Managing IT Is a Conflict of Interest for CFOs

A business usually cannot expect to have both a great return on investment for IT and cut costs at the same time.
Andreas LudwigFebruary 19, 2013

The number of information technology leaders reporting to the CFO has increased, rising from 42% in 2011 to 45% in 2012, according to a Gartner study. That compares with 31% who report to the chief executive officer and 9% who report to the chief operating officer. Despite the trend for more and more IT executives to report to finance chiefs, it has begun to make less and less sense for them to do so.

At the time when this currently preferred reporting relationship was first established, the complexity, penetration, number of systems, and applications were far less than is standard and common today. Depending on the industry, IT has evolved into a deeply penetrating and complex business discipline capturing and running a much denser grid of data and associated controls.  Some industries, such as insurance and banking, are heavily reliant on IT from a transactional perspective.

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In the early days of IT, in fact, a lot of the money spent on IT derived from finance-related projects and needs. But that is no longer true.

IT has become too big and too important to fall under the responsibility of CFOs, who have big and important responsibilities all their own. But more than that, it’s a conflict of interest for CFOs to manage IT.

The CFO has the goal to hit numbers and control spending, while IT’s goal is to act as a change agent supporting the defined business goals through smart application of technology (which, when you get down to it, means spending money). Often, CFOs must ensure that the company hits earnings before interest, taxes, depreciation, and amortization (EBITDA) numbers that are expected by the CEO. To compensate for economically influenced sales declines or overly ambitious sales and margin budgets, cuts and reductions in capital expenditures and operational expenditures are needed to realize the CEO’s expectation.

Each company has (or should have) a unique baseline dollar figure it knows it needs to spend on IT to create a return on investment. The cost associated with support of short-term, midterm, or long-term business goals laid out by the CEO is on top of this baseline dollar spending.

That creates a strong conflict of interest.  A business usually cannot expect to have both a great ROI for IT and cut costs at the same time. And it’s hard to both manage expectations and explain the performance of IT if you’re the one responsible for it. What CFO would want to put himself in that situation?

Instead, CFOs could benefit from taking a pass on IT.

Unless a company’s change initiative or business goals fall under the umbrella of finance, CFOs most likely have no control over it. The person leading the department where the change is happening may not be motivated to change if he knows the cost for the initiative is coming out of his financial bucket and his year-end bonus could be affected.

But if the CEO manages IT, he or she could provide for a situation like that and defuse the associated risk while ensuring that the desired and needed change becomes reality. A higher degree of buy-in, support, and transparency should result in less work for the CFO. The CFO, in most cases, benefits in some way, shape, or form from most change initiatives and, therefore, realizes on a benefit without having to manage or drive it.

By shifting the management of IT to the CEO, or even the COO, CFOs avoid the conflict of interest when it comes to the spending (or controlling the spending) of money. That in turn enables IT to develop its full potential as a change agent, not a mere necessity.

Andreas Ludwig is vice president, business systems, at AMG Advanced Metallurgical Group NV and a strategic adviser to the CEO at the Welcoming Center for New Pennsylvanians. 

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