The CFO and CIO: Partners in Success

The roles of the CFO and CIO have been subtly changing. In many enterprises, these roles had veered away from the strategic focus that one would expect from CXOs. But to succeed in the digital world, as I discuss in my book War & Peace & IT, enterprises must let their CIOs and CFOs re-establish a focus on strategy, empowering them to move away from operational concerns—cutting costs and closing the books, or delivering IT services and completing projects on time—to driving competitive strategy and innovation. And, importantly, the CFO and CIO can and should empower each other in accomplishing this transformation.

According to a McKinsey study, two-thirds of CFOs think they should spend less time on traditional finance activities and more on strategic leadership.[1] According to BCG, about 30% of the finance department’s effort is invested just in the mechanics of assembling data and resolving inconsistencies.[2] Finance has largely had its attention on control—reducing spending, in particular by saying “no” to proposed budget items and investments, and establishing systems to keep the company compliant and ensure good audit reports. That is, when it hasn’t been focused on the operational considerations of closing the books every month. Although finance has been concerned with data, this has amounted largely to reporting on past performance.

A truly strategic CFO role is about making the right investments to drive company growth and profitability, not simply reducing costs; actively managing the company’s risk posture and making risk-based decisions to increase competitive advantage; and using data to drive the company’s operational performance rather than merely reporting on it after the fact.

And the CIO? The CIO’s role came to be oriented around providing “customer” service to the company’s own employees and delivering projects based on “business needs” handed over by something called “the business.” This arms-length, contractor-like, business-IT relationship precludes IT from fully participating in direction-setting. It jerks IT in different directions, making it hard for IT to maintain a consistent technology strategy. Ironically, this is happening at the same time that company strategy has moved largely into the digital world, where IT should be expert.

A strategic CIO role, in contrast, would focus on guiding the enterprise through the digital world; formulating company strategy based on a deep understanding of digital technology and its possibilities; and driving innovation.

But in order for the CFO and CIO roles to become more strategic, they need to empower one another. The CFO cannot accomplish his or her objectives without the CIO’s active participation, and vice-versa. In the digital world, competitive advantage is created by the CFO. It is created by the CIO. And most of all, it is created by the synergy of the two working together.

Let me give a few examples.

Data

The two roles obviously intersect when it comes to data. The CFO is the steward of the organization’s performance and operational data, the executive who oversees its analysis and presentation to the board and to the other CXOs, and who helps the company use data to drive business outcomes. The CIO’s role—as implied in the title Chief Information Officer—includes the identification, collection, storage, and extraction of value from the company’s data. The CFO and the CIO can work together to maximize the data’s value for driving performance.

A critical CFO need is transparency across organizational silos. The CIO generally has visibility into the data held in all those silos and is able to integrate it across line of business boundaries. The IT organization has always had the advantage of working across all of the organizational units; often IT knows, better than anyone else, how the company really works.

Sometimes, the CFO and CIO can “work backwards” from intended outcomes to the collection and management of the data. Together, they can better understand what the company needs to do with its data, and based on that, decide what to collect, how to collect it, and how to make it available for analysis. At least, that can work in cases where the desired outcome is known in advance. But increasingly we need to build flexibility into how we analyze data, in concert with the agility and nimbleness we demand in general. The CIO, fortunately, also has tools that give the CFO flexibility—or in other words, tools that lower the cost of curiosity.

Investment

Today’s IT approaches are based on the assumption that we are in an environment of uncertainty, complexity, and rapid change. Uncertainty results from changes in technology, in consumer behavior, in the regulatory and statutory environment, in geopolitics, and in the rise of industry-disrupting startups. In such an environment, the company needs the flexibility to respond to change; such flexibility has actual business value. Because of this uncertainty, business plans, typically based on projections, have less validity, and commitments to large, extended IT projects are risky. In other words, the basis for making investment decisions must change when we acknowledge uncertainty.

The CFO and CIO can work together to find ways to invest nimbly and to take advantage of the faster pace of IT execution to manage risks in IT investments. Instead of committing up front to large, drawn-out, risky initiatives, the company can stage its investments, reviewing progress frequently and adjusting as necessary. It can invest in experiments to buy down risk, get products to market quickly to get market feedback, and use this feedback to refine the products or pivot and pursue other opportunities instead. What enterprises can no longer do is spend years assembling and vetting business cases that are unlikely to have enough precision to guide their investment decisions, allowing precious opportunities to pass by while the enterprise is mired in over-planning and over-documentation.

The CFO and CIO can work together to make sure that company resources are channeled into the right investments. Such expertise at making investment decisions under uncertainty and mitigating their risk is a source of competitive advantage.

