3 Bs of IT Financial Management
Facing CFO with questions like “Why is IT Cost so high”, “What is the ROI on IT investments”, “How much will IT Costs go down after moving everyone to cloud”has never been easy – Confessed “Bill” a newly appointed CIO.
Across his 20 year career, Bill had risen through IT ranks on his superior technical knowledge, leading implementations of ERP and Email. The key success criteria in his job was amount of “Process Automation” he could infuse within the organization. Each and every go live for him was a medal of honour.
I met Bill a month back and during my discussions, he shared story of his glory days when launching a company website used to be a big milestone in the history of the organization. “IT Financial Management” was unheard of those days, Managing IT Budgets used to be a domain of Finance department who would come once a year, Negotiate on 5-10% increase on last year’s budget and never to be seen for next 12 months. Business cases were prepared by vendors and were never looked again after go live. In other words life was good for as long as business teams got the latest technology.
Moving to Circa 2015, Life had changed for Bill
Website launches and process automations are no longer prized, In fact most of times they are termed as “Releases” or “Updates” with no rewards for IT. CFOs are now having a larger involvement in deciding how much resources to allocate to IT, What portions of IT budgets should remain centralized and how much should remain with business teams. There are now frequent demands to demonstrate the financial returns of IT spend, keeping lights on, while at the same time brokering assortment of technologies between business and vendors.
With IT-ROI measurement becoming a key data point to determine Bill’s yearly bonus and longevity in the new company, there seemed a pressing need to institutionalize ITFM or IT Financial Management discipline. Considering this was less familiar space for him, he needed guidance to make 1st start. As someone with rich experience in ITFM, I thought of helping him.
My advice to Bill was Start Simple – Focus on 3Bs of IT Financial Management
- Business Case : Define a threshold spending level say 1 % of IT budget and start demanding documented business cases for all IT projects over that level. Add sections for Qualitative and Quantitative project benefits over 3-5 years to your standard business case template. Align these benefits with one time (Capex) and recurring costs (Opex) to determine Returns on investments for the project. Once these numbers are ready, Pass them over to CFO/CEO for a 2nd validation. I also advised Bill to use the Governance structures within his organization to make sure the business case approval/rejection is a joint decision between Business, Finance and IT. Thus, safeguarding him from the pressures of saying “NO” to business demands in a new organization.
- Budgets : Bill was also advised not to wait till the end of the year and meet with his finance team for a 60 min, once a month to discuss Budget Vs Actual spends. He was also guided to Invite his 2nd line of IT leaders and procurement team in the meeting to delegate accountability of IT spend to all track leads (Heads of Infra/Apps etc). Further to that he was encouraged to be watchful, if during these budget reviews he discovers non IT spends wrongly tagged as “IT costs”. Finally take improvement actions and send summary notes to CFO and CEO, demonstrating he is in control of IT budget.
- Benchmarking : While there are many paid sources of getting IT benchmark data (Gartner/CEB/Mckinsey Solutions/APQC etc). A simple internet search can also give some high level indications on “IT Cost / Revenue” , “IT Staffing / Overall staff” ratios for the industry. I told Bill to start with whatever you get free, Make early inroads by asking IT vendors, Seek insights from other CIOs at public events. Stay mindful that no organizations are same,IT spending benchmarks need operating context, They could vary with region, level of IT investments done in past and the choice of formulas and definitions used to arrive at metric. Bringing all together in a presentation and explaining the approach with some results to CFO/CEO should be a convincing start. Not knowing his CFO enough, I advised Bill, that in case he gets further challenged then it is important to seek corporate funding for engaging a consultant to benchmark your company’s IT cost with similar companies in the region. Since the CFO himself is sponsor in benchmarking project. The benchmarking project should get easily funded.
Finally, I summarized the conversation with Bill by reinforcing that ITFM (IT Financial Management) is a journey, 3Bs discussed above are only small beginning, They are 1st but important step to spark a culture of IT cost consciousness across the organization. Like any corporate project, it requires strong change management. Tools can help, However the real success story will only come when there is equal commitment from IT, Finance & Business.
Written by Abhinav Mittal, Abhinav is IT Productivity Coach based out of Dubai, He has a decade of experience in helping business leaders get more value from their IT investments