Besides the promise of falling leaves, autumn inevitably provides finance chiefs with piles of requests to add project costs to their corporate budgets. Hence September is a good time to put together a game plan for assessing which projects to partly or fully fund, table, or jettison.
For many companies, the most requests for added spending tend to pour in from the information technology department. While the applications for IT budget approval should continue to flow this year, the emphasis may be a bit different, notes Rob Prinzo, chief executive of The Prinzo Group, an Alpharetta, Georgia-based performance-management consultancy.
For one thing, demand for product upgrades has been building in many IT departments as wary companies restrain their capital spending. “Most organizations, in their core software for such things as accounting, finance, manufacturing, and sales, are running two versions behind the current one,” says Prinzo.
Because they’ve fallen so far behind, however, the pitches from chief technology officers to CFOs will involve more than upgrades, he says. Following the software market itself, CTOs are likely to pitch more-integrated approaches, favoring software-as-a-service (SaaS) and other cloud-based structures over traditional, on-premises products.
In July, in fact, Gartner Inc. issued a forecast projecting that worldwide SaaS revenue would reach $12.1 billion in 2011, a 20.7% rise from 2010 revenue of $10 billion. SaaS will enjoy healthy growth through 2015, when worldwide revenue is projected to reach $21.3 billion, according to the research firm. (Gartner defines SaaS as software owned, delivered, and managed from remote locations by one or more providers.)
While such plans promise to cut costs — a very desirable thing — they also may require unexpected changes across a wide swath of corporate processes and systems. Because of this, says Prinzo, CFOs need to be able to assess the “dependencies” of these systems and components — what has to be done to one system to keep another system functioning.
Corporate technology managers, however, “often think of these things as an upgrade solely in the technology process, when it’s really a business-improvement project,” adds the management consultant.
But if CFOs dig a bit more into the details of the budget, “what they find out is that you’re not only upgrading the technology. In addition, you’ll have to integrate departments, change business processes, fulfill new system requirements,” points out Prinzo. “There may be changes in people’s jobs or a potential need to lay off people.” Retraining may also be required.
With so much potentially at stake, finance chiefs need to be ready for whatever CTOs throw at them when fall budgeting gets rolling, according to Prinzo. Here are four steps for CFOs to follow to be prepared.
1. Assemble a detailed list of all proposed projects. Make sure the list has a complete breakdown of all project costs, including future ones. Avoid situations in which tech people realize that some needed system requirements are missing after the project has been launched and then have to ask for more money from finance.
2. Categorize the projects. List them by size, function, and expected returns. Are they part of existing operations? What level of effort is needed to implement them? What are the resources required and what’s the organizational impact?
3. Gauge the dependency of projects on each other. Can you, for instance, do project A if you don’t do project B?
4. Prioritize the projects. These days, cost (or the lack of it) and cost efficiency tend to be top priorities. First determine which projects are “low-hanging fruit” — small efforts with few or no dependencies that can produce immediate results while consuming few or no resources. Next, group together “intermediate projects” — small to midsize ones that can spawn a measurable impact and have dependencies that can be fixed internally. Finally, list the large projects and new systems with potentially big dependencies that are being called for.
If a big upgrade is being proposed, finance chiefs should ask tech people if the company can be moved toward that goal by making a smaller but longer-term investment, says Prinzo.
In essence, though, CFOs need to be prepared to ask a more fundamental question, says Prinzo: “What I’ve been advocating, as September rolls around, is that the finance function needs to be pretty well-versed in talking to IT about what they’re really trying to accomplish.”