IT/Finance Alignment: A Boon for Strategy, but Will the Trend Continue?Published: March 01, 2006 in Knowledge@Wharton
In today's market, where intense competition drives companies to reduce their business cycles and react faster, the interaction between Information Technology and Finance continues to gain importance, says David Wessels, an adjunct professor of finance at Wharton. He notes that as technology permeates just about every activity engaged in by an enterprise, it's only natural for the functions of IT and Finance to converge.
"Traditionally, information technology simply involved gathering data for Finance and then pushing it out in a series of reports," observes Wessels. "But today, IT is no longer just about information gathering. Instead, it gives CFOs timely access to critical parts of a business, enabling them to engage in more analytical functions that force them to rethink the way in which their business operates."
The result, Wessels and others observe, is that IT/Finance alignment has become a key catalyst for business strategy. According to a survey released by CFO magazine in December 2005, 77% of CFOs say they regard IT as a strategic function instead of as a utility and, accordingly, 65% plan to spend more on IT this year compared to last year.
Despite this trend, however, companies are showing increased dissatisfaction with returns on IT investments. Only 40% of the respondents surveyed by CFO indicated that IT met their performance expectations (down from 42% last year). Moreover, only 6% say they apply formal ROI analyses to most or all of their IT investments, and 30% say they forgo any formal approach to evaluating IT ROI. That, Wessels and others point out, can spell trouble moving forward.
The Chief Performance Officer
"Advances in information technology have driven changes in the fundamental responsibilities of CFOs," says Wessels. "CFOs are . . . increasingly being looked upon as chief performance officers, charged with developing and upgrading key performance indicators (KPIs) that measure the effectiveness of a business's operations" -- including those dependent on technology.
Determining just what those KPIs are, however, is an important first step. Wessels says that it's not unusual for companies to focus on activity that is easy to measure, like total sales or market share, instead of focusing on strategic indicators that relate to the complete activity and long-term health of the enterprise, such as customer satisfaction.
"Each business will have its own set of metrics -- for example, consider the airline industry," says Wessels, who has worked extensively with the industry in a consulting capacity. "It would be easy to consider total labor costs per dollar of revenue as a key performance indicator, but that wouldn't be extremely insightful. To build a clearer picture of performance, you must decompose the financial metric into operating items, such as average salary, productivity, utilization, and ticket price. Only then does it become clear that airlines could not overcome major drops in ticket prices solely with improvements in productivity and utilization."
Once the KPIs have been identified, a CFO can utilize them to identify weak or inefficient business processes -- and that is where technology can be applied or augmented usefully.
"A comprehensive IT-Finance effort means more than just integrating a series of systems," he says. "First, the underlying business processes must be examined -- otherwise you may be simply taking a bad way of doing things and making it twice as fast."
He says that airlines like Delta understand this approach and have added such features as automated re-booking for passengers who miss a connection. Under the system, ticket-holders can swipe their original boarding pass through a gate reader, which will automatically produce a new boarding pass with the passenger's new flight information and seating assignment on it. The automated system reduces required headcount while simultaneously increasing customer satisfaction.
"This is an example of [technology being] identified and carefully considered before any action was taken," says Wessels. "It saves time and money for the airline while aligning the company's financial objectives with those of its customers."
Moving Beyond the Roadblocks
The roadblocks for getting adequate returns on IT investment are two-fold, notes James Blyth, chairman of Diageo -- the world's leading premium drinks company. "One, it's difficult to sustain a technology-based competitive advantage; two, companies often lack the management discipline they need when evaluating technology proposals."
Speaking at the 2005 Wharton Globalization Forum, Blyth said that "approval of IT spending [at Diageo] is subject to enormous evaluation and scrutiny. Investments are phased in, performance milestones are set at each stage, and funding has to be defended at each step."
Through a series of key acquisitions and divestments, Diageo became the world's leading premium drinks company by 2002, Blyth noted, "but we could not operate efficiently as a single global business because our systems and processes [were fragmented]." The solution: Diageo invested in a SAP solution, which allowed for integration and was also a catalyst for deeper changes in the organization, such as the reduction of back office support activities and the addition of a technology-driven shared service center. "It's an example of creating value from a broader business change," Blyth said.
Wessels points out that balancing the short view with the long view is essential. As the CFO survey points out, many CFOs don't formally evaluate returns from IT performance; in other cases, says Wessels, their expectations are too rigid. "Some CFOs want hard and fast numbers for a project. They want to know a starting date, an ending date and what the overall expenditures will be. But a comprehensive convergence between IT and finance is an evolving project that doesn't lend itself to that kind of firm cost analysis."
A company's business changes over time, and Wessels notes that the IT-Finance continuum must also change to meet the new circumstances. Otherwise, the system will be delivering outdated or incomplete information.
The benefits arrive incrementally at first, but they soon begin to snowball. Rod Radojevic, director of business services at Geac, a global enterprise software company headquartered in Waltham, Mass., says that his company has been working with a particular client for five years -- a high-tech company that has global operations and annual sales of about $300 million.
Initially, the client wanted to streamline its budgeting and reporting processes, so Geac implemented a budgeting and reporting system that sits on their existing systems, pulling data from disparate sources to deliver more information in less time. Over time, Geac was able to help the company ramp up its forecast reporting from a quarterly basis to a monthly one even as the client reduced its headcount of global controllers from 14 to 12. "Because of the planning and budgeting efficiencies achieved through IT-finance integration, this company spends almost 60% less man hours to develop the annual budget and has become 95% more efficient in producing monthly product line profit and loss forecasts," says Radojevic.
Although in many companies CIOs still report directly to the CFO, CIO magazine's 2006 "State of the CIO" survey executive summary notes that "the CIO is at the executive table and has the confidence of the senior management team. Budgets and staff levels are on the rise, and CIOs are building business-savvy departments to maintain IT's important role in the overall company strategy."
Regardless of the growing independence of the CIO's role, in the wake of the Sarbanes-Oxley Act (SOX), it would seem that CIOs and CFOs would have good reason to continue to work closely together, forging a unified perspective on the value of IT investments. Following the announcement of SOX, for example, many software companies, such as SAP, rolled out new enhancements in compliance and auditing (including, even, some whistle-blower features) -- promising a seamless integration of IT and Finance imperatives.
With the downward trend in formal evaluation of these investments, as highlighted by the CFO survey, it seems that SOX has not had that effect; in fact, the survey shows that only 34% of CFOs feel that Sarbanes-Oxley has created a tighter working relationship between Finance and IT (down from 48% the previous year). One reason could be that the controls required for SOX have driven CFOs back to the basics -- numbers -- and away from the level of strategy that an integrated IT/Finance program requires.Does that mean that the two functions will move back to their respective silos? Wessels doesn't think so. "The companies that succeed in the future will be the ones that embrace a joint IT-Finance initiative. In today's competitive environment, it's no longer an option -- it's increasingly becoming a necessary step in the development of competitive advantage."