Strategy

Finance 101: How IT leaders can achieve greater business outcomes

By Colin Rowland, Apptio
Strategy
Published: 3 April 2018

Technology is transforming the way we do business. Practically every company is adopting emerging technologies such as cloud, Agile, continuous delivery or IoT. Modern technology provides organisations with the ability to quickly meet customer and market needs, but it also adds additional complexity to an already involved IT ecosystem. CIOs are well poised to understand and manage this rapidly evolving landscape, and many are raising their profile with the business and having more interactions with their CEO as a result.

However, this complexity doesn’t just apply to managing the technology itself, but also the associated costs. Finance departments shouldn’t be expected to sift through hundreds of thousands of lines of cloud bills from multiple vendors to get a clear picture of cloud costs, or to match vendor contracts against service usage. This burden generally falls to CIOs and IT departments, and with Gartner predicting that global IT spending will climb to $3.7 trillion in 2018 – a faster increase than both 2017 and 2019 – it’s now more important than ever for IT to grow its financial acumen.

Having full oversight of all IT spend is essential – not only for cost optimisation but also for funding growth and innovation initiatives. Many CIOs are turning to Technology Business Management (TBM), the practice of running IT as a business, to improve their ability to communicate the value of IT to the rest of the business.

These are some of the financial concepts which CIOs and IT executives can map onto their technology systems through TBM to improve IT spend:

1. Embrace the ‘Matching Principle’
The Matching Principle is well understood by finance, but doesn’t always translate into the IT organisation. The idea is simple and is all about tying the cost of a service or product to the time at which you experience the benefit from that service or product.

In the world of modern IT where many costs can be billed near-instantly, it can be tempting to put off accounting until the invoice arrives. But this poses a problem as it makes it hard to assess the true cost and value of IT. You may see a bump in productivity in one quarter without the associated cost, giving a fundamentally flawed picture of how IT finance is working.

CIOs and IT departments who are embracing the Matching Principle are able to understand the true value of IT, meaning projects are more likely to stay on budget and future investments can be made more rapidly.

2. Get a handle on CapEx and OpEx
Capital Expenditure (CapEx) and Operating Expenses (OpEx) are well understood financial concepts, but applying them directly to IT helps CIOs to plan more effectively for the long term. CapEx includes all spending on fixed assets, or assets with a useful life greater than a year, such as buying a printer or software licence. Meanwhile OpEx is the ongoing cost of running a business, such as charges for using cloud systems or paper for a printer.

Some businesses are naturally more asset intensive, with much of their spending falling under CapEx. Yet this still involves ongoing responsibility, as often the cost is ‘depreciated’ (spread out over the course of an asset’s lifetime) throwing up extra challenges for IT departments. It may seem better to turn off or decommission an asset that’s not in use, but that means its entire remaining cost will hit the budget at once, causing a “budget shock”. Instead, IT departments should try and look to repurpose such assets, improving the overall efficiency of IT.

Meanwhile, CIOs are having to pay more attention to OpEx as they increasingly move to cloud applications. CapEx locks companies into the depreciation schedule and reduces the overall agility of IT, while cloud necessitates moving spend into OpEx. Shifting this spend can allow IT departments more flexibility with their budget, helping with digital transformation, but also means they need to have effective systems in place to forecast and monitor spend.

This flexibility is vital for CIOs and IT leaders who are managing transformation projects. For example, a new IT project could be financed by underutilised cloud services if fixed costs cannot be reduced. It’s therefore essential that CIOs have a clear view of how IT budget is allocated and how it can be redistributed. This gives them the ability to pivot quickly and experiment with new concepts as business needs change.

3. Recover costs
Costs are often spread out to various business units via allocations – either by distributing costs evenly among business units or dividing them based on head count or revenue generation. However, finance often isn’t equipped to understand complex IT costs when charging them back to other teams. For the same reason, other business units often perceive IT costs as something separated from the rest of the business. Direct IT expenses – like the cost of a new server running one application – are clearly attributable to a user. On the other hand, indirect costs – like the facility burden of a data centre – are not, as they are often shared across multiple systems.

This often leads to simplistic, arbitrary and possibly unfair spend allocations, which will frustrate business leaders and damage the relationship between IT and other departments. To recover costs and make sure all allocations are accurate, CIOs need to explain IT costs to finance and other business units. It is therefore essential that they have the tools that enable this.

Marrying these financial concepts with a strong understanding of IT is a new “business as usual” for CIOs and their IT departments, but still requires a dramatic shift in approach. The increasing financial responsibility of the CIO means that those who embrace concepts such as TBM stand to benefit significantly.