What CIOs Need to Know About Money

To succeed in business, you need to understand how businesspeople keep score

Most CIOs know that hardware depreciates quickly (losing value as an asset on the company's balance sheet). Therefore, leasing instead of buying can sometimes save a company money. And if that nugget of financial insight represented the apex of what CIOs need to know about money, its language and its management, this story - this whole special section - wouldn't be necessary.

Being a modern-day CIO - an equal partner with your enterprise's other business leaders - is not a matter of saving a dollar here, amortizing an investment there, or even making IT look good on the balance sheet and in the annual report; it's about understanding how to enhance the value of the company as a whole.

That's where an understanding of and an appreciation for finance and accounting pay off. CIOs who are not sensitive to money, who do not speak the language of their CFOs, are setting themselves up to lose their jobs within the first 15 minutes of an annual budget review, warns Paul Strassmann, a researcher on corporate IT value and a former CIO at Kraft, General Foods, NASA, the US Department of Defence and Xerox. He's exaggerating only a little. CIO's "State of the CIO 2004" survey showed that 27 percent of CIOs were in their current jobs for five years or more, while another 23 percent were in their jobs less than two years.

One reason for this relatively short CIO tenure, Strassmann believes, is the by-now legendary disconnect between how CIOs and CFOs think about their work. "The CFO keeps score through a very complex process that all ends up in earnings per share," Strassmann says. "The CIO thinks in terms of projects - and the twain shall never meet."

Asking CIOs to tie what they spend on hardware, software, systems, training and support to a tangible fiscal outcome is a tall order, particularly when the ROI for some IT projects (for example, ERP) isn't as clear-cut as it is for others. But the sad fact is that about 70 percent of all IT organizations are still perceived as cost centres by their business counterparts, according to researchers at Meta Group. (Locally the number is much higher. In our "State of the CIO 2004" survey 87 percent of the CIOs responding indicated the IT function was budgeted as a cost centre.) And no matter how efficiently it's run, a cost centre - a department that spends the company's money - doesn't have the same clout inside most companies as a department that brings money through the door. Consequently, the head of a cost centre will never have the same job security as the leader of a revenue-generating unit.

So, to succeed in business, "it's the CIO's job to translate what IT can do for the company" into monetary terms, says Meta Group senior vice president Louis Boyle. And the best way to do that is to understand what goes on between the top (revenue) and bottom (profit) lines.

The good news is that this is straightforward stuff. There are a few basic terms, a few fundamental concepts. You probably know them already; if you don't, you can grasp them easily.

The bad news is that understanding is not where this particular exercise ends. It's what you do with this information, how deeply you are able to delve into the meaning of financial information about your company over the course of months and years that matters.

Of course, that doesn't have to be bad news. In fact, it can be pretty interesting.

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

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