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CFOs are more likely than ever to oversee IT. How much do you need to know in order to manage it effectively?
David Rosenbaum, CFO Magazine
March 1, 2012
A recent poll on a popular LinkedIn group for finance chiefs asked: "Is it a good idea that IT reports to the CFO?" The vote, as of late January, was 67% yes, 32% no (the other 1% were presumably skiing in Gstaad). The comments were anything but subtle, ranging from concern about CFO ineptitude ("The CFO does not have a nuanced understanding of . . . the risks associated with technological failure") to expressions of CFO triumphalism ("I want IT to report to me so that I can make sure that it gets used to the maximum benefit"). And then there was the more measured "It depends on the person in charge — their expertise or lack of it." In the corporate world, however, authority generally trumps expertise.
In any case, IT is increasingly sheltering under the finance umbrella. According to a 2011 study of 344 executives (66% of whom were senior finance executives) by Gartner and the Financial Executives Research Foundation, 47% of IT departments report to the CFO in organizations with less than $50 million in revenue; in companies with $1 billion or more in revenue, the percentage is 46%. In other words, the debate is somewhat moot.
The important question, therefore, is not whether CFOs should oversee IT, but rather what they should focus on in order to provide effective leadership.
Emerging technologies are transforming both the IT function and the relationship between IT and the business. Software as a service has enabled business leaders to implement applications outside traditional IT (and finance) controls, sometimes without the knowledge of IT or the CFO. And the increasing mobility of the workforce has burdened IT with the need to support all those phones, tablets, and laptops while simultaneously reducing its control over workers' access to the corporate network, creating a plethora of security risks.
In this turbulent environment, it's hard for IT to keep up. For CFOs who are new to IT oversight, there's "no way to keep abreast of the changes," says PwC principal Phil Garland. He suggests that finance chiefs need "a trusted adviser" to help them understand how technology can "improve, change, and grow revenue." Small-business CFOs, without in-house IT expertise, may need to hire consultants, Garland says, or take a college course or two, or split the difference by talking with academics.
What CFOs May Not Understand
Unlike other business functions, IT is strongly bifurcated. It has behind-the-scenes, keep-the-lights-on responsibilities, and a front-facing, revenue-enhancing job. That first function, according to PwC principal Chris Curran, needs to be managed by focusing on service levels, cost containment, and controls. But IT's second job, its strategic mission, has to be managed with a balanced scorecard (one that's truly balanced; that is, not focused only or even primarily on financial reporting), pilots, and experiments.
"Some CFOs believe every dollar should have some sort of ROI," Curran says. "Not true. When you're experimenting, piloting a new initiative, there may be no ROI."
"CFOs need to understand that you have to keep the core running," says NetSuite CFO Ron Gill. "Sometimes the CIO will say the phone system needs upgrading. The CFO will ask, 'What will we get from the upgrade?' The CIO says, 'Phones.' Some IT spend falls into that bucket.
"CFOs are not enamored of technology for technology's sake — nor should they be," Gill continues. Instead, what they need in order to manage IT is a very clear window on processes, efficiency, and costs. As finance chiefs know, without transparency into costs, it's impossible to determine the profitability of anything.
Cost Doesn't Always Equal Value
In a world that emphasizes the differences between finance and IT, Karoline Mello, vice president of finance and technology at The College for Financial Planning, sees strong similarities. There are, she says, IT jobs that drive revenue (such as "web enhancements that attract new customers") and jobs that negatively affect the bottom line (such as systems maintenance). In accounting, there are jobs that increase net income by, say, improving accounts receivable, and essential jobs that reduce income, such as GAAP compliance.
"I deal in making money or not making money," says Mello. "I deal in what I spend, what it costs me to output every item, and what I expect to gain. In IT, I look at every request, what it costs me to produce it, and what I think the company will gain. I think IT and finance are more aligned than most CFOs or CIOs think."
Right now, Mello is overseeing the implementation of a new learning management system (or LMS, a platform for faculty-student interaction). "In education," Mello says, "expanding the technology budget is crucial to staying ahead of the competition. I'm spending almost 25% of revenue on IT; the usual has been around 5%."
Mello emphasizes that CFOs need to apply their forecasting skills to IT investment cases. "The historic rate of return is very important," she says. "Look at past projects. Say this one took 18 months longer than it was supposed to and was 30% over budget. Now when the same person comes to you with a new initiative, take that into account and don't think in terms of best-case scenarios."
In IT, Mello says, ROI is always tricky to project. "For example, I'm traveling with my iPad. I go to a website and it's Flash-enabled. Well, they've just lost me as a customer. [The iPad doesn't support Adobe Flash Player.] Now, updating your website for the iPad, you can't measure the ROI. You can't say how many customers you've lost by not updating."
Instead, Mello looks at potential gains and then prioritizes. "I have so much money I can put into capital projects. The things that get funded first are those where I'll see an immediate return, or things where replacements or upgrades are long overdue. Because I'm replacing my legacy LMS, I have projects for information security. I'll prioritize those."
And Mello believes her participation as a finance executive is critical. For example, "the information security team, left to its own devices, would render the company unprofitable [in its efforts to] eliminate all risks of breach."
Ultimately, in order to manage IT effectively, a CFO needs to know enough about IT to balance the risk of investing against the risk of not investing, and enough to balance the forms of IT that make money with those that don't but are essential.
"CFOs and CIOs are in it together," PwC's Garland says. No matter who reports to whom.
David Rosenbaum is senior editor for technology at CFO.