To succeed as an IT director, you need to understand the
numbers, and a close working relationship with the finance
department can prove invaluable. Sally Flood looks at the
challenges and benefits of forging alliances
Jim McEwan began his career as an accountant before
moving into IT in 1981. As director of IT at Scottish Power he has
found his financial background invaluable. "The IT director's job
is as much about watching the pennies as watching the technology,"
he says.
McEwan believes that anyone with aspirations to become an IT
director needs a working knowledge of finance. Without it, IT
executives risk not being taken seriously by the finance director
and being unable to gain approval for vital IT expenditure.
"I remember an old professor said to me once that if you do not
understand the numbers, you are at the mercy of those who do," says
McEwan. "I definitely think that is true for an IT
executive."
IT executives are increasingly called on to work alongside the
finance department as the nature of IT investment changes, says
Scott Phares, IT director at software supplier Business Engine. "IT
finance used to be a headcount once a year, where you looked at
what projects were planned," says Phares. "Today, finance is a lot
more interested in the details of exactly what you have spent, and
exactly what you have achieved in return."
This process can quickly become hostile if IT executives cannot
speak the language of the finance director. "Money is the language
of business, and if you cannot articulate the value of what you
have spent, you have got problems," says Phares.
As a rule of thumb, IT directors should be able to understand basic
financial terms such as net return, net present value and
depreciation. On top of this, it is important to understand metrics
that are specific to your company, says Phares. "Return on
investment is a pretty standard measure, but many companies use
return on assets or return on equity as a measure."
Without this understanding, life can become very difficult for an
IT director, says Martin Curley, director of IT innovation at Intel
and author of Managing Information Technology for Business Value.
"If you cannot speak the language of the finance director, the
result could be systemic under-investment in IT. That is an
increasing problem as IT directors are reporting into finance to an
ever greater extent."
At Scottish Power, the relationship between IT and finance is
considered so important that the company has appointed a dedicated
IT financial controller who acts as a liaison between the IT and
finance directors. "It means I am effectively in contact with the
finance department every day, and the numbers we are producing are
in line with what the finance director needs," says McEwan.
Although not every company needs an IT finance controller, Phares
recommends appointing one project manager in each department to
monitor finances. "There should be someone in each area with some
accounting training," he says. "That person runs the finance and
works alongside another manager who runs the IT."
A close collaboration can make the process of building business
cases much easier. At Scottish Power, the finance and IT
departments have agreed standard methods of presenting business
cases and return on investment, increasing the chances of projects
being approved. McEwan uses standard company-wide hurdle rates for
all potential IT projects costing more than £1m. "It basically says
that for investment X, we expect certain results, depending on
whether it is an operational or capital expense," he says.
However, it can be challenging to fit every IT investment into such
neat boxes. "Sometimes with IT, the investment is fundamental to
the business, but does not make a good business case - so with
security, we cannot make a great business case, but if we did not
do it, we would be in big trouble."
There are several factors driving the IT-finance alliance. First,
IT directors are required to produce far more rigorous return on
investment calculations than ever before as budgets come under
greater pressure. "Capital is a lot harder to come by in any
business than it used to be," says Curley. "IT directors have to
think about what value their projects are delivering, and how that
value can be quantified."
IT is also increasingly important to companies' compliance efforts.
Regulations such as Sarbanes-Oxley mean that IT departments need to
be able to show that corporate reporting follows set procedures and
demonstrates compliance. The issue has made finance a core element
of the IT director's job, says Clarel Sookun, UK IT director with
German-owned banking group ING-BHF.
"A lot of the projects we are undertaking in the financial sector
have a compliance element built in, and because we are an
international business, it affects us a great deal," Sookun says.
"I have to work closely with the chief financial officer to ensure
that our reporting meets all the legal and regulatory
requirements."
Historically, IT and finance have attracted different types of
manager, and this can make forging a close working relationship
difficult, says Curley. "Finance and IT managers generally have
completely opposite perspectives. Finance is still doing things the
way it did it 100 years ago, whereas IT has to reinvent itself
every few years - it is no wonder there are culture clashes."
