There are indications that the economic malaise that has been hanging over Europe for the past six years is beginning to lift. CFOs across the continent are feeling more buoyant about growth prospects. They are also aware that information technology is essential to driving business transformation and bottom-line success.
Unfortunately, an exceedingly large share of capital (70 percent) is spent on what we call “keep-it-running” projects, which are IT investments in transacting the business, such as ERP (enterprise resource planning) systems. This leaves only 30 percent for growth-oriented, “improve-the-business” IT spending: IT investments that can boost a company’s financial performance. Most would like to see much greater stress on the latter and would prefer a 50/50 split.
Those findings stem from AlixPartners’ “IT Spending and Return: A Deeper Exploration” study, which was conducted in partnership with Oxford Economics. In late 2013, Oxford Economics surveyed 50 senior finance executives — 23 percent of them CFOs, 26 percent controllers —across four European countries: France, Germany, Italy and the United Kingdom. The respondents were from 14 industries, with the largest number coming from telecommunications (16 percent), wholesale/retail (14 percent), and healthcare (10 percent)
Among the respondents, 14 percent said their company’s operating margins had remained roughly the same over the past three years, 24 percent said their margins had decreased, and 62 percent said their margins had improved. The survey also revealed that a full 50 percent of the executives don’t believe their companies are getting their money’s worth from what, for many of them, has been considerable IT investment over recent years. They are also frustrated with not getting the key insights from IT that enable maximizing business performance, given what they are spending.
These are common themes we hear from CFOs worldwide, along with the challenges of attracting talent from insufficient supply, of internal politics that often lead to the wrong actions and of generally getting IT properly connected with the business.
Most of the European finance executives have embraced IT as a potential driver of profits, according to the survey, and 30 percent see the primary function of IT as improving operating profits. The evidence suggests that they are correct. In fact, an AlixPartners analysis included as part of the study demonstrates that 45 percent of the executives representing companies with rising margins over the past three years said that their access to management information matches or exceeds expectations, while only 21 percent from companies with flat or falling margins had that response.
Further, 60 percent of survey respondents said that they have been successful in implementing IT projects aimed at improving their businesses’ financial returns. With the rapid rise of social networks, the emergence of dynamic online and mobile channels, an avalanche of business data and the distribution of computing power through the cloud, growth-driving “improve-the-business” technologies contain real promise, suggests the study.
In order to improve IT investments, respondents agree, process problems have to be fixed. Weaknesses in the planning and budgeting process often undermine the effectiveness of their plans, with 44 percent of respondents saying that such factors as politics and personal persistence influence their decision-making. Such findings support our hypothesis that these problems are generally a result of disconnections between a company’s IT and business operations.
Such problems also seem to come from a lack of analytical skills, since 54 percent of respondents admit that their teams lack the specific competencies needed to help drive their businesses forward.
Our recent study mirrors findings of a similar survey of senior financial executives we did in North America in January 2013. According to that survey, Maximizing the Value of Information Technology, conducted in collaboration with CFO Research, 95 percent of 153 senior finance executives indicated their companies would meaningfully benefit from tying financial returns to IT investments. Additionally:
- 71 percent of the executives polled said their companies should have access to more robust business information for the money spent on IT.
- 66 percent gave their companies low grades for measuring financial gains from “improve-the-business” IT projects.
- 50 percent of respondents indicated that their IT budget is weighted too heavily toward “keep-it-running” IT approach.
The message from CFOs and other senior finance executives is loud and clear – companies are not getting the returns on their IT investments that they should be getting, and they’re not getting the business information from IT that they truly need and should have. These surveys should be a sobering wake-up call for managements everywhere, especially those considering expensive IT projects of any kind. At the very least, they should be doing rigorous proof-of-concepts before implementing any new project and perhaps looking at bridge solutions before diving head-first into a new project.
One big reason companies are over-spending on IT or spending on it in the wrong places, reports the survey, has to do with governance and discipline around IT programs. For example, 72 percent said that factors other than a carefully considered business case (such as internal politics or personal persistence to be a “squeaky wheel”) influence the priority and funding of “improve-the-business” IT projects much more often than they should.
Meanwhile, when asked who in their company should have a greater voice in whether to fund such projects, 45 percent said sponsors from business or functional units and 28 percent said the finance function. By contrast, when asked who today is primarily responsible for deciding funding, just 14 percent said business sponsors and only 7 percent said the finance function.
By the same token, when it comes to “keep-it-running” IT spending, 62 percent of finance executives said that kind of spending is currently either kept at the corporate level (within the IT department) or only partially charged to business units, neither of which may help control such costs. Moreover, 66 percent said that keep-it-running and improve-the-business IT spending are budgeted together at their companies.
IT that’s not helping grow the business should always be tracked separately and treated as a cost to be managed. Failing to directly allocate those costs to users makes it that much harder to manage them. Conversely, comingling budgets for both kinds of IT too often leads to the cannibalization of new, high-value-add IT spending for low-value-added, but entrenched, IT spending.
Based on both studies, I recommend that companies implement the following five measures to improve their return on IT:
1. Separate “keep-it-running” from “improve-the-business” IT costs for budgeting, tracking, benchmarking and management purposes.
2. Aggressively drive “keep-it-running” IT costs down each year. The effort should include giving budget responsibilities to corporate IT, prohibiting cost increases that don’t drive business-volume increases, and allocating costs to business units and other functions based on such cost drivers as the number of internal email, application and desktop users.
3. Manage “improve-the-business” IT costs with the same rigor as you do non-IT expenditures for the same purpose. You should budget by the business unit; approach projects from a “portfolio management” point of view; set up a strong governance process that ensures results; and spend only on the strongest business cases.
4. Support IT in coming up with new ways to improve operating profit, including ideas to enable specific business processes to become more flexible, higher quality and lower cost.
Closely scrutinize the business cases of large IT projects and make sure that smaller, less-risky alternatives, including targeted “data cubes” and custom analytics, are considered.
Because both North American and European finance leaders are so focused on investments in “keep-it-running” IT, they may not have turned their attention to the need to make the best use of their “improve-the-business” project portfolios. By aggressively driving down the former types of IT costs, CFOs can create a bigger investment pot and apply rigorous portfolio-management techniques to get the most business benefit from growth-oriented IT.
Meade Monger (firstname.lastname@example.org) is a managing director and global leader of the Information Management Services group at AlixPartners, LLP, a business-consulting firm.