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Maximizing the Value of Information Technology CFOs Dissect Their Companies’

Spending and Return on IT

A report prepared by CFO Research in collaboration with AlixPartnersCFO

research

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

Maximizing the Value of Information TechnologyCFOs Dissect Their Companies’ Spending and Return on IT

A report prepared by CFO Research in collaboration with AlixPartnersCFO

research

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

MARCH 2013 11

About this Report 2

Two Categories of IT Spending 3

Achieving Expected Return on IT Investments 8

Are Companies Getting the Information They Pay For? 10

Sponsor’s Perspective 12

Contents

MAXIMIZING THE VALUE OF INFORMATION

TECHNOLOGY

in january 2013, cfo research conducted a survey among senior finance executives at large and midsize North American companies to exam-ine their views on the value of their investments in information technology. We sought to under-stand how finance teams gain insight into their companies’ spending on IT, measure the return on their IT investments, and perceive the business benefits their IT systems provide.

We gathered a total of 153 complete survey responses. Respondents represent a broad range of company segments, as follows:

Title Controller 26%Chief financial officer 23%Director of finance 19%VP of finance 13%EVP or SVP of finance 10%Treasurer 4%Other senior finance executive 2%Other 3% Revenue $500 million – $1 billion 26%$1 billion – $5 billion 34%$5 billion – $10 billion 14%$10 billion or more 26%

Industry Financial services/Real estate/Insurance 24%Auto/Industrial/Manufacturing 16%Telecommunications 7%Wholesale/Retail trade 6%Transportation/Warehousing 5%Public sector/Nonprofit 5%Chemicals/Energy/Utilities 5%Pharmaceuticals/Biotechnology/ Life sciences 5%Health care 5%Business/Professional services 5%Media/Entertainment/Travel/Leisure 4%Software/Internet/Networking 4%Food/Beverages/Consumer packaged goods 3%Construction 3%Aerospace/Defense 3%Hardware/Electronics 2% Note: Percentages may not total 100%, due to rounding.

About this Report

MAXIMIZING THE VALUE OF INFORMATION TECHNOLOGY

2 © CFO PUBLISHING, LLC MARCH 2013

3

as they strive to make the right investments in information technology, companies often find themselves torn between two competing impera-tives: the need to limit the amount of money spent on IT, on the one hand, while at the same time ensuring that they do spend money on IT where it can help improve operating profit. Senior finance executives are often at the center of their compa-nies’ mission to optimally manage their spending on IT. It is up to finance departments, in large part, to ensure that their companies develop the expertise and processes needed to ensure that every decision to invest in IT (and every decision not to invest) is an informed one. But although many finance executives have an explicit mandate to oversee IT decision making, our research in recent years has suggested that they often lack the visibility required to do so effectively. CFO Research, in collaboration with AlixPartners, set out to investigate the organizational and process dimensions of IT-expenditure decision making. To learn more about how finance teams are planning to help their companies make smarter investments in IT, we surveyed 153 senior finance executives at large and midsize companies in North America.

A major line of inquiry in our research involved exploring the differences, if any, in finance execu-tives’ views on two categories of enterprise IT: “keep-it-running” IT, which includes the basic hardware, software, and services needed to operate a business, and “improve-the-business” IT, which are projects aimed at boosting business value. (See sidebar, “Definitions.”) In this study, which was conducted in January 2013, we sought to explore finance executives’ point of view on the way their companies allocate resources to these two respec-tive categories of IT. How successfully are compa-nies directing scarce resources to the IT projects

How successfully are companies directing scarce resources to the IT projects that are most likely to produce a ROBUST RETURN?

that are most likely to produce a robust return? How level is the playing field for “improve-the-business” IT projects? Are potentially valuable “improve-the-business” IT projects not being funded because of the way companies organize and approach their IT investment decisions?

As a population, finance executives show no clear preference toward viewing IT as either primarily a cost to be managed or primarily a tool for add-ing value, suggesting that either viewpoint can be defended—or, indeed, that most finance executives adopt a hybrid view. Although a handful of finance

Two Categories of IT Spending

Definitions“Keep-it-running IT” refers to information-technology services that

support and maintain systems that a company is currently using. These

services are not discretionary and are required to continue to do busi-

ness. Examples of “keep-it-running” IT services include IT-applications

maintenance, hardware maintenance, help desk, desktop support,

data-center operations, telecommunications, and general IT adminis-

tration and management.