The key to creating a successful working relationship with your
finance department is regular communication and mutual respect. "It
is important to try to understand the other person's point of view
- and IT managers are not always very good at doing that," says
Sookun. For example, when he wants to invest in new hardware,
Sookun checks with finance to see what costs can be written off in
a particular quarter, or whether there are opportunities to spread
the outlay across different budgets. "It is basically a case of
trying to meet their requirements whenever you can," he says.
If you are not a financial whiz-kid, Curley recommends a specialist
training course covering the value of IT, or a business-focused
qualification such as an MBA. "At the very least, there are plenty
of books around about how to calculate and measure value and write
accounts," he says. "It is not an impossible thing to achieve in a
few months."
It is also worth simply knocking on the finance director's door and
asking for help, says Curley. Explaining to a finance director that
you want to present a business case for a new investment, and
asking for help to calculate value to the business can save hours
of hard work.
"If you work with finance on the metrics, you will finish a lot
quicker, and you may gain useful knowledge about the company's
metrics in the process," he says.
Ultimately, a good working relationship between IT and finance
directors makes life easier for everyone in the IT department. At
Scottish Power, where IT and finance collaborate on a daily basis,
IT director Jim McEwan thinks the benefits are clear. "I have not
had a single IT project knocked back, because all my proposals met
the needs of the finance department - and therefore improved the
profitability of the business."
Case study: DMG Media
Global exhibitions company DMG Media understands the importance
of technology - the company relies on IT systems to co-ordinate
events around the world and communicate with suppliers and
customers all over the globe.
To get the best out of its IT systems, the company recently
reorganised so that the IT department reported to finance, rather
than directly to the chief executive.
"We used to have a separate vice-president of IT until November
2004, but we now have a single global vice-president who is
responsible for all technology and finance operations," says Ken
Sawyer, the firm's UK IT director.
Bringing IT and finance together reflects the company's belief
that the two disciplines share the same challenges and aims.
"Finance and IT are both trying to drive the business forward and
create a set of single, centralised processes," says Sawyer.
"Because of the regulations, bringing the two processes together
increasingly makes sense."
In practice, this means that all IT expenditure is approved by
the vice-president for finance and technology. The IT team will
draw up a project overview and details of the technical
specification, but all costing is done by the finance team to
ensure it matches corporate reporting standards.
To work with the vice-president, it is essential that managers
in the IT department have an understanding of the company's
financial processes, but Sawyer considers this important for all IT
directors. "As a senior manager in any department, in any company,
you have to understand money. It is your job," he says.
However, it is important to realise your limitations and
maintain a level of professional respect for your colleagues in
finance. "You have to acknowledge that it is not your profession,
and you are not the expert," he says. "It is like someone presuming
to tell you how to run an IT infrastructure because they have just
bought a PC at home."
The bluffer's guide to finance
Return on investment: A measure of operating
performance and efficiency, computed in its simplest form by
dividing net income by average total assets.
Depreciation: The process of cost-allocation
that assigns the original cost of equipment to the periods
benefited. The most common method of calculating depreciation is
the straight-line methSalod, which assumes assets should be written
off in equal amounts over their lives.
Sarbanes-Oxley: US legislation that applies to
all companies listed on the New York Stock Exchange, requiring
companies to submit a report showing the adequacy of their internal
control environment.
Net return: This is the revenue after tax and
other deductions that a project or business makes.
Net present value (NPV): This is the value the
project will return over a set period, with future cash flows being
discounted at the cost of capital (opportunity cost) appropriately.
It is measured over an arbitrary set period and if the project
returns a positive value it should be undertaken.
Amortisation: The process of cost allocation
that assigns the original cost of an intangible asset to the
periods benefited. Calculated in the same way as
depreciation.
Capital expense: An expenditure that is
recorded as an asset because it is expected to benefit more than
the current period.
Internal rate of return (IRR): A discounting
rate that can be used in establishing whether to implement a
project, even if the NPV is zero. The higher the IRR, the more
acceptable the project. It makes no allowance for the fact that the
largest IRR may be for a very small project that may not give the
maximum total return.
Hurdle rate: Required rate of return, above
which an investment makes sense and below which it does not. Often
based on the cost of capital, plus or minus a risk premium. Also
known as required rate of return.
Chargeback: The redistribution of costs to the
units within a company. The percentage is worked out arbitrarily
and can lead to a skew being put on the results. This can go as far
as to make what is a profitable product appear to be unprofitab