It is often said that cash flow is the lifeblood of a company, however, how many organizations truly understand where they are spending their money? IT is often seen as a big black box or even a money pit that consumes significant resources without having much to show for it, something which most if not all IT leaders have heard during their careers.
Historically tensions have existed between CIOs and CFOs as IT leaders have found it difficult to articulate how they use their resources to deliver business value. Increasingly CIOs are now starting to take control by analyzing both operational and financial data, to gain insights on how IT is being managed and run by embracing IT Financial Management (ITFM).
What is Financial Management?
Financial management has been defined as “planning, organizing, controlling and monitoring financial resources in order to achieve organizational objectives” (1). From a simple IT Financial Management perspective, it allows stakeholders to follow the money and see what is delivered.
The discipline of IT Financial Management provides:
- An increased awareness of what activities drive IT costs
- An understanding of what resources are consumed by IT
- A vital component for managing demand and consumption
- Identify cost optimization initiatives
- Better decision-making capabilities
- Open and honest communications creating greater strategic alignment
IT Financial Management allows the IT leadership team to proactively manage spend; make informed decisions based on evidence, not a gut feeling; and change the conversation between IT and the business from being technical, to one that is business and outcome focused.
It is safe to say that CIOs have two primary objectives:
- Keeping the lights on and providing services at an optimal cost and quality;
- Progress the organization’s strategic goals to deliver innovation and business value.
To achieve these objectives CIOs need to be able to do the following:
- Communicate the costs and consumption of IT business services so as to identify what resources are needed to keep the lights on and users can understand what they are paying for.
- Provide transparency of spend, capacity, and usage and enable informed investment decision making to prevent any breaks in service and identify future requirements.
- Align IT budgets and plans for business outcomes.
IT Financial Management provides the CIO with the relevant information to accomplish all of this and meet the two primary goals.
Financial Management and its importance for IT leaders
The IT leadership team has to prove that they understand their cost drivers, resource requirements, and investment needs. This can be achieved by demonstrating:
1. Visibility: There must be an understanding of what and where IT spends its budget. This is not simply a finance or IT view of expenses i.e. rent, power, labor or storage, servers or networks. IT spend needs to be communicated in a way users will understand. Costs need to be matched to a clearly defined and easily understandable IT business service, such as email.
2. Alignment: Developing open and honest conversations about the current state of IT, future risks and business needs in partnership with the users. This will help the CIO articulate the investment needed to ensure that IT helps the organization achieve its desired strategic outcomes.
3. Velocity: IT needs to know what technology does the business need to meet its current and future strategic objectives whilst being able to react quickly to the changing demands placed on IT in an ever-changing world.
With budgets continually being scrutinized IT leaders are facing increasing pressures on where they spend their money. Where should a company invest its limited resources?
If an organization has $5m to spend, where should that money go? Where would a CFO invest the money if they had two very different investment options? For example, what would the reaction be if a CIO were to say I need the money to provide more storage. Compare and contrast that to a CMO saying I can increase market share by 10%. The investment decision would probably favor the marketing team. However, what if the CIO said the investment would enable the organization to enhance its sales application? This would result in having quicker access to customer and marketing data enabling timely analysis of the impact of any marketing spend, which would be achieved by investing in faster and more storage capacity. By communicating IT spend in language that the business understands alignment between the two can be reached. IT Financial Management changes the conversation from being technical to one that is business-focused and allows IT leaders to clearly demonstrate their actions are supporting the business’ strategy.
Visibility of day-to-day costs is also important to end users, as is the impact of investment spend. Probably the most-often cited criticism of IT is that users don’t understand what they are paying for and that it can be cheaper to buy services elsewhere. For example, the fully loaded cost of providing a laptop internally from IT includes software, help desk support, security, upgrades and so on. However, most users don’t consider this. Whereas, buying a device from a high street retailer generally does not include the ongoing support or security. These are extra costs which users would need to account for.
Once customers can see what they are paying for, a like for like comparison can be made. Visibility also makes clear the relationship between business consumption and demand and IT costs. It enables users to change their behaviors by understanding what drives costs. Do customers need a gold support service or would silver or bronze be sufficient? By changing the level of support IT and the business may make costs savings which could be reinvested.
Showback or visibility of IT spend allows users to have transparency on what each service costs, and crucially what the service includes. It starts to transfer the responsibility of IT spend to the business by understanding the cost levers they can pull.
How Nestle aligns IT, spend, and business objectives
At a corporate level, IT needs to demonstrate the link from technical activities to business outcomes and how it is aligned to and supporting the business’ strategy. The services provided by IT enable the business to achieve their planned objectives. Many businesses are undergoing some form of Digital Transformation and the analyst firm Forrester recently published a Wave report discussing the importance of strategic portfolio management. An IT Financial Management cost model links the costed IT kit to business services and forms the core of a strategic portfolio management approach.
Today, many companies publish their corporate objectives. One example is Nestlé who publishes their 12 corporate challenges and objectives. The IT leadership team can align their activities and objectives with those of the organization and ensure IT is aligned with the business to create value across Nestlé for all its stakeholders.
Cost transparency and openness regarding the state of IT is crucial to managing the current and future IT landscape of any establishment. Without it, there can be no alignment between the supplier, IT, and the customer, the end user. Without any alignment, IT and the business can be pulling in different directions which can lead to dysfunctional behaviors. Ultimately this has a negative effect on IT with CIOs being viewed as a technology supplier, not as a strategic partner helping to drive the business forward. Research has shown that where IT is seen as a partner, digital initiatives are more common and their impact positive and wide-ranging.
IT Financial Management allows the impact of new initiatives to be assessed against the services currently provided. It can accelerate the decision-making process so that CIOs can react quickly to changes in technology and customer preferences.
IT Financial Management may not be the silver bullet to cure all of IT’s ills, but it can enable the IT leadership team to be proactive and demonstrate what IT is providing given the current level of funding and what could be achieved if budgets were changed. Finally, CIOs will be able to address, arguably, the most common question posed by users “Why is IT so expensive?”
Sources:
(1) https://knowhownonprofit.org/organisation/operations/financial-management/management
By: Sanjiv Sachdev