“Improve-the-business IT” refers to discretionary IT projects that seek

to improve or add to the systems that a company is currently using.

They may be aimed at improving a company’s capacity to execute

transactions or other business activities; its ability to access, analyze,

and report information for business planning and decision making;

or its ability to maintain or extend its competitive position. Examples

of “improve-the-business” IT projects include implementation of a

business-intelligence system, ERP system, or transportation-planning

system; improvements in the technology used to report inventory

positions or staffing requirements; and improvements in the technol-

ogy used to plan and track the manufacture of goods or the delivery

of services.

MARCH 2013 © CFO PUBLISHING, LLC 3


TECHNOLOGY

executives in our survey are polarized on the issue—characterizing IT as everything from “a value-added activity” to “a necessary evil” in open-response questions—our research suggests that, in aggregate, finance executives recognize that IT has both “keep-it-running” and “improve-the-business” attributes. As one CFO at a midsize media/enter-tainment company puts it, “There are components [of IT] that are costs to be managed and other components that are tools for improving operating profit.” For finance executives, then, deciding on the correct way to look at IT may be somewhat of a moot point. When it comes to making IT invest-ments, say finance executives, the true challenge lies in striking the right balance between spending on “keep-it-running” IT services and “improve-the-business” IT projects.

Companies tend to struggle with that balancing act, say finance executives, often spending too much on “keep-it-running” IT services and not enough on “improve-the-business” IT projects. A plurality of respondents (49%) estimate that, over the past two years, their company has maintained approximately a 70-30 ratio of “keep-it-running” IT spending to “improve-the-business” IT spending. (See Figure 1.) Although, on its face, the cluster-ing of respondents around the 70-30 split does not necessarily mean that companies are spending too much on “keep-it-running” services, respondents’ overall opinion of the ratio does hint at exactly that problem. Of the respondents that estimate a 70-30 ratio of “keep-it-running” to “improve-the-business” IT spending at their companies, a solid majority—63%—believe that their companies’ spending is weighted too heavily toward “keep-it-running” IT services, and that a greater share of resources should be directed to “improve-the-business” IT projects. Across the entire survey population, this view—that “keep-it-running” IT soaks up too many resources—is held much more commonly than the alternatives. (See Figure 2.)

One source of this suboptimal balance, our research suggests, is companies’ tendency to focus disproportionately on “improve-the-business” IT

“Over the past two years, the proportion of ‘keep-it-running’ IT spending to ‘improve-the-business’ IT spending at my company has been closest to ___________________________.”

“At my company, IT spending is ___________________________.”

49%

15%

11% 2%

20%

FIGURE 1:

FIGURE 2:

70% “Keep-it-running”30% “Improve-the-business”

90% “Keep-it-running”10% “ Improve-the-

business”

30% “ Keep-it- running”

70% “ Improve-the- business”

10% “ Keep-it- running”

90% “ Improve-the- business”

Note: 4% of respondents selected “Not sure.”

50% “Keep-it-running”50% “Improve-the-business”

50%Weighted too heavily toward “keep-it-running” IT services

Neither of these; our IT resources are ideally balanced

Weighted too heavily toward “improve-the-business” IT

projects

Not sure

33%

11%

5%



spending when mining for cost savings. Asked which form of IT spending their companies most often focus on reducing when they cut IT costs, respondents are twice as likely to say that their companies target “improve-the-business” IT spending as “keep-it-running” IT spending. (See Figure 3.) At one midsize financial services firm represented in our research, for example, “There has been a keen focus on [reducing] the costs of ‘keep-it-running’ IT, but that is constrained by having to keep the lights on and the doors open,” according to a high-ranking finance manager at the firm. “Therefore, [reductions are] focused on new projects.” Another finance executive—a VP of finance at a large telecommunications com-pany—observes that “people give up after a while, because every year you start with improvements, only to see them eliminated as the year progresses and as ‘keep-it-running’ costs increase.”

