The CIO and CFO Conversation
In earlier blog posts I’ve talked about the CIO-CFO relationship, how it’s changing, and how it needs to change. In this post I’ll begin delving into what sorts of conversations should really be taking place between CFOs and CIOs and how the CIO can better frame these discussions.
Must-Spending: The Historical Focus
Beginning in, oh, say the 1960s, businesses found that they had to start spending money on information technologies as a cost of doing business. It was a new kind of administrative overhead, an extra cost that had to be borne—like a very expensive equivalent to staplers, paper clips, heating, telephone service, and maybe office real estate. The logical thing to do with such an expense is to predict it, bound it, and try to reduce it. Essentially, you’d want to do the minimal IT possible while still remaining a viable business. Given this goal, comparing IT spending as a percentage of revenue to industry benchmarks was a rational approach. So was outsourcing much of IT if it seemed to lower costs while providing adequate service.
It was also a “given” that the CFO and others outside of IT would not understand the technical details of what the money was being spent on. So the CIO was asked to propose IT spending on technical gadgets and then translate it into “business” language, justifying spend via ROI-based business cases with concrete, predictable returns. Or the CIO was asked to prepare a plan and budget for the technical part of a business initiative. The CFO was a “check” on this spending, reviewing business cases and offering an IT budget for the CIO to manage to.
In other words, the CIO-CFO conversation was oriented around CFO gatekeeping of spending that the CIO “wanted” for reasons that others could only vaguely understand; planning and execution according to plan; and translation of technology spend into “business terms”—in other words, a translation into the terms and decision frameworks used by other parts of the business.
Things Have Changed…in a Big Way
It’s not just technologies that have changed: it’s also the role that information and digital technologies play in an enterprise. Where before technology was a viewed as a supporting function—that fixed, overhead, administrative cost I mentioned—it’s now core to what a company does. It’s central to the company’s revenue generation and cost structure, its competitive strategy and its risk posture, its controls and its human resources activities.
As a consequence, we no longer just want to minimize technology costs. Instead, we want to spend on technology to accomplish business results. Technology is one tool we use to implement our business and competitive strategies. The question is no longer how low we can keep technology costs, but where we can apply technology to increase profits, whether by reducing costs or increasing revenues. If incremental technology spend brings a return that’s higher than the cost of capital, we want to spend it enthusiastically (but cost-effectively, of course), subject to the limitations of cash and other resources (people, for example) we have available.
Another important change is that if we ever were able to accurately predict our technology spending and the returns from it, we’ve lost that ability in the speed, uncertainty, and complexity of our digital environments. Sure, you can (and often should) project an ROI on a technology investment, but the precision of your estimates is awful (if you’re being honest with yourself, that is). And the investments we make in technology today might be for building organizational capabilities rather than features; we invest in improving our agility and resilience so that we can deal with future needs, whatever they are. The business case is more about developing off-balance sheet assets and real options.
The idea that the CFO and others can’t or shouldn’t understand the technology is also outdated, and with it the idea that CIOs must translate technology needs into the “language of the business.” The language of the business, today, is increasingly technology-talk. Let’s give some credit to the intelligence of non-IT folks, who can understand anything we CIOs explain well, and call on them to be accountable for doing so. I don’t mean the technical minutia, but the important concepts of technology strategy.
Finally, we must acknowledge that technology risk is an important part of business risk, and, conversely, that technology plays an important part in managing other risks of the business. This is most obvious when it comes to cybersecurity risk, but there are other risks as well that we rarely talk about. There’s resilience—the company’s ability to respond to disruptions like the COVID-19 pandemic. There are also risks posed by IT systems’ inner architecture: Is it obsolescent? Will it hold the company back from accomplishing what it needs to in the near future?
The CFO-CIO Conversation Must Change Too
The “check and balance” conversation where the CFO’s role is to serve as a control on technology spending should no longer be the focus of the CIO-CFO relationship. Both parties are accountable for making the right IT investments to support the company’s objectives, and for helping to define those objectives.
The CIO and CFO should start their planning from the company’s highest-order strategic objectives, and map those to investments IT can support. Is growth a critical priority? Then what IT spending will support that growth? Perhaps your business wants to develop a competitive advantage through superior customer service. Well, then, how does technology help? Do you want to reduce costs by better targeting customers with the right offerings? Fine, how should IT help to leverage the company’s data to do just that? This makes more sense than having the CIO come to the CFO with contextless requests for geeky spending.
For each IT initiative, what’s the best way to define success and to measure it? This is often a big issue for the enterprises I work with. I see them moving to the cloud to speed up their time to market but then judging their success by how many of their servers they’ve moved or how much their cost of infrastructure has changed. Or CFOs will tell me, “I understand that our goal is to gain agility. But how will I measure that and how will I know if we’re being successful?” The CFO and CIO must proceed with a shared definition of success.
IT costs must be considered holistically and in relation to non-IT cost categories. An incremental dollar spent in IT might cause more than a dollar of improvement in revenues or other cost categories. As the budget year progresses, an incremental dollar spent over the original plan in IT might reduce spending in another area, essentially transferring that dollar from one budget category to another without increasing total spending. The CIO-CFO conversation can’t be limited to IT costs and metrics, but must include the impact on the company as a whole.
The CIO must make the CFO aware of the state of the company’s technology systems and its potential impact. If there are risks, the CFO needs to know and probably needs to communicate them to other stakeholders. And the technology’s impact on future financial returns is critical for the CFO’s financial planning. So, what are the security and resilience risks and where is the technology obsolescent? What technical debt will prevent the company from moving quickly in the future? What skills is the IT staff lacking that it will need soon? Together, the CFO and CIO must make a plan for addressing these risks and constraints.
In the past, the CIO has borne the burden of advocating for improvements to existing systems (particularly the often-discussed reduction of “technical debt”). But this is not just a CIO responsibility. So-called technical debt will reduce future revenues, increase future costs, and add risks. The CFO needs to know about it and be part of decisions to reduce it.
As I said earlier, many of the company’s IT investments must be directed at building organizational capabilities. Agility is an asset: it pays off as the company is later able to respond to change more quickly, more cheaply, and at lower risk. Often, ROI-based business cases can’t capture these benefits; as a result, businesses underinvest in them. The CFO must work with the CIO to find ways to justify investing in this asset, making good investment decisions despite the lack of a typical business case.
Finally, the CIO and CFO must find ways to limit the risk of technology investments. In the digital world, this is often best done through staged, incremental investments with constant monitoring of results. The two should work together to identify the smallest incremental IT investment in working toward a goal, and how its success will be determined, before committing more spending to it. Working together, they can find ways to retain agility throughout the budget year to alter plans as the company’s changing needs require.
Having the Right Conversation
The CIO and CFO are colleagues in trying to advance the company’s objectives, not adversaries in a relationship where the CIO dreams up ideas and the CFO shuts them down. Because they must make judgment decisions about where to invest for uncertain returns, they must share an understanding of the technology baseline and its influence on the company’s future. That is to say that the CIO’s priority is to give the CFO a complete understanding of IT’s cost structure and dynamics, readiness for future change, agility, and risk posture. How do IT’s costs affect other company costs? What drives the level of spending in IT areas? What will scale with revenue growth and what will not? What limits IT? What are IT’s directions and how will they affect costs and revenues?
Ultimately, the CFO and CIO should share a vision of how technology is going to contribute to the company’s success and how to direct the right resources to it. So let’s change the conversation to focus on that.
The CFO and CIO: Partners in Success, Mark Schwartz
Decisions at the Margins, Mark Schwartz