“It’s one thing for a CFO to demand a solid approach to ROI, and another for a CIO to deliver it. We have to solve this problem, but there’s been little progress.”
“At some point, it all comes back to ROI — in theory. But ROI is just one tool for setting priorities.”
“Every year there’s talk of giving the business units control of IT spending, and each time the decision is, ‘Not this year!’ “
The preceding thoughts came from a CFO, a CIO, and a college professor, but can you guess who said which? The first comment comes not from a frustrated CFO, but from Mark Cotteleer, an assistant professor at Marquette University’s business school and a senior consultant for the Cutter Consortium, an IT research firm. Cotteleer recently served as guest editor of an issue of the Cutter IT Journal that examined the perpetually vexing question of ROI analysis as it pertains (if it does) to IT investments.
The second comment comes from Michael Zellner, CFO of Wind River Systems Inc., an Alameda, California, software company. While CFOs are often portrayed as absolutists in the quest for rock-solid ROI analysis, Zellner’s pragmatic approach is in line with many of his peers’.
The final quote is attributable to Al Etterman, senior vice president of corporate infrastructure at Openwave Systems Inc., which makes software for the telecom industry. Etterman is in some ways a CFO’s worst nightmare (“When you do ROI, the numbers are always suspect, and can you even put business improvements in financial terms?”), but in other ways his best friend (“When I started my job here, there was a big capital budget waiting for me, and I gave it all back. The CFO’s jaw dropped.”).
All of this serves as a lengthy preamble to our third annual IT Directions survey. These comments capture many of the challenges and disagreements that are threaded throughout this year’s results. In polling nearly 250 senior finance executives at U.S. companies, CFO IT uncovered a number of sharp divisions, disappointments, and even a certain disillusionment. But there was also a surprising consensus on the ultimate potential of IT, and on the working relationship between finance and IT.
Battle of the Metrics
CFOs remain optimistic — improbably optimistic, some might say — about the role that IT can play in their companies. Despite a surfeit of talk about IT becoming a commodity or a utility, fully three-fourths of respondents said they consider IT to be strategic, and of those, about 60 percent will spend more on IT next year as a result.
But they despair of spending it wisely. Despite assuming greater involvement in setting IT strategy — a trend in effect for several years — CFOs remain unconvinced that IT investments are paying off, or that they know how to properly assess IT projects before giving the green light. Fewer than half believe the IT expenditures they’ve made in the past year have achieved the return they had hoped for, and for every CFO who has resolved the ROI debate by adopting a formal approach for some or all IT projects, another continues to search for better ways to analyze the return on spending.
“At the end of the day,” says Etterman, “these are judgment calls, not empirical decisions. We focus more on business metrics than financial metrics.” As one example, he cites a recent project to improve his company’s maintenance and service renewal rates. “We got a 30 percent improvement,” he says, “and there was an IT component to it, but it also entailed changes to our processes. So I can’t say exactly how much of the benefit can be traced to the IT portion of the effort.”
Many CFOs still seem interested in trying. In September, 80 finance executives gave up a perfect San Francisco Sunday afternoon to attend a three-hour ROI boot camp taught by Ian Campbell, president and CEO of Nucleus Research, an IT advisory firm that specializes in ROI analysis. Campbell offers a more-intensive version of this training at Babson College in Wellesley, Massachusetts, where, he says, finance and IT staffers often show up “having been given a mandate from the CFO to put a process in place; some structured approach.”
But wasn’t that what finance was supposed to bring to the table from the start, its structured approach to investment analysis? What does it mean when CFOs and their reports have to get training in what was supposed to be their “value add” in IT strategy? “The calculations are easy,” says Campbell, “but what people need help with is learning how to extract the right data; how to ask the right questions of the right people.” A structured approach, he says, guarantees consistency, even if accuracy remains elusive.
The Governance Approach
Many companies have decided that having the right people ask the right questions is the single best way to keep IT spending on track. Unable or unwilling to impose a formula on IT project plans, they impose some form of governance instead (or in addition to, with the balance of power between numbers and human judgment varying from one company to another and even one project to another). IT investment decisions are made by one or more teams, with members drawn from the executive suite and/or lines of business.