A perception problem may help explain the widespread targeting of “improve-the-business” projects during cost-cutting initiatives. Such proj-ects are often viewed as discretionary, and, as one controller at a large transportation/warehousing company puts it, “discretionary projects go first.” Modifying entrenched IT processes and systems to make them more efficient tends to be very diffi-cult, whereas nixing a new IT project requires less time, fewer resources, and reduced risk—in the short term, at least. Says one director of finance at a large financial services firm, “We find it harder to cut ‘keep-it-running’ projects than ‘improve-the-business’ projects, because [‘keep-it-running’ projects] are deemed ‘essential.’”

“Improve-the-business” IT spending is “easy to cut, but not necessarily the wisest,” as one CFO at a midsize telecommunications com-pany remarks. Several finance executives in our survey offer explanations for the potentially problematic nature of an approach to cost-cutting that disproportionately targets “improve-the-business” IT spending. Such an approach “can be short-sighted,” says a VP of finance at a midsize manufacturing company, because it means simply

pushing required IT investments to future years. Another VP of finance at a midsize manufacturing company warns that “delays to important but not urgent upgrades usually result in critical failures due to extended delays.”

By contrast, finance executives affirm the value of resisting the temptation to make the easiest short-term cuts. At one large financial services firm, for example, “All projects are considered ‘on the chopping block,’” which, according to a director of finance at the firm, means that the company manages to “achieve some balance between cuts to both portfolios.” Fostering such a balanced approach to cost-cutting is not easy, however, in part because most companies do not build the distinction between “keep-it-running” IT spending and “improve-the-business” IT spending into their budgeting process, according to survey respondents. Most respondents (66%) say that their companies budget “keep-it-run-ning” IT spending and “improve-the-business” IT spending together.

“When my company cuts IT costs, it most often focuses on reducing ___________.”

FIGURE 3:

50%“Improve-the- business” IT spending

“Keep-it-running” IT spending

It depends

Not sure

25%

16%

9%

“We find it harder to cut ‘keep-it-running’ projects than ‘improve-the-business’ projects, because ‘KEEP-IT-RUNNING’ PROJECTS ARE DEEMED ‘ESSENTIAL.’”

—DIRECTOR OF FINANCE, FINANCIAL SERVICES FIRM



TECHNOLOGY

Sub-par processes for formulating and evaluat-ing business cases for “improve-the-business” IT projects may also contribute to underinvestment in “improve-the-business” IT projects, survey results indicate. A plurality of respondents (45%) agree that, in the past three years, their companies probably failed to fund a worthwhile “improve-the-business” IT project because the responsible teams did not adequately formulate, document, and present the business case for that project. (See Figure 4.) “New ideas are nearly impossible to gain support for,” says one control-ler at a large pharmaceuticals/biotechnology company. Another controller—one at a mid-size manufacturing company—says that “some projects get tabled even though the benefit of efficiency is evident.”

Weaknesses in the business-case process have caused some companies to miss opportunities. At one large health-care company, for example, a major “improve-the-business” IT project ended up dying because IT and operations could not see eye-to-eye on the necessity of the project, accord-ing to a division VP and CIO at the company. Operations “did not do a good job of ‘selling’ the project and its importance, so the project never got past the initial review phase,” says this execu-tive. One large telecommunications company is currently dealing with a similar situation, in which the “basic foundational structure of IT is inad-equate to take the company forward, but no one can build the business case to tackle it,” according to a VP of finance at the company.

Perhaps even more damaging than a poorly formu-lated business case, companies can often lose their way in internal politics when making IT invest-ment decisions. Most respondents to our survey (72%) agree that factors other than a carefully considered business case (e.g., internal politics, personal persistence/willingness to be a “squeaky wheel”) influence the priority and funding of “improve-the-business” IT projects much more often than they should. “Often the loudest rise to the top,” says one EVP of finance at a midsize

nonprofit company, adding that this can work to the detriment of “strategic items that can help generate long term revenue, increase efficiencies, or reduce costs.” Similarly, at one midsize manu-facturing company, “Pet projects tend to dominate other valuable but less ‘sexy’ initiatives,” accord-ing to a VP of finance at the company. “ ‘Improve-the-business’ projects like upgrades to existing architecture are put aside for projects with ‘easier’ ROIs,” says this executive.

