IT and the Bottom Line
- 29 September, 1998 11:17
CFOs not only rely on IT to manage the enterprise's finances, they must also assess its value and in many cases oversee the function. A recent US survey outlines the top IT issues for finance executives; their Australian counterparts are likely to concur Bean counters. Corporate cops. Number crunchers. Finance executives have heard them all and accept these names as indigenous to the territory when their number-one responsibility is the financial well-being of the company. When faced with corporate technology concerns, however, CFOs find themselves between the proverbial rock and its equally unyielding partner, a hard place. More often than not, they must reconcile their role as supervisor of the IS department with that of financial watchdog (not to mention their position as major IS user). The need to balance all three perspectives makes for a complex attitude toward technology for many finance executives. Is IT a function to be managed, a cost to be contained or a strategic asset to be exploited? No clear road signs help CFOs navigate the intersection of finance and technology, but a recent survey of 417 corporate and business unit CFOs conducted by the Financial Executives Institute (FEI) in New Jersey, and Computer Sciences Corp (CSC) in California, suggests the general direction in which many CFOs are moving. Entitled "Technology Issues for Financial Executives 1998", the survey casts light on the conflicting technology issues with which many CFOs now struggle.
Measuring IT's Business Value
CFOs are interested in distilling the value of technology down to nice, hard numbers. Unfortunately, they are thwarted in this quest by the slippery nature of technology, which proves difficult to quantify. So it's no surprise to find that two of the top five IT issues for finance executives concern technology spending: "Prioritising technology investments" was either very or somewhat critical for more than 90 per cent of respondents, and "identifying the appropriate level of technology investment" elicited a similar response.
"Finance's priorities and interests are often very different from those of the CIO," says Dewey Norton, vice president and controller at Ameron International, a manufacturer of protective coatings and piping systems in California.
"Finance tends to be more focused on business assessment." Norton compares a similar survey of CIOs done by CSC in 1997 with the results of the FEI survey.
Of the top 20 hot topics, he observes that the task of determining the value of IT was last on the list of important issues for CIOs. "CIOs are less concerned with cost/benefit analysis," he says. "They feel that it's up to the business process owner to make that determination." CFOs insist that their interests in technology quantification arise from business rather than from budgetary considerations.
"It's not about cutting costs; it's more about making sure that technology gives us the information to run the business better," says Dorothy Hayes, director of internal audit at Hewlett-Packard in California. "But if we spend lots of money on IT and we're still not getting the ROI, we get kind of irritable." The top criteria CFOs use to evaluate returns on IT investments confirm that financial executives are considering business value as well as costs. Although "helped us cut operating expenses" was the most popular criterion, mentioned by 71 per cent of respondents, the next most used criteria -- "enabled us to stay even or ahead of competition" (62 per cent) and "provided us with the opportunity to enhance operating revenue" (44 per cent) -- suggest that CFOs clearly recognise IT's potential to add value to the bottom line.
Still, many CFOs find it difficult to measure the value of their technology investments, and that frustrates them. "You can do a cost/benefit analysis, but you don't know if it does any good," says James Walsh, director of financial planning and analysis at National Association of Securities Dealers in Maryland. "Once you get to the benefit part, it gets really fuzzy." Thus, financial directors end up signing off on projects without a clear sense of the budget's accuracy, which isn't good for a CFO's stomach lining. "The CFO wants a high probability that projects will deliver the estimated returns," Norton says, and many IS project estimates do not satisfy that desire. "We have no idea whether [the IS department is] making those numbers up," says Christian Weiss, controller at The Franklin Life Insurance in Illinois. "They could be sandbagging for all we know." Agrees Hayes, "It's really a leap of faith."After making such a leap, the last thing a CFO wants to see is an IS project run into significant cost and time overruns, as happens all too often. In fact, project management was cited by almost 50 per cent of the survey respondents as one of the two IT skill sets most lacking in their organisation. (The number-one missing talent: communication skills.) The survey results echo finance executives' ambiguous feelings toward IT's ROI. Fully 30 per cent of the respondents didn't know whether they were getting a good return on IT investments, and another 19 per cent characterised their returns as either low or negative. "The bottom line is that nearly half of the respondents are unhappy with -- or baffled by -- technology's ability to improve their business," note survey authors Gerald Boltin, Stacy Gorneau and Mark Bealin of CSC. Boltin, a partner and financial management practice leader in CSC's Chicago office, recommends that CFOs try to impose the same type of rigour on IT investments that they would apply to any other kind of capital investment.