As part of that, some companies have adjusted reporting relationships so that the CIO reports to the CFO. Survey respondents were split on the wisdom of that: 43 percent believed such an arrangement makes sense, while 56 percent said IT should not report to finance but that the two functions should work together to sort through major IT expenditures.
When Etterman returned the IT capital budget to his CFO, he was effectively insisting on a certain approach to IT governance. Having come from Cisco Systems, where business units control their respective portions of the IT budget, he wanted to instill a similar sense of responsibility on the part of the people who were requesting the projects. While the business units at Openwave do not, strictly speaking, own the IT budget (at least not yet), Etterman and his staff won’t move on a project that doesn’t have a business sponsor. In a sense, a substantial portion of the IT budget is a sort of trust fund that can be tapped only when responsible parties step forth with solid plans.
“We had a project called OneView,” says Etterman, “that was a $6 million CRM project. But key executives couldn’t articulate why we should do it, so we canceled it.” Similarly, before Etterman arrived, the company had purchased a $750,000 professional-services automation application, but it was an IT initiative that had no business sponsor. “When the second year rolled around and we had to pay another $100,000 in maintenance,” says Etterman, “I let it be known that if it didn’t find a champion, we’d kill it. It didn’t, so we did.” A sponsor came forward later, and the IT staff was able to meet his needs with a lower-cost technology.
The Nature of the Company
Most companies have one, and often several, teams of senior executives who assess the case for a given IT project and ultimately say yea or nay. As Zellner of Wind River Systems says, an ROI analysis is often part of that effort, but rarely the deciding factor. “The applicability of ROI depends, to some degree, on the nature of your company,” he says. “We think of ourselves as being very good at customer service as opposed to some other emphasis, like being a commodity provider that might stress operational efficiency. So if a project looks like it will enhance our mission, we tend to like it,” even if a firm payback within a specified time frame appears impossible to calculate.
Although nearly 40 percent of survey respondents said they continue to debate the ROI issue and look for better approaches, very few will admit publicly that their companies should do things differently. Marquette’s Cotteleer says that, too often, companies go through a “justification exercise” in lieu of making a truly smart decision because they lack the discipline needed to link IT projects to the underlying business processes they support. “There’s no commonly accepted paradigm,” he says, “no GAAP for IT spending. But it’s a variant of capital spending, albeit with more uncertainty. It can be cracked.”
Curiously, while more than half of the respondents said that their IT investments either had not produced the ROI they expected (27 percent) or that they were unsure (30 percent), nearly 80 percent said that IT investments had resulted in productivity gains, although a strong majority of those said the results were hard to quantify. “So many projects entail a human element that is very hard to measure,” says George McGrath, CIO at Norcal Waste. “You may know that a new system saves keystrokes or some other form of labor and allows you to get more out of people, but you may not necessarily reduce head count or otherwise be able to measure the labor savings in an exact way.”
As one example, McGrath cites a Web-based electronic billing system that his company installed. “Everyone we spoke to said that a 7 percent adoption rate was standard,” he says. “But we found that in some areas, fewer than 1 percent of customers were willing to pay their bills online, while in other areas it was 19 percent or higher. If we had done an ROI analysis [for this project] and stuck to it, we never would have done the project. But sometimes you simply decide to do it based on judgment.”
Even if continuing interest in ROI seems to be outstripping progress by a good margin, CFOs are nearly unanimous in believing that a strong working relationship between finance and IT is essential to achieving business alignment. And many see the demands posed by Sarbanes-Oxley as being at least partly responsible for fostering stronger ties between the two groups, a possible silver lining to a regulatory burden that has weighed very heavily on CFOs (see “Hard Times,” CFO, November).
And frustration over the lack of solid ROI numbers and the questionable payback on IT investments doesn’t seem to affect spending: 29 percent of respondents said they’ll increase IT budgets by 6 percent or more next year, compared with only 16 percent who planned a similar increase last year. Only 16 percent anticipate decreased spending; from 2003 to 2004, 30 percent made cuts.
All of which suggests that IT remains far from mature, its potential balanced by its demands. Whether the closer working relationship between CFOs and CIOs ever results in that “GAAP for IT” that Cotteleer spoke of remains to be seen, but even if a hard-and-fast formula remains elusive, a cross-disciplinary approach to management seems more essential than ever.