Asked how they would improve processes for IT decision making, finance executives indicate that they see the greatest opportunity in obtaining input from more voices from across the company. When companies prepare and evaluate business cases for “improve-the-business” IT projects, finance executives tend to say that sponsors from business or functional units should contribute more to documenting both the costs and ben-efits of “improve-the-business” IT projects. (See Figures 5 and 6, next page.) “Let those closest to the project lobby, but give them a temporary cadre of support [from finance],” says a controller at a midsize nonprofit company. Respondents also tend to say that sponsors from business/functional units should have a greater voice in deciding whether to

In the past three years, do you think your company failed to fund a worth-while ‘improve-the-business’ IT project because the respon-sible teams did not adequately formulate, document, and pres-ent the business case for that project?

FIGURE 4:

No, probably not

Yes, probably

Maybe—it’s hard to know

32%

45%

23%



fund “improve-the-business” IT projects. (See Fig-ure 7.) “The businesses should have more flexibil-ity on how to allocate resources for IT,” says one VP of finance at a midsize manufacturing company.

Finance executives also see a greater role for their own teams in the business-case process for such projects—in many cases as a facilitator of con-versations between IT and operations groups. To ensure accountability for the return on IT proj-ects, “Sponsors of the IT spending requests and their finance teams need to jointly develop and own the business cases,” argues one controller at a large software/networking company. “Business cases need to include the measurements and the methodology that will be used to assess actual performance versus the business-case assump-tions.” Another executive, a division VP and CIO at a large health-care company, corroborates this view, saying that “there need to be meaningful conversations between operations, IT, and finance on a regular basis. These conversations review the status of IT developments, [as well as] their priorities and their costs. If you get these three organizations on the same page with these aspects (status, priority, and cost), you’ll expose more IT value.” Yet another executive—a director of finance at a midsize pharmaceuticals/biotechnol-ogy company—illustrates the success of a col-laborative approach to IT decision making: “We have a very open development methodology that incorporates various departments in coming up with development objectives for the coming years. This business-unit partnership with IT has proven to be very successful in approaching problems in an innovative and cost-efficient manner.”

FIGURE 5:“At my company, should contribute more to documenting the COSTS associated with ‘improve-the-business’ IT projects.”

FIGURE 6:“At my company, should contribute more to documenting the BENEFITS associated with ‘improve-the-business’ IT projects.”

FIGURE 7:“At my company, should have a greater voice in whether to FUND ‘improve-the-business’ IT projects.”

Note: 5% of respondents selected “Not sure/Does not apply,” 4% selected “None of these,” and 3% selected “Other.”



45%Sponsors from the

business or functional units that would benefit from the

project

28%The finance

function

20%The IT

function

19%The senior corporate

management team



project

44%The finance

function

33%The IT

function


management team



project

44%The finance

function

40%The IT

function


management team



TECHNOLOGY

when “improve-the-business” projects do go forward, companies often lack the ability to reliably translate such IT projects into expected financial return, say finance executives. Most respondents (57%) describe their companies’ ability to ensure that “improve-the-business” IT projects yield their expected return as either “fair” or “poor.” Almost no respondents (3%) describe it as “excellent.” (See Figure 8.)

In open-response questions, one often-cited expla-nation for these difficulties with realizing expected return on IT involves project timing. A large number of respondents say that lengthy decision-making and implementation processes can hinder companies’ ability to achieve expected return on “improve-the-business” IT projects. “The biggest challenge we have is our nimbleness,” says one division VP and CIO at a large health-care com-pany. “We often try to make sure a new product or enhancement is perfect before deploying it, which hurts our ‘time to market’ track record.” Another company represented in our research—a large telecommunications firm—faces similar challenges: “We have many projects that never end because the initial specifications are never firmly set and achieved,” says a VP of finance at the company. Moving too quickly, of course, can also pose a problem, as one VP of finance at a large software/networking company explains: “Our company is far too reactionary and quick to jump on the latest fad in IT. Right now, we are outsourcing all of our developers. That lowers our direct salary expense, but the end result thus far is higher overall project cost and late completion.”

In addition to struggling to move at the right pace, scoping projects properly is also a challenge for companies, say finance executives. At one large

telecommunications company, for example, a recent “improve-the-business” IT project became so unwieldy that it eventually collapsed and did more harm than good, according to a VP of finance at the company. This executive says that the lack of an agreed-upon statement of work led to “constant changing of scope, resulting in trying to end world hunger and ending with no return, and therefore [we’re] further behind than when [we] started.” This executive advises other compa-nies to “have an IT investment committee across all functions,” and to make the decision to go forward with a project “only [after] a firm project plan is in place.” This executive also stresses the need to “measure the project constantly and stop if you see early signs of scope creep.”

