CFOs are suckers for precision. They can recite exact figures about the percentage growth of their employers’ share price in after-hours trading, for example, or tell by how many cents the company beat analysts’ expectations in its latest quarterly earnings report. They unspool figures and ratios with all the enthusiasm of schoolboys reciting “Paul Revere’s Ride” from memory.
But ask them to calculate the returns they are getting on their IT investments, and they tend to leave numbers behind, substituting them with a terse phrase: not enough. “We should be getting more [from our IT], given existing investment levels,” offers the vice president of finance at a midsize manufacturer. The vice president of finance at a large telecommunications business proposes a theory as to why that is indeed the case: “We have continually reduced IT spending, [to the point] that people don’t even submit [IT projects] anymore because they believe nothing is going to change.”
Such sentiments are expressed in recently published research conducted by CFO Research, in collaboration with AlixPartners, a global corporate consulting firm. The aim of the research was to gain insight into how senior finance executives view their investments in information technology. The effort included an online questionnaire, which was fielded by CFO Research this past January. The results reflect the views of 153 senior finance executives at large and midsize companies that are based in North America and represent a broad range of market segments, from financial services/real estate/insurance (24%) to food/beverages/consumer packaged goods (3%). (To download the full report, “Maximizing the Value of Information Technology,” go to www.cfo.com/research.)
Optimizing spending on IT is generally the responsibility of the CFO, who must consider all requests within the context of the company’s broader strategic plan. Understandably, finance officers are not interested in technology for technology’s sake; they need a compelling reason to open the organizational purse strings. Ever aware of the sluggish economy, CFOs have imposed a much tighter level of scrutiny on both capital and operational IT budgets. That translates into a bias in favor of investments that can deliver both a short payback time and a positive return on investment.
In our research, we found that CFOs recognize that there are distinctly different kinds of IT investment decisions, each of which can align with the objectives of the business. As the CFO of a midsize media/entertainment company puts it: “There are components [of IT] that are costs to be managed, and others that are tools for improving operating profit.”
An Imbalance of Payments
When it comes to making IT investments, finance executives find themselves confronted with the challenge of balancing two distinct brands of IT spending: “keep-it-running” IT services and “improve-the-business” IT projects. The former refers to information-technology services that support and maintain the company’s existing systems; the latter consists of discretionary IT projects that seek to improve or add to the systems that are already in use in the business. Over the past two years, say a plurality of survey respondents, about 70% of their firms’ IT spending has fallen in the keep-it-running category (see Figure 1).
On the face of it, that finding can’t be considered a positive or negative phenomenon. But of the respondents who estimate a 70%–30% split between the two kinds of technology purchases, 63% say that their companies’ spending is weighted too heavily toward keep-it-running IT and that more resources should be spent on improve-the-business IT projects. Among all respondents, the view that keep-it-running technology is eating up more than its share of resources is much more widely believed than other alternatives (see Figure 2).
The reason executives tend to cut discretionary improve-the-business spending is, well, because they can. Such spending is, in the words of one CFO, “easiest to cut, but not necessarily wisest.” Adds the director of finance at a large financial-services firm: “We find it harder to cut keep-it-running projects because [those projects] are deemed essential.”
Choosing Better Decision-Making Processes
While survey respondents may legitimately differ in their opinions of the IT spending choices their companies make, a plurality of them find fault with the decision-making process that leads them to those options. Nearly half of respondents agree that in the past three years, their companies failed to fund a worthwhile improve-the-business IT project (see Figure 3). The reason: those responsible for making the business case for such projects failed to create one that was both convincing and compelling. Among our respondents, one vice president of finance says that decision making is deteriorating because the “basic foundational structure of IT is inadequate to take the company forward, but no one can build the business case to tackle it.”
Even a well-formulated business case for IT investment can be derailed by internal politics. “Pet projects tend to dominate other valuable, but less sexy, initiatives,” says one vice president of finance.
But until the right technology comes along — one that can replace humans in decision making, that is — the best fix may be to invite more employees into the process, survey respondents suggest. For instance, finance executives envision a more active role for sponsors from business or functional units in assessing the costs and benefits of improve-the-business IT projects.
Finance teams could also do more to improve the process, say respondents, including facilitating dialogue between IT and operations.
More and better collaboration is likely to accelerate the decision-making process, produce gains in productivity (as more employees apply and develop expertise), and spark growth in areas like increasing innovation and entering new markets. That’s the kind of ROI — tough to quantify but visible — that any finance executive would be eager to brag about.