Make friends with finance

To succeed as an IT director, you need to understand the numbers, and a close working relationship with the finance department...

Strategy feature p30 010205  

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

This was last published in February 2005

Read more on IT risk management

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.

-ADS BY GOOGLE

SearchCIO

SearchSecurity

SearchNetworking

SearchDataCenter

SearchDataManagement

Close