Print this article | Return to Article | Return to CFO.com
News, trends, and research that drive IT strategy.
CFO Staff, CFO IT
September 15, 2003
Despite survey after survey suggesting that the Sarbanes-Oxley Act of 2002 will not touch off an IT spending spree, software and hardware companies continue to insist that technology is a big part of the answer. So, too, does the consulting community.
A report from Forrester Research (dubbed the "CFO Playbook") urges CFOs to educate CIOs on the requirements of the law so that CIOs can build proper systems of internal control, workflow, analytics, and more. Echoing a theme that is likely to be sounded more often now that the deadline for complying with certain Sarbanes-Oxley requirements has been extended, Forrester's Jennifer Chew says that CFOs should view the legislation as a catalyst for financial change and an opportunity to improve shareholder value. But she admits that the extended deadline may pose its own issues.
"Initially companies didn't consider IT solutions, because time was so short," she says. "Now that they have more time, they may decide to invest down the road, not now."
If they did invest in IT, such as an "electronic controls library," she says, companies could rise above the static (and often ignored) paper-based controls processes—the so-called tidy binder—and take advantage of the Internet to connect people and information. For example, instead of booking sales directly into the general-ledger application, workflow software could post certain types of revenue into deferred accounts pending approval for high-risk line items that often get companies into revenue-recognition trouble. An electronic controls library could also act as a repository for rules governing T&E expenses or procurement, automatically rejecting requests or transactions that don't satisfy those rules. The library could be augmented with analytics software that could predict credit risk, search unstructured data for hints of material events, and otherwise sound alerts before the month-end close turns up problems.
While apparently not eager to fund such projects at the moment, CFOs do seem the likely candidates to offer some coaching across the enterprise. At 55 percent of the companies we surveyed, the CFO is the person deemed to be at the helm (with the controller or assistant controller assuming that role at another 32 percent of respondents). But whether finance tells the IT department to go long on technology or make an end run in the name of fiscal restraint is an open question.
Offshoring Goes On and On
A recent study of IT outsourcing found that 42 percent of all engagements have an "offshoring" component, meaning that work is done in other countries where labor is generally cheaper. The study, a joint effort by IT research firm IDC and TPI, a sourcing advisory services firm, determined that even if global economic conditions improve, offshoring will continue to grow. As it does so, it will drive down prices for IT services.
That fact is not lost on the Information Technology Association of America, an IT lobbying group that urged its members in August to avoid protectionist steps and instead increase training and "constant retooling" of U.S. workers so that the States can maintain its leading role in global IT expertise. The group wants to see some foreign markets it deems restricted opened up to American IT products and services.
IDC found that declining prices for IT services, while affected by the general economic slowdown and competitive pressures, will continue even if and when those factors abate. It cites two reasons: smaller companies, which currently tend to keep IT operations stateside, will begin to explore offshoring options, and major offshore service providers such as Indian giants Infosys, Wipro, and TCS will expand their offerings and introduce new programs that make it easier for customers to balance "onshore" and offshore IT functions. IDC goes so far as to say that pricing for IT services is "for-ever changed" as a result.
A Public Servant Goes Private
ark Forman, we hardly knew ye. Hired as associate director for IT and electronic government at the Office of Management and Budget in June 2001, Forman was, essentially, the federal government's CIO, with control of a $50 billion-plus IT budget and a mission to boost government productivity and efficiency. He made progress, but resigned last month to take a job in the private sector. Two of his deputies also gave notice, most likely prompted by President Bush's suggestion that any officials who don't plan to serve in a second Bush Administration leave sooner rather than later, lest high-profile departures sully the impending election season.
Forman had made it a priority to bring private-sector thinking to government IT spending, insisting that agencies make a business case, or something like it, for new projects. Forman told CFO IT's Norm Alster in June that he believes the private sector could ultimately learn a thing or two from the federal government's new approach to IT management.
As one example, he said that by combining gap analysis (as a means to identify and develop projects) and milestone-based project management, the government brought new rigor (financial and otherwise) to computer security. According to Forman, the combination of techniques would work for a wide range of IT efforts. More prosaically, he pushed for more information-sharing among agencies to reduce duplication of effort: as a new hire, he had to fill out "15 or 16 forms, most of them nearly identical."
Chief technology officer Norman Lorentz was expected to move up into Forman's spot, at least for now. Some officials said he would make a fine replacement, but others were pushing for someone with more private-sector experience, the better to keep shaking things up.
he fact that companies are spending less on IT these days has touched off a growth industry in shopping advice. PricewaterhouseCoopers, for one, has established a new IT Business Risk Manage-ment service that aims to help companies determine whether IT resources and capabilities are aligned with current and future business goals.
