TechnologyStrategy and efficiency: the watchwords of IT investment

Strategy and efficiency: the watchwords of IT investment

As times are tight, and since the record of return on investment and added value created by large systems is not particularly good, it's not surprising that organisations are taking a more cautious view on the business benefits of IT implementation.

So step forward the finance director (FD) who, holding tight to the company purse strings, stands in the way of the chief information officer (CIO) and his pleas for more investment.

To be successful, CIOs must be able to justify the benefits of expenditure in terms of pounds and pence.

And there is a feeling that you mustn’t go to the FD with a project unless it is cheap, will cut costs, and the IT department is willing to be held accountable for delivering those savings. But there are some issues to consider when investing heavily in IT that transcend this model.

First, FDs are not all penny-pinching spreadsheet jockeys. Second, the really smart companies appreciate that not all technology generates ‘x’ dollars return on investment (ROI) in a pre-defined period.

For example, how can you put a price on making a better business decision because your data is real-time consolidated accounts rather than disparate systems?

And if a company spends less time trying to compile data, and more time analysing it and thinking about business strategy, it is difficult to articulate that payback.

While IT decision makers will always use costs and cash ROI as a first point of call, investment in technology is also about strategy and efficiency.

Likhit Wagle, a strategic consulting partner at IBM Consulting, who works with FDs in many of the FTSE-100 and Fortune 500 companies, has started to notice a sea change in the way businesses approach large IT investments.

“Businesses are still looking for tangible results and defined financial benefit,” he said. “But instead of cutting costs in bad times and driving revenues in good times, the most successful companies make doing both a core competency, all the time.”

FDs, especially those in technology companies, agree. “FDs look at cost of ownership, not just cost,” explained Stephen Gill, chief executive of HP UK and former European FD at Compaq.

And David Howell, FD of Lastminute.com, maintained that the £15m his company spends each year on IT is not just about cutting costs and improving efficiency.

“We believe it creates competitive advantage,” he said. “This is not the language of the bean counter, but of business strategists who see IT as essential in creating shareholder value.”

So the trick for CIOs is to pitch IT investment opportunities to FDs in these terms, where the business outcome of an investment is taken into account as well as any immediate financial payback.

External suppliers of IT kit have hit upon one way to appeal to FDs’ sensibilities, as Kevin Parker, chief financial officer (CFO) at PeopleSoft revealed.

“I now have conversations CFO to CFO,” he said. “Their IT guy brings a decision to the CFO for approval, and often the CFO says that he will not do anything until they have had a chat with me.”

The UK FDs of Oracle and Microsoft also claim that they spend much of their time talking to the FDs of their customers.

John Macguire, FD at telco Thus, offers some advice to CIOs approaching their internal FD with an investment proposal.

“I would expect as a given that the financials make sense,” he stated. “That means revenue improvement, cost improvement, cash flows and a sensible idea of payback. IT projects tend to be over budget, late and deliver less than is promised.

“It’s actually very easy to measure these. I don’t like simple ‘strategic’ investment proposals. That means loss-making in my book. The word ‘strategic’ is often used as an excuse for woolly thinking.”

CIOs should always give thought to cash ROI as part of an investment proposal, whether it is a cost saving, direct cash return or a knock-on effect of IT on company profitability.

If there is not a financial outcome, FDs will always question whether it is worth investing the money.

  • Tom Berry is deputy editor of Financial Director.

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