Looking after the pennies

There once was a time when businesses deferred IT investment decisions to their resident technology experts. But successive disappointments, including the millennium bug and the dotcom crash, have bred a degree of cynicism among finance executives towards IT and its supposed worth.

As a result, ultimate responsibility for assessing the financial viability of significant IT investments has in many organisations shifted to the CFO. And although that has introduced a degree of financial control, it may also have absolved IT executives of the need to be experts in financial management themselves.

This is not to say that IT leaders do not understand the importance of the financial component of IT project management. Indeed, the need for a cogent business case and a demonstrable return on investment (ROI) are ingrained in IT project managers as a matter of course.

But the budget cuts following the credit crunch called for an organisation-wide view of all IT investments and their relative contributions, and some CIOs struggled to build a complete picture.

According to Phill Everson, head of the IT effectiveness team at accounting giant Deloitte, this reflects the professional history of most IT executives.

“As IT professionals mature in their careers they receive project management training, and financial management will be a part of that,” he argues. “But when you reach a certain level of authority, you are suddenly managing operational spend as well as project spend. From that point, understanding the distinction between profit-and-loss and cash accounting really starts to matter.”

And while the urgent need to cut IT spending might have abated for many companies, the need for a holistic view of IT investments has not.

In general, IT spending will be practically flat in 2011. Of the respondents to the Effective IT Survey, 42.0% said their IT budget will stay the same in 2011, compared to 34.2% for whom it will increase and 23.8% for whom it will decrease.

Analyst company Gartner’s IT spending forecasts anticipate just a 1% increase in 2011. Given the 10% drop in 2009, IT budgets are on average 9% behind 2008 levels.

All this means that when the business demands new functionality, there will be no new budget to pay for it. Previously, the cost of new development could often be met through the regular, incremental growth of the IT budget, but now new investments must be balanced against all other ongoing expenditure.

This could mean that when a department wants to initiate a new project, it must free up budget from elsewhere. Gartner went so far as to suggest that companies appoint “project firing squads” – teams independent of
any department that can identify projects that are ripe for termination.

While they may not have gone that far, certainly many organisations took the opportunity in 2010 to audit their ongoing IT projects, if they had not already done so.

A visible example was the US government’s Office of Management and Budget (OMB), which reviewed 30 financial software upgrade projects across 20 government agencies, with a combined budget of $20 billion.

Half of those projects were over budget, it found. For two of them, the OMB decided to bring forward delivery of the most valuable functionality, which it says saved $230 million. Two other projects were cancelled outright, saving $500 million, and the scope of three others was reduced, saving $680 million.

Valuing IT

Finding out what is being spent and where is obviously an essential part of balancing IT investments, but equally important is an understanding of what IT contributes. And even after 60 years of business IT, this remains a complex question.

Advocates of IT service management, in which the IT department delivers services to the business as though it were an external provider, say that by articulating those services in business terms the model allows their true value to be understood. “Service management dovetails with finance management in that it allows you to link assets to business services,” says Michael Nieves, a senior manager at Accenture.

Among those Effective IT Survey respondents who had adopted ITIL, the popular framework of IT service management guidelines, the majority found it to be effective (53.8%) and many said it had delivered the required ROI (38.7%).

However, Jim Quick, a consultant for Diamond Advisory Services, a division of PricewaterhouseCoopers, warns against managing IT finances in a way that is too far removed from the IT assets themselves. “It’s easy to cost hardware components, but when you try to relate those back to business functions and value chains there is so much guessing involved,” he warns.

By contrast, some experts advocate an even more conceptual approach. Speaking at Information Age’s Managing IT Cost Effectively seminar in early 2010, strategy consultant Chris Potts argued that trying to figure out the contribution of IT investments is a meaningless pursuit.

“The reason why we cannot figure out the value we’re getting from our IT spending is the very simple fact that IT on its own delivers no value,” he said.

Instead, Potts says, CIOs need to measure the change that IT projects support and the value that this change creates. “Focusing on how much you are investing in change to create value, in which IT plays some part, moves the conversation on from IT cost figures, which are meaningless, to something that has meaning.”

In due course, Potts believes, CIOs must become the “executive with responsibility for managing investments in change”.

The available approaches to IT financial management, it seems, range from the prosaic to the philosophical, and this variation might prove frustrating for the IT executive who simply wants a way to get their finances under control.
But while IT financial management may be a maddeningly broad church, CIOs nevertheless have little option but to get to grips with it.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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