As part of its analysis, PwC employs its Total Spend Analysis software to measure IT spending against company goals, peers, and best practices. By optimizing current IT investments rather than embarking on new initiatives, and by making CIOs more accountable for matching IT decisions to business needs, risk can be mitigated, says PwC.
If that doesn't work, companies might consider turning to Evident Software, formerly Apogee Networks, which has "refocused" itself from a limited specialization in usage-based chargeback of network bandwidth to become a more broadly applicable analyzer of all IT spending. The company's software is designed to help customers understand what it costs to actually deliver IT services to each user, versus offering a top-down analysis of IT budgets.
Meanwhile, McKinsey & Co. says that the current buyer's market can be made to last even when the economy picks up if IT buyers get a better handle on spending patterns and continue to (re)negotiate better deals rather than treat them as one-time opportunities. The management consulting firm says a 10-to-20 percent reduction in a half-dozen categories is well within reach and can be achieved within two to six months. Among the areas most responsive to hard-bargaining customers: IT consulting.
Phase Up to Reality
Most companies want their IT departments to add more value and run more efficiently, and many acknowledge that "IT portfolio management" is a valuable way to achieve those goals, yet few are actively implementing ITPM. In an effort to understand this disconnect, Northwestern University's Kellogg School of Management, in conjunction with consulting firm DiamondCluster International and the Society for Information Management, surveyed 130 senior IT executives. They found that while 89 percent were aware of ITPM and 65 percent believed it could yield "significant tangible and intangible benefits," only 25 percent currently address most of the 15 criteria deemed essential to ITPM. The survey found that successful adoption hinges on a phased approach, rather than a big bang, with three stages: define key components of the portfolio; manage/measure current performance against projections and historical baselines; and optimize by, among other factors, tracking earned value through the life cycle of a project or purchase. Support from CFOs and CEOs is essential and, ideally, shared with IT from start to finish, although the study's authors say that the initial burden of proof for ITPM will likely fall squarely on IT.
What's In Store For Data
E-commerce may no longer be synonymous with dizzying initial public offerings, but it lurches ahead nonetheless. While far from sexy, the issue of data synchronization is the subject of much discussion these days between supply-chain partners, and particularly between consumer-product manufacturers and retailers.
Data synchronization is a method of describing all attributes of a product--from its ingredients to its price to the pallet number on which it's shipped--in a standard way so that all parties in a supply chain share a common understanding of that product; as one benefit, changes or updates can then ripple through the entire supply chain. Some big retailers, such as Wal-Mart, are mandating that all suppliers be members of UCCnet, an industry group that sets such data standards, soon--by January, in Wal-Mart's case--which has lit a fire under many companies.
Developing a platform to get data in synch can be expensive, although hosted services have become available that address the chore for a monthly fee. According to IBM, product manufacturers currently face the biggest challenge, because retailers typically want more data per item than manufacturers now classify or track.
The company also says that while the benefits of embracing data synchronization are not immediate, they will be realized eventually because data synchronization will pave the way for new types of supply-chain initiatives.
AMR Research estimates that unless data synchronization is made a priority, B2B connectivity efforts will waste $2.1 billion over the next five years. A study by the Automotive Aftermarket Industry Association confirmed other research that found that synchronized data could save manufacturers an amount equal to 1 percent of sales and save distributors .75 percent of sales.
Harnessing Bright Ideas
Citing a Brookings Institute study that found an enormous shift in a typical company's value from tangible to intangible assets (from 20 percent in 1978 to 70 percent by 1998), Deloitte & Touche is stressing the very tangible benefits of intellectual asset management (IAM) programs. The value, D&T says, is twofold: saving money and maximizing revenue.
Patents, copyrights, and trademarks present a substantial and often overlooked number of licensing possibilities--IBM earns $1.4 billion a year from such intellectual assets. Worldwide patent licensing was a $100 billion business in 1998 and is expected to grow to $500 billion by 2005. At the same time, maintaining such assets is costly (legal fees, anyone?) and often difficult to track.
Intellectual assets can extend to trade secrets, internally developed processes and procedures, the "human capital" of a skilled workforce, and more. Software abounds for addressing various aspects of IAM (see www.ipmenu.com for a list of vendors), but bear in mind that this is an emerging area rife with bankruptcies and acquisitions as (mostly new) technology companies struggle to find the right mix of products and services. D&T says that as a first step, companies can use any database system to capture information about the intellectual assets they own or hold the rights to. Teamwork and systematic thinking about intellectual assets count most.