The CIO/CFO Partnership is Not All About Numbers
April 8, 2008
In many companies the CIO position has been elevated to executive management and he or she is now a strategic partner within the business divisions. This change reflects how important technology has become to every organization and it recognizes that managing this vital and dynamic activity now requires sophisticated executive skills.
Technology investment has led to gains in productivity, provided a competitive advantage and enabled faster global deployment of business strategies. But it has also meant that technology has taken a larger share of the firm’s expenses and as a result, controlling technology costs has become a top priority for the CIO along with the CFO.
There are usually several times a year when the CIO and CFO meet one–on–one to discuss technology expenditures.
The astute CIO will use these meetings with the CFO as an opportunity to accomplish three key goals:
- Strengthen the partnership between finance and technology.
- Learn about the key financial issues facing the firm that the CIO can use as intelligence to take back to his staff about how to manage technology initiatives.
- Gain a deeper understanding about the firm’s business priorities and then position the technology division to enable these priorities to be realized.
If you are a CIO or manage a technology function, here are some guidelines to follow the next time you meet with the CFO or his designee:
1. Business priorities vs. the CFO’s priorities.
If the business wants it and is willing to pay for it, how do you say no?
This is very common and a difficult predicament. As the CIO, you have an implicit fiduciary responsibility to ensure that the firm’s technology resources are prudently consumed. Parts of your organization may even have matrix accountability to the business divisions making it more difficult for them to say no to their project requests and often they allocate the budget needed for your activities.
When the CFO asks you to explain the major initiatives for the business, try to frame it in terms of the business strategies the expenditures are helping realize. The CFO also has a very similar fiduciary responsibility and needs to obtain his/her own understanding about the strategies of the business – not just by relying on you. That being said, suggest that an IT governance process be established to review all major projects that include IT, Finance and the business divisions. This type of collaboration will level the playing field for all stakeholders and yield a higher level of transparency over how technology resources are being consumed.
2. The ROI discussion.
Theoretically, capital is allocated to those investments that generate the highest return and add to shareholder value. Capital is a limited resource and how it is used by the firm is a major job for the CFO. The basic metric for deciding what projects to commit capital to is ROI – return on investment.
The difficulty for the CIO is that their organization is not a profit center – no revenues are usually posted to the IT division and its cash flow is usually negative. Therefore, determining ROI on major initiatives becomes a very complex process involving the business divisions and their assumptions about how revenue, expenses or some other P&L element will be impacted by an IT project.
The ROI discussion probably cannot be avoided, so it is best to do your homework and try to understand as much as you can about the business impact of each major technology project – quantified as much as possible.
You must, however, be prepared to discuss how your role in managing the technology efforts of a business initiative is helping to maximize the ROI for that project: Among the elements that you should discuss with the CFO are:
- Using smart procurement practices – taking full advantage of vendor discounts and opportunities to renegotiate service agreements, particularly when the vendor sees that a major purchase by your firm is likely to have a multi-year impact on their own bottom line.
- Exploiting the existing infrastructure as much as possible and taking advantage of your operating leverage.
- Avoiding one off technology solutions which may be more costly to support in the long run.
- Standardizing on major technology components such as hardware, operating and database systems and software development.
- Considering outsourcing low value services.
3. Presenting the operating budget.
This is every manager’s responsibility and usually an opportune time to show the CFO how much in command you are with your expenses.
While specific business projects may have resulted in an increase in your costs, your job is to fully “vet” these variables before you present your budget to the CFO. Present these as incremental, or growth initiatives so the CFO can gain more of a perspective on how business activity affects your cost structure.
If you have a large maintenance budget the CFO will expect year-over-year increases to be kept in line with inflation. The same activities that influence ROI, mentioned above, also apply to your operating budget.
Try to segregate those efforts that are geared towards infrastructure upgrades from the normal recurring costs. The CFO knows that keeping the technology plant fresh will save costs and lower systems downtime over the long run. It’s a cost of doing business. But the CFO also knows that not everything has to be upgraded at once, so schedule them strategically over the course of a few years and work with the business on setting priorities for which upgrades or other infrastructure enhancements come first. Avoid justifying upgrades on the basis of fear or risk. This will only alarm the CFO and bring down more scrutiny on your organization for failing to plan properly.
4. Learn about the CFO’s Issues.
Use your internal network to find out about the CFO’s issues, concerns and preferred projects. More than likely the CFO is also a client and has very complex reporting and financial management requirements that span the entire firm.
Information is the CFO’s primary tool for alerts about the business and understanding revenue, cost and profit dynamics.
Be proactive. When there is a severe systems disruption, keep the CFO informed about status and progress. Avoid having the CFO call about an issue that might blind-side you.
5. Get a good finance officer for your organization.
If you are not good with the numbers, ask for a finance officer to be assigned to your division. Use this resource to help with budgets, financial analysis and develop financial models that tie directly to the way your operations scale to changing business conditions. This resource can also give the business more transparency into costs and resource utilization. Be sure the person knows how to promote team work and collaboration with his peers and your peers in the business and finance units.
6. A final word about talking about the gadgets.
You’re the CIO and a senior manager in the firm. You got to this position because you know how to manage a very sophisticated technology complex that has probably become a key strategic asset for your firm. Just like you may not be an expert in financial techniques, the CFO probably is not an expert in many aspects of technology. Your role is to bridge the gap and translate hard core technical knowledge into information the CFO can use to assess and evaluate the value of technology to the firm. Avoid complicated explanations about how “things” work.
If the CFO truly has an interest in understanding a specific technology or application, suggest a separate meeting so you can prepare a “right sized” presentation
The CIO-CFO partnership will continue to be an important and necessary alliance in the organization. Perfecting a two-way dialogue will show unity in purpose and objectives with the business division which always insists on doing more with technology. The guidance discussed above should help you further develop this relationship and provide you with a unique opportunity to show the value of your organization in improving the efficiency, stability and security of the firm.
About Tom Warren: Tom Warren is an executive in the Financial Services practice at Acumen Solutions, a business and technology consulting firm. He possesses an extensive background in financial services companies and electronic trading patterns with a career that spans more than 20 years at Merrill Lynch & Co. At Merrill Lynch he held many senior positions at the firm in both finance and technology including head of Corporate Technology and Application Infrastructure Services, Head of Global Treasury Systems and Global Director of Financial Systems. Some of the projects Tom had direct responsibility for included: implementation of a new risk management and funding platform for Global Treasury Systems (a group that Tom launched at Merrill Lynch) creation of the principles used to perform transfer pricing of revenue between Merrill’s institutional and retail businesses, and he also participated in an extensive analysis of the data center’s cost structure and helped implement a chargeback mechanism based on usage.
In addition to his deep technological expertise Tom has been a financial advisor and is a certified financial planner. He can be reached at twarren@acumensolutions.com.
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