The difficulty of quantifying IT's value is exacerbated by the lack of written strategic IT plans within responding companies. "Most IT departments [58 per cent, according to the survey] don't have a written strategic IT plan in place," Norton says, which makes it hard to assess success. Jack Mallinger, vice president of financial services at Airlines Reporting in Virginia, says his company tries to tie its IT investments very closely to the strategic business plan so that only critical projects get funded. "You really need to pay attention to where you're going," he says. "If you don't stay focused, years will go by and nothing will come of your investment."The IS Reporting Structure Of the financial executives surveyed, slightly more than half (55 per cent) said that the CIO reports to the CFO, and about a fifth (21 per cent) said the CIO reports to the CEO, although those numbers vary considerably by industry.
For example, respondents in the insurance and financial service sectors reported that 38 per cent and 33 per cent of their CIOs, respectively, report to the CEO. "The pattern seems to be that in industries where IT is central to daily operations, there is greater likelihood that the CIO will report to the CEO," note Boltin, Gorneau and Bealin in the survey report.
CFOs agreed with this with some reservations. "Finance is frequently the best place [for IS to report to]," says Norton, who cites two reasons. First, he says, finance executives are often computer savvy, which helps them understand what's going on in IS. Second, they "pride themselves on the objectivity of the information they provide", notes Norton. Thus, prospective IS projects get a balanced analysis: "Finance is less likely to spin a project to its own advantage," he says. Norton points out one exception: "If IS is truly a core competency of the business, like in financial services, it makes more sense for the CIO to report to the CEO." Raghavan "Raj" Rajaji, senior vice president, CFO and treasurer of Dallas-based BancTec and chairman of FEI's committee on finance and information technology, concurs that the more technology-dependent a company is, the wiser it is to have a direct CIO/CEO reporting relationship.
According to Hewlett-Packard's Hayes, "It really depends on the organisation.
[Former HP CIO] Bob Walker reported to our CFO and it worked out great. But if he'd been reporting to someone with the point of view of, 'I'm going to cut costs no matter what', it would have been a disaster. You have to do what works for the organisation."The Hot IT ProjectsThree big technology projects loom large on finance executives' horizons: year 2000 (Y2K) initiatives, e-commerce and building integrated companywide systems, which frequently means implementing enterprise resource planning (ERP) packages such as SAP and Oracle.
"Y2K is big time," says Mallinger. "There's a big fear factor and a lot of outside pressure. We always get asked at board meetings what we're going to do about Y2K." Hayes and Norton agree: "We're all interested in Y2K issues," says Norton. But, he emphasises, "it's a passing concern." Although many CFOs profess interest in making sure systems programmed with two-digit date fields can accommodate dates in the next century, a surprising number of them (16 per cent) haven't done anything more than evaluate the problem. Broken out by industry, more than a third of non-profit and construction businesses are still at the assessment stage. Kirk Arnold, vice president and managing partner in consulting and systems integration at CSC in Massachusetts, says: "I was very surprised at the number of companies still in assessment on Y2K. They really need to get going." Companies are also intrigued with the idea of electronic commerce. Hayes says that she's very taken with "the whole e-business notion -- how do we take our knowledge of the Web and turn it into a better way of doing business?" Turns out, she's not alone. Nearly 30 per cent of the survey respondents reported that they were conducting business electronically, although that number includes companies using proprietary electronic data interchange (EDI) networks as well as those using the Web. Another third of the companies are piloting some sort of e-commerce application, and 27 per cent are considering such a project. That leaves a measly 10 per cent professing themselves completely uninterested in e-commerce.
Integration also proved to be a hot topic among CFOs. The need to resolve millennium bug issues and the desire to cut maintenance costs and increase functionality led 89 per cent of the surveyed CFOs to rate the integration issue as significant. About half of those surveyed were implementing enterprise systems like SAP or Baan. Users who have completed implementation were not fazed by ERP's notorious cost and time frame overruns. Although 51 per cent said the project took longer than planned to implement, and 56 per cent reported going over budget, an overwhelming 87 per cent reported that they felt that the project was successful. From the response to this inaugural survey, it's clear that finance executives rate IT high on their agenda. And given the study finding that 78 per cent of CEOs view technology as a source of competitive advantage, that isn't likely to change anytime soon.