Achieving Expected Return on IT Investments

FIGURE 8:“My company is at ensuring that ‘improve-the-business’ IT projects yield their expected financial return.”

3%EXCELLENT

Note: 1% of respondents selected “Not sure,” and 1% selected “It depends.”


“We have many projects that NEVER END because the initial specifica-tions are never firmly set and achieved.”

—VP OF FINANCE, TELECOMMUNICATIONS FIRM

39%GOOD

36%FAIR

21%POOR


If properly recognized, companies can learn from—or even rectify—the failure of an “improve-the-business” IT project to yield its expected return. Unfortunately, finance executives tell us that recognizing failure or success—by measur-ing the return of an IT project—is far from easy. “The challenge is that there are many factors that influence the business,” says one CFO at a midsize media/entertainment company. “How do we know what really caused the business to improve or decline (that is, how much is driven by the tech-nology)?” In our survey, most respondents (66%) describe their companies’ track record in measur-ing the financial gains (e.g., improved profitability) that they realize as a result of their “improve-the-business” IT spending as either “needs improve-ment” or “poor.” (See Figure 9.) Very few (5%) describe their track record as “excellent.”

Almost all respondents (95%) indicate that their companies would meaningfully benefit by improving their ability to tie “improve-the-business” IT spending to measurable financial gains, and some offer advice as to how to go about making such an improvement. “Establish review dates at project approval including post imple-mentation,” says one CFO at a midsize telecom-munications company. “Don’t just measure time and cost; include functionality. Dropping features to make project cost and time targets should not be considered a success.”

“My company is at ensuring that ‘improve-the-business’ IT projects yield their expected financial return.”

FIGURE 9:What letter grade would you assign to your company’s track record in measuring the financial gains that it realizes as a result of its “improve-the-business” IT spending?

Note: 1% of respondents selected “Not sure.”

5%A - EXCELLENT

29%B - GOOD

14%D - POOR

52%C - NEEDS

IMPROVEMENT



TECHNOLOGY


a major end result of weaknesses in IT decision making, finance executives tell us, is shortfalls in access to business information. Asked to step back and consider their access to informa-tion alongside their companies’ investments in IT, finance executives identify a discrepancy between expectations and reality. Most respondents (71%) believe that their companies should have access to more robust business information, given their IT investments in recent years. “We really need to improve our access to business information,” says one VP of finance at a midsize manufacturing company. “I think we have underinvested, but we should still have more than we have given existing investment levels.”

Respondents are especially interested in the financial benefit their companies could realize by having access to more robust information on prof-itability—by product and by customer. (See Figure 10, next page.) It comes as little surprise that finance executives—who continue to be tasked with helping their companies do more with less—would be most interested in having more granular information on sources of profitability. Respon-dents also show strong interest in having better access to information about customer acquisition and revenue, suggesting an understanding among finance executives that providing decision makers with better access to business information can be a powerful means of supporting growth.

But although respondents view better access to business information as a worthy goal, they also indicate that the costs of achieving it are often prohibitive. Finance executives believe that gaining better insight into profitability and other forms of information is, for the most part, a question of time and money. Presented with a list

of possible barriers to improving access to more robust information, respondents most often select “lack of time, attention, and resources” as among the greatest barriers.

Faced with extreme resource constraints, finance executives are hard-pressed to help their compa-nies get the value they expect out of their invest-ments in IT. Asked to offer advice as to how to get more out of IT spending, one CFO at a midsize manufacturing company urges, “Be vocal about your needs. Don’t accept the status quo!” As many finance executives in our survey indicate, how-ever, this is no easy task. At one large telecommu-nications company, for example, suboptimal cost-cutting practices have caused many potentially worthwhile “improve-the-business” IT projects to be overlooked in recent years, according to a VP of finance at the firm. “We have continually reduced IT spending, [to the point] that people don’t even submit anymore because they believe nothing is going to change,” says this executive.

