Call to overhaul accounting rules for valuing IT

Russell Altendorff, a director of the information systems division at the London Business School and a qualified chartered accountant, said that financial directors have too much power to cap IT budgets, and IT directors are in a poor position to justify spending because they are unable to put forward sound arguments based on best accounting practices.

‘Rather than evaluate projects on a return-on-investment basis, firmsshould evaluate them on a marginal cost basis,’ he said, adding thatcost is often calculated as a percentage of existing resources, leadingto artificially inflated figures.

Healthy IT investment will only occur if traditional accounting methodsor total cost accounting are abandoned for more flexible procedures, hesaid. Altendorff underlined that a traditional cost and profit centrementality places too great an emphasis on ROI.

‘If you are working on a portal project, the traditional accountingmethod will calculate costs on a share of the database being used, ashare of the server and a share of the staff overseeing the Web hosting,but this is unrealistic,’ he said. ‘The actual additional costs are onlythose related to new coding.’

Altendorff argued that many projects would give companies hugeadvantages if they were approved, but they are often turned down becauseof the link to ROI.

‘Not all projects have a profit or a revenue stream,’he said. ‘Forexample, there is always a need to spend on infrastructure.’To succeed, IT directors need better skills in organisational behaviourand a firmer grasp on accounting practices, said Altendorff. ‘ITdirectors should refer to opportunity costs or how much more it willcost the company to come up to speed at a later date,’ he said.Altendorff said the problem was exacerbated by poor managementstructures. ‘Quite often the IT director reports to the finance directorand this is a disaster for a company,’ he said. ‘Such a set-up dictatesthe way that IT investment is made because there is only a financialfocus on ROI, which takes no account of benefits such as competitive orstrategic advantage.’Altendorff said firms could improve matters by dividing the ITdirector’s role between a chief information officer – who offers astrategic view, sits on the board and reports to the chief operatingofficer – and chief technology officer, who is focused on thetechnology.