:
- Are you, as CFO, and other members of the C-suite involved in determining IT spend and development priorities?
- Do major IT projects have a clear ROI that is documented and measurable?
- Do the approved IT projects help you with both your long-term business and long-term IT objectives?
The second level of governance should be the CIO’s domain, which means the IT department is accountable for the success or failure of an individual project. Questions to be asked to ensure an effective IT project governance model include:
- Are the appropriate levels of technical practitioners and business users assigned to the project?
- Are both the development methodology and controls environment adequate to protect systems from errors and data issues?
- Are regular status reports that provide project progress and costs available?
The CFO and the CIO should be clear about which are long term projects that require a portfolio review and which are individual projects under the IT department’s purview. Typically, individual IT projects should be sponsored by a business unit.
If there are initiatives that are not business-sponsored, they should be reviewed on the project level to make sure they are achieving technology advancement. If they are not, they should be cancelled. “Overall,” says Deloitte, “there should be very few IT projects without strong business sponsorship.”
Deloitte suggests that CFOs benchmark five to 10 important processes by asking questions targeted at discovering how well IT supports these processes. The first set of questions should address the quality of information support generated by the business process. For example, is the information timely and relevant?
The second set of questions should focus on IT’s ability to provide what the business needs now and in the future.
Once equipped with a list of IT capabilities and vulnerabilities at the process level, CFOs should then have visibility over the gaps that might need to be fixed and also have a clearer idea of how IT is improving processes within the organization.
Armed with the relevant information, CFOs can then proceed to ask their CIOs and process owners about the costs of fixing a gap and also evaluate the risks of not fixing them. “As a CFO, you may need to determine if funding the unknown or a ‘big bang’ solution is prudent,” notes Deloitte. Sometimes, you may not need to do either.
The solutions may not be cutting-edge or world-class. But in some cases, says Deloitte, “really good may be good enough.”
About the Author
Melissa Chua is a CFO Innovation Contributing Editor based in Singapore.
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