How do finance executives overcome the status quo and push their companies to aim higher when it comes to IT? The first step, finance executives tell us time and again, is getting better insight into IT spending and investment. One EVP of finance at a midsize manufacturing company advises peers to “link the quality of information possible to specific operating decision making that the organization feels it cannot make effectively with current technology.” Getting better information out of IT requires companies to fully understand their information needs—in addition to the capa-bilities of their current technology relative to the capabilities of available offerings. In this effort, evaluating business cases for potential projects is just as important as calculating return on prior

Are Companies Getting the Information They Pay For?

“We really need to improve our access to business information. I think we have underinvested, but we should still have more given existing investment levels.”

—VP OF FINANCE, MANUFACTURING COMPANY


projects; retrospect must be held to the same rig-orous standards as foresight. “Clarify the benefits up front, get buy in, and then hold the project to the same criteria when doing the post-audit,” says one director of finance at a midsize chemi-cals/energy company. Similarly, another director of finance—one at a midsize financial services firm, argues that “there has to be an independent opinion to the figures that support a business case. There has to be accountability, for good or bad. Following up is as important as delivering.” The task of providing decision makers with better business information—information that is timelier, more comprehensive, and more insightful—starts with learning more about the primary delivery mechanism for such information: IT. For many companies, our research suggests, getting better information out of IT starts with getting better information about IT.

FIGURE 10:To what extent would providing decision makers with more robust information in the following categories yield a MEANINGFUL FINANCIAL BENEFIT for your company?

Product profitability 44% 43% 13%

Customer profitability 44% 43% 14%

Customer acquisition 35% 50% 15%

Revenue 34% 48% 18%

Price elasticity 33% 44% 23%

Customer attrition 31% 47% 22%

Promotions effectiveness 27% 43% 30%

Purchasing dollar volume 19% 54% 27%

Little or no

benefitGreat

benefitSome

benefit



TECHNOLOGY

MARCH 2013


the results of this survey strongly confirm what we at AlixPartners have found in helping hundreds of companies rationalize their IT project portfolios, develop advanced analytics for business decision making, and take cost out of their IT organizations:

n Companies are split between viewing IT as a cost to be managed and as a tool for improving operating profit.

n Most companies:

• Lump IT costs for “improve-the-business” projects together with “keep-it-running” costs when budgeting.

• Want to reduce “keep-it-running” IT costs but do not give business units and functions the visibility or incentive necessary for them to help do this.

• Want to spend more on “improve-the-business” IT projects yet cut these projects when there is cost pressure on IT.

• Want to improve their return on “improve-the-business” IT projects but are not disciplined in measuring the actual returns they achieve.

• Believe they should have much better business information given the amount of money they have spent on business intelligence and data warehouses, but have not explored the power and value of rapid targeted business analytics aimed at supporting specific business decisions.

But how can companies take this beyond an intellectual discussion, and actually improve their return on IT?

We suggest five specific actions that any company can take to increase the operating profit impact of their IT expenditures... and the CFO is ideally positioned to work with the CIO to help drive these changes.

1. Separate “keep-it-running” from “improve-the-business” IT costs for budgeting, tracking, benchmarking, and management purposes.

• “Keep-it-running” IT costs are those costs that are not discretionary. They include items such as the maintenance of current application systems, data center, voice and data communications, help desk, desktop/laptop support, IT security, and the management of the IT function.

• “Improve-the-business” IT costs are costs related to the implementation of new business functionality for the business units or corporate functions, and are discretionary. Examples include implementing customer- and product-profitability analytical functionality, enhancing an existing demand-forecasting system, or selecting and implementing an entirely new ERP system.

2. “Keep-it-running” IT costs are a cost of doing business, and they should be aggressively managed down year-over-year. Specifically:

• They should be budgeted by the corporate IT organization.

• The corporate IT organization should be held accountable for managing the unit costs down every year. Total “keep-it-running” costs should only increase as the volume of business increases.

• These costs should be directly charged or allocated to the business units and corporate business functions based on transparent, common sense cost drivers (e.g., number of email users, application users, desktop users) to provide the means for them to affect their charges wherever practical.

SPONSOR’S PERSPECTIVE

Specific Steps to Maximize Your Return on IT

12 MARCH 2013

MARCH 2013

3. “Improve-the-business” IT costs should be viewed as a tool for improving operating profit, and should be managed with the same rigor as non-IT expenditures that improve operating profit. Specifically:

• They should be budgeted by the business units and corporate functions.