Profitability

The cloud and today’s IT delivery practices have turned many costs that were previously fixed or step costs into variable costs. In the cloud, infrastructure can scale up to meet demand or scale down when demand is lower. Most cloud services are offered pay-per-use. That means that their costs may go up over time (if the company is successful!) because they rise in concert with revenue; that is, they become a variable cost that is factored into gross margins. They can therefore be managed to ensure that revenue growth is also profitable growth.

The CIO and CFO working together can ensure transparency into costs and can set guardrails and controls that manage those costs to maximize profitability. Instead of pure cost reduction, the CIO and CFO together can look to minimize costs per unit of revenue, thereby allowing for growth while still managing the bottom line.

It has also become impossible to look at IT spending in isolation, because each marginal dollar of IT spending might cause a marginal revenue increase or cost reduction in another unit of the business. The CFO and CIO together are in a position to make wise budgeting and investment decisions that consider the business holistically, and spend where it increases the value of the enterprise.

Today’s IT approaches are based on the ideas of Lean manufacturing. They speed up time to delivery by eliminating waste. Eliminating waste also reduces costs. But the ripest area for removing waste is not actually in the technology, but in the business processes that are used to manage technology projects. Typically, this involves writing requirements documents, getting approval for them, negotiating with IT on schedule and deliverables, reporting on status, and other areas that can dramatically be reduced by better integrating IT into the rest of the business. This is a frequent topic in my books.[3]By working together, the CFO and CIO can identify ways to reduce waste both within and without IT.

Risk

In the digital world, risk is managed by working quickly and incrementally, and then adjusting course when necessary. The CIO can provide the approaches that will let the company do so. They involve quickly building and releasing minimal viable products and then adding to them incrementally. At any point, investments can be discontinued if returns are not forthcoming.

The CIO obviously plays an important role in controlling security risk, which is increasingly a concern of the CFO. Working together, they can make appropriate risk-based trade-offs, and the CFO can then communicate the appropriate security story to the board to assuage their fears. Many of the company’s other risks can also be managed by putting in place automated guardrails that enforce policy. With the cloud and automated testing, the company can not only avoid accidentally introducing security vulnerabilities, but can also document their control and compliance in an automated way.

The synchronized activity of the CFO and CIO can also address the enterprise’s largest risk: namely, disruption—the competitive pressures that can affect the very sustainability of the company. They do this by maintaining nimbleness and directing investment to the places needed for the company to be able to compete.

Innovation

Most companies have an imperative to grow, often coming from the capital markets, where valuations are highest for companies with a growth story. But the only way to grow is through innovation, whether it is small innovations at the margins of the company’s business or large innovations that take it into new markets. How can the CFO provide a growth story to shareholders? What can a CFO do to encourage innovation?

In the digital world, the CFO can do so by allowing new ideas to be tested. Innovations rarely have a compelling, demonstrable business case; small advances to the company’s core business often appear to be better candidates for investment. The CIO can help reduce the cost and risk of trying out new ideas to get data to support their business cases. The CFO can make sure that it is possible to invest in innovative ideas to drive the company forward.

The CIO, of course, is in a good position to drive innovation based on digital technology. The two, working in partnership, can identify disruptors and opportunities, and work together to drive innovation to address them.

Goal Clarity

A final area that I will mention is clarity of goals. Today’s IT initiatives should be oriented around accomplishing business outcomes rather than around implementing requirements documents. Success should be measured against those outcomes rather than adhering to schedule milestones per se(schedule milestones are adhered to simply because today’s IT works in short increments, often deploying results every day). But these business objectives must be well-defined and consistent with company strategy. The CIO and CFO can work together to define these outcomes, work backwards from them to specific actions, and oversee them by checking against desired outcomes and adjusting.

The digital world provides an opportunity for CFOs and CIOs to work together to define and accomplish the organization’s desired outcomes. It is the combination of identifying the right IT initiatives, financing them, and guiding them that produces the best business outcomes. And it is the data collected and analyzed that drive company performance. By working together, the CFO and CIO advance each other’s agendas and empower each other to play the role they were always meant to play in the enterprise.

–Mark

@schwartz_cio
A Seat at the Table: IT Leadership in the Age of Agility
The Art of Business Value
War and Peace and IT: Business Leadership, Technology, and Success in the Digital Age

[1] Ankur Agrawal, Brian Dinneen, and Ishaan Seth, “Are Today’s CFOs Ready for Tomorrow’s Demands on Finance?” McKinsey.com, December 2016, https://www. mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/ are-todays-cfos-ready-for-tomorrows-demands-on-finance.

[2] Julien Ghesquieres, Jeff Kotzen, Tim Nolan, Marc Rodt, Alexander Roos, and James Tucker, “The Art of Performance Management” (Boston, MA: Boston Consulting Group, 2017), https://www.bcg.com/en-us/publications/2017/finance -function-excellence-corporate-development-art-performance-management.aspx.

[3] A Seat at the Table and War & Peace & IT both include discussions of how the business-IT arms-length contractor-like relationship leads to wasteful activity.