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CFO: Is your technology investment high enough?

By: Dr Frits de Vroet

Many CFOs are concerned about the ever increasing and ever changing cost of IT. This is partly because is it hard to understand the cost themselves, but also because they seem to be recurring and generally lack transparency. There are a number of reasons for this.

Firstly, not all CIOs are good at explaining their IT cost in clear business terms. This makes it harder to understand the relationship between the cost and the benefits derived.

Secondly, not all IT cost in an organisation are actually controlled by the CIO. Moreover, an increasing part of IT cost is incurred outside IT due to the emergence of cloud computing services (subscription-based software or infrastructure hosted externally) and other IT solutions where it is not a necessity to have the traditional IT function involved.

A third reason is the absence of good governance that would provide linkage to the overall business strategy and strategic initiatives. This can be achieved through involvement in annual planning cycles, project governance and closer engagement with business owners.

Against that background, it is not surprising that CFOs find IT cost too high. However, as we are living in a world where technology becomes increasingly central to everything we do, one could argue that more successful companies actually distinguish themselves from their competition by making the right investment in IT. There is a lot of talk about the ‘digital enterprise’ in which technology and the digitalisation of processes is used as a competitive advantage. This does not only lead to process optimisation (and standardisation where beneficial), but also enables the organisation to truly leverage trends in mobile, social and data analytics (‘Big Data’). This will lead to the creation of innovative products and services reaching new customers in new ways.

So, how does your organisation achieve better use of your IT cost? Here are some suggestions:

1. Distinguish between ‘Build’ and ‘Run’ cost

Most organisations spent in excess of 80% of their IT cost on running existing platforms. Successful organisations have moved this to around 50% as a result of more consumption-based arrangements and reduction of waste. The remaining 50% is spent on technology investments (mainly projects utilising vendors providing cloud-based services) that drive competitive advantage.

2. Distinguish between core IT platforms and customer/user interfaces

Core IT platforms (e.g. your ERP, CRM, etc.) should be highly standardised across your organisation and have minimal customisation (customisation is expensive!). At the customer interface, there is room for customisation to provide a dedicated experience through different delivery mechanisms (web, mobile, API, systems integration, mashable data, etc.). This presents a thin and separate layer where for limited cost customisation is achieved.

3. Create appropriate governance to manage (IT) programs

A ‘Project Board’ with membership of key senior executives should govern the initiation, prioritisation and execution of larger projects or programs. This type of body will ensure that the right initiatives are prioritised, that they are aligned and provide transparency on progress and cost of these initiatives. IT projects are infamous for under-delivering on targets and overrunning of budgets. Proper initiation and good governance will go a long way in addressing that reputation.

Technology is disrupting many industries by uprooting existing business models and changing the rules of the game. Successful organisations embrace technology to drive new product development and business process optimisation. Reducing spent on existing IT and allocating it to the right IT projects will ensure that your investment in technology will be high enough…

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