• They should be viewed and managed as a portfolio of projects.

• A governance process should be established to:

• Ensure that standard business cases are developed and actual results are measured.

• The business, with the help of finance, should be responsible for defining and achieving the benefits, and

• IT, with the help of finance, should be responsible for estimating and achieving the timeline and costs.

• Prioritize the portfolio of projects based on the business case either within the business unit or across the corporation.

• Business unit and corporate leaders, with the help of finance, should be responsible for reviewing the status of the projects and adjusting the priorities of the projects based on changes in business conditions.

• IT, with business and finance partners, should be responsible for managing the projects and recommending corrective actions as problems arise.

• The amount of money spent on “improve-the-business” projects should only be limited by the amount of cash that the corporation has allocated to these types of projects.

• If the business case is strong for a set of IT projects, the decision to proceed with the projects should not be based on the total IT budget or on what is being spent in the “keep-it-running” IT budget.

• As companies become more proficient at the management of their portfolio of “improve-the-business” IT projects, they may choose to prioritize these together with all of the operating profit improvement projects within the business unit or company.

4. IT, with the help of finance, should be proactively coming to the business units and corporate functions with ideas for improving operating profit.

• IT and finance are the two functions within the company that have a cross-functional view of the business processes within the various businesses, and are in the best position to see how IT can enable the businesses to increase revenue and reduce costs.

• They should be looking at how IT can enable specific business processes to become more flexible, higher quality, and lower cost—and also at how IT can provide better information to enable the business to make better decisions.

5. Ensure that large “improve-the-business” IT projects have their business cases closely scrutinized, and that smaller, less risky alternatives are considered.

• Much smaller, targeted IT projects can often obtain the majority of the business benefits at a much lower cost and risk than the large ERP implementations that are often proposed.

• Rather than the massive, general data warehouse and business intelligence projects that so many companies have spent large amounts of money on, much more useful management information can be delivered by focusing on the key decisions business executives must make and creating targeted data cubes and custom analytics.

By leading an effort to implement these five steps, CFOs can partner with their CIOs to help their companies both reduce their IT “keep-it-running” costs and increase the operating profit improvements that their “improve-the-business” IT expenditures provide—thereby maximizing their return on IT.

MARCH 2013 13


TECHNOLOGY




Separate “Improve-the-Business” and “Keep-It-Running” IT Costs and Manage Them Differently to Maximize Return on IT

“Improve-the-Business” Discretionary IT CostsBudget for these costs in the business units and corporate functions that benefit from the projects, and limit these expenditures solely by the amount of cash the corporation determines to spend and the number of projects that exceed the corporate project-return hurdle rate.

Manage these as a portfolio of projects, with priorities set based on rigorous business cases, like non-IT operating profit improvement projects.

Hold the business accountable for defining and achieving the benefits, and IT accountable for defining and achieving the project timeline and costs.

Focus on smaller, targeted IT projects that provide analytics to enable specific business decisions, or provide specific functionality to help improve operating profit, rather than committing to massive ERP or data warehouse/business intelligence projects.

“Keep-It-Running” Non-Discretionary IT CostsCentralize the management and budgeting of these costs within the corporate IT function.

Hold IT accountable for driving down unit costs year-over-year.

Directly charge or allocate all of these costs to business units and functions in a transparent, common-sense way that enables them to take actions to reduce their usage and therefore their charges as they see fit.

14 MARCH 2013

Major “Improve-the-Business”Projects

Minor “Improve-the-Business”Projects

Application Maintenance

IT Infrastructure Projects

Data Center

Desktop/Laptop/Tablet

Help Desk

Data/Voice Communications

IT Security

Management and Administration

AlixPartners, LLP is a global business advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial advisory services, and information management services. The firm was founded in 1981 and can be found on the Web at www.alixpartners.com.

Maximizing the Value of Information Technology: CFOs Dissect Their Companies’ Spending and Return on IT is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Please direct inquiries to Matt Surka at (617) 790 3211 or [email protected].

CFO Research and AlixPartners developed the hypotheses for this research jointly. AlixPartners funded the research and publication of our findings. At CFO Research, Matt Surka and Celina Rogers directed the research, and Matt Surka wrote the report.

March 2013

Copyright © 2013 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.

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