Budgeting & Finance

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Business asks itself financial questions all the time. While the question might not at first sight appear to be purely financial, the source of the question begins in finance, and the answer is often expressed in financial terms and metrics.

Some examples of financial questions and their possible IT equivalent are:
 
Business financial questions
IT financial questions
Are we performing better or worse than our peers?
How much should our organisation spend on IT?
What is our hurdle rate?
What is the required value that our IT investment should bring us?
Are we facing cash-flow problems? (Working capital - liquidity)
How does IT funds usage track against budget over time?
Are we facing solvency problems (long term sustainability)?
Are we locked into technology that will compromise the organization in the future?
Are we making adequate provision for potential future losses?
Does our refresh cycle match the useful life of the underlying IT assets?
Are we maximizing value while managing risk?
What is our rate of return for different categories of IT spend?
Does funding (or lack of it) expose the company to risk; where and how?
Are our long-term decisions sound?
Do we get the benefits promised in project business cases?
Are we funding the right projects?
Are we funding the right projects?
Are our short-term decisions sound?
Where is cost-cutting in IT appropriate?
What are our current assets and liabilities?
Do we effectively manage our IT assets?
 
While the match from business question to IT question is not direct, the way IT tries to answer the questions about IT investment is often ambiguous at best, and obscure at worst.
It is our contention that CIOs must answer business questions that have a financial basis, with IT responses from a disciplined financial foundation.

 

The language of business is the language of IT

The maxim that ‘the meaning of the message is in the receiver’ holds true for IT when responding to business questions. Our research shows that messages about life-cycles, refresh schedules, infrastructure foundations, architectures and application upgrades often miss the mark in terms of business understanding and message effectiveness.
 
An example in our experience, is the case of a CIO presenting her large IT budget, arranged on a spreadsheet, with general ledger accounts as columns, and IT initiatives as rows. The CEO made the only decision he felt qualified to make: He looked to the bottom right-hand corner of the spreadsheet, where the final IT budget total was represented, and said: ‘That seems too high. Cut it by 15% and come and talk to me again’. He was unable to assess the merits or demerits of each line item, because he was unable to distinguish which of these items was about securing their current computing capacity, which were about sustaining their near-term IT viability, which were business projects aimed at improving margins or increasing revenues, and finally which were speculative budget items.
The CEO made a purely financial decision, without any ability to assess the value of different IT initiatives, because it was the only decision that IT had left to him. The fault lay with IT for not talking the right language.
 
We categorize IT spend based on a number of factors: Firstly there are three outcome based roles that IT needs to fulfil: Deliver IT without fuss; Help improve business results; and, Provide appropriate leadership. These three roles of IT are mapped against what we term the business momentum - the current business activities, revenues, geography, staff levels and so on. Business momentum is a conceptual construct whose aim is to split the IT budget: That part of the IT budget needed to maintain the current business momentum, and that part of the IT budget aimed at improving the business momentum.
 
Secondly we categorize spend in five different ‘layers’, from the deep ‘keep the lights on’ layer up to the speculative ‘may-do’ layer. The combination of the three roles and the three layers allows our clients to budget for IT in a way that makes sense to their business executives and allows these executives to make truly educated decisions about IT spend. The budgeting model also serves as a sophisticated governance tool, allowing the Boards of organisations to meet most of their King III governance responsibilities.
 
Senior business management find it difficult working with their internal IT departments and often express the disappointment with both their perceived view of IT’s performance and their general interaction with IT. Much of this is a result of IT not engaging the business in a language that business understands! In today’s agile business environment, this gap between IT the business needs to closed. Our IT management programs are designed to improve the performance of IT in bridging the divide between IT and the business and at the same time deliver real and measurable benefits to the bottom line.
These programs deliver the following outcomes to IT departments;
  • Deliver business-like products and services
  • Enhance their reputation and relationships within their enterprise
  • Understand and respond to business issues
  • Manage themselves with confidence, good governance and rigour
  • Improve their working methods and practices
In addition, because the assessment methodology includes business like management, the program acts as a very good communication and educational tool that CIO’s can use to expose the business to issues that IT faces. (We run a similar program for line management that works in parallel to educate and expose line management to their responsibilities and expectations in their interface to IT.
The focus is on business-like management (the dynamics of what they do), rather than on the technical and functional disciplines of IT (the mechanics of IT). Business-like management uses market economics and practices within the IT domain. Hence the topics for business-like management in IT are:
  • IT Posture
  • IT Economics and Finance
  • IT Leadership and strategy
  • IT Operations
  • IT Innovation and Entrepreneurship
  • IT HR and people
  • IT Marketing
  • IT Procurement and sourcing
It is immediately obvious that we are not dealing with IT specific mechanisms (ITIL, Architectures, etc.), rather we bring tried and tested business practices to the above aspects of managing IT.
  • For example, in economics and finance, we use established financial methods (e.g. ROI, NPV, Points of action analysis, Real Option analysis, etc.) to assess the financial and economic prospects of IT initiatives. We also have tools for IT budgeting (using business methods), financial planning, financial governance, tracking, business cases, and many other business techniques, to bring to bear on financial IT problems.
We believe that unless IT behaves in a business-like way, they will never gain the full confidence and trust of their organisations. To this end, we have available a series of assessments which quickly and simply test the maturity of IT functions within their organisation. The value of our assessment process is:
  • Quick analysis of current IT status and maturity with respect to business-like practices in 8 areas.
  • Baseline view of where IT is now – from the organisation’s perspective
  • Development of actions and roadmaps to improve IT maturity in these areas where deemed necessary
  • Effective education of both IT and business in terms of what their mutual expectations should be of each other
  • Improved relationship between business and IT : A fully mature IT department would not be seen as a different unit from the rest of business as they are conducting themselves in a professional and business-like way - in the eyes of the business
  • Improved capacitation (resources, finances, time) from business to IT
So these simple yet immensely effective programs which are quick and easy to administer will change the face of IT within your organisation in a very short time.