Careful With That (IT) Axe, CFO!

Judicious investments in the right initiatives and technologies can help turn a run-of-the-mill IT department into a world-class operation -- and finance can reap the benefits.

Given the discussions in recent years about the supposed strategic irrelevance of IT and the "commoditization" of IT resources, it's perhaps no wonder that the function has been a primary target for companies' cost-containment efforts. IT departments are certainly feeling the pinch; 42 percent of IT managers feel that their organization spends too little on their function, according to a May survey by Managed Objects, up from 31 percent in a comparable study by the business service management firm last year.

New research from The Hackett Group suggests that it's a mistake to assume that when it comes to IT, less is more. Organizations that Hackett defines as "world-class" -- those that achieve peak efficiency and effectiveness in the strategic advisory firm's IT benchmark studies -- spend 7 percent more on IT operations than typical companies do.

Eric Dorr, senior business advisor with Hackett and co-author of the report, is quick to point out that he's not advocating that companies should go wild on IT spending. "When we see companies go through a journey to world-class and do strategic IT transformation, they actually typically cut costs," he says. However, "once they have a lean IT operation, they then build on that and improve the effectiveness of the IT function."

"One area where we see companies spending and getting good returns ... is in information management, data management, analytics, and business intelligence," Dorr notes. "That's one area where we see that additional 7 percent going." Investments in data management initiatives and technologies, in particular, can provide a sustainable competitive advantage, he asserts. "Once you're off track with [data management], you cannot make any shortcuts -- you always have to go back to the basics and fix those basics."

Still, selling a CFO on any IT investment is a tough assignment for IT managers in the current climate. "Where CFOs push back is in saying 'Look, I'm looking at my overall IT budget. I've got tons of maintenance, I've got tons of break/fix, I'm spending more year over year, and I haven't seen that dialog about what I could invest in to help me make these improvements in my function," says Bryan Hall, finance practice leader with Hackett. "Where we find companies struggling is when a disproportionate amount of that IT investment goes to just keeping the lights on, as opposed to really improving the processes."

But solid ROI on IT initiatives is out there, not least in improving finance processes. "World-class companies in finance actually spend a large percentage of their process cost on technology," notes Dorr. "However, because these process costs are far lower for the world-class companies than for the peer group, the total spend (as a percentage of revenue) on technology is still going to be lower." IT costs are directly related to the number of end users, he points out. "If you automate, at the same time you're eliminating substantial numbers of FTEs. You're adding some IT spend to process automation, but at the same time you're actually reducing IT spend because there are simply less FTEs to support."

Hall emphasizes the benefits of data standardization in improving finance's effectiveness. "One of the things that we see crippling finance organizations today that don't do a good job of this is that they have a hundred different ways to view the organization's performance, multiplied by hundreds of sites; we call that 'business performance reports,'" he says. "And we'll find that organizations have 10 times as many performance reports as leaders in the space when we normalize for industries." The problem is fixable within the constituency of finance, he adds. "Finance can go back to IT and say 'I'm really going to rationalize my requirements.' We don't view that as a cutting-edge technology, but we certainly would see that as a leading practice or a best practice for how to approach data standardization. And what we're showing is that there's a very real impact on the organization for doing those things."

How big of an impact? "It's not uncommon for a business analysis person in an organization to be over US$200,000 fully loaded," says Hall, "so the group that's paying the price for this lack of standardization is finance in the non-transactional roles that they're supporting. When we really start peeling back 'How could I make an impact on this investment or become more effective with this investment?,' we start to find that over half of the time that these $200,000 resources are spending is used in looking for information. And I'm not talking about a unique analysis or an M&A deal; I'm talking about day-in, day-out business analysis of just 'How are we doing profitably, what do we need for management results?'"

"Discipline pays big dividends, and part of that discipline is in working with IT to put together a common view," Hall adds.