Part I

However, even as tech stocks plummet, technology soars, becoming integrated into our daily lives more then ever before. Outside the more traditional aspects of IT, enterprise systems, mammoth databases, and office reporting, the Internet continues to work its way into what we do, day in and day out. According to the Pew Internet Project, www.pewinternet.com…

" On an average day, over 64 million Americans go online."

According to their surveys, people use the Internet to do everything from sending email to taking college courses on-line. The young, and not just college age kids collaborating on complex projects or with professors, but all the way down to kids in elementary school learning to use the web for developing reading and writing skills especially embrace the Internet. How does this translate up to adults and, more importantly, to you and me?

Lets start with an historic point of view. Originally, the corporate IT department existed to store and transmit data within and between departments and business units of an organization large enough to afford the up-keep. The cost of supporting an IT structure was offset by the costs of maintaining this data outside of the organization, after all, the idea behind the modern corporation wasn't just to define legal responsibilities and share-holder equity but also as a way to integrate all the tasks, jobs, and functions of an organization into the most efficient means of producing whatever service, product, or commodity the organization provides. The costs of creating, storing and distributing this data was simply part of the costs of doing business. Hence, IT departments all over America were added to corporate balance sheets and revenue statements as "cost" centers.

As technology and the data it provided proliferated the corporate desktop, so did the demand for more ways to distribute it. The centralized mainframe gave way to client-server; client-server gave way to the Internet. In the process, the "means to an end", for a lot of businesses, became the end itself. In other words, today technology is not just a part of how organizations keep up with how they make and distribute their products and services; it is rapidly becoming the product or service! Technology, and network technology, in particular, whether the form is intranets, extranets, or the public Internet, is becoming so intertwined with the businesses they support as to become indistinguishable. If this is true then IT, technology, and even product development can no longer be confined to "costs" centers but now contribute directly to the bottom line as "profit" centers.

However, this is a shift in paradigm that CIOs and technology managers may understand readily agree to, but it may take a little more to convince "traditionalist" CFOs and other high-level executives on the "business" side.

With little to show for years of undisciplined, often profligate IT spending, many companies are putting CIOs on a shorter leash, especially as the economy remains sluggish. They're demanding proof of payback at each juncture of IT projects, requiring CIOs to add financial expertise to their technical and business repertoires.

"Rather than just listen to the IT lingo and the CIO saying they can really do it, we are looking for immediate cost-vs.-benefit analysis on everything we do,"


Top Execs Rein In CIOs By DAVID LEWIS, July 13, 2001
http://www.internetweek.com/newslead01/lead071301.htm

In actuality, the relationship between CIO and CFO does not necessarily have to be a contentious one, nor does it have to be at a very high level. The CIO can be viewed as a large-scale "project manager" but only if the CFO is viewed as a large scale "accountant". This is, of course, an oversimplification. But I believe things are best understood when stated simply. Regardless as to whether each of these descriptions are accurate or flattering, this does help illustrate the point that when a project manager is given a project she is told how long she has to do it and how much she has to spend. The accountant is told how much money is available and what benefits there are to spending it. Obviously, if the accountant knows what the project manager is doing and why, and the project manager knows what the accountant needs to know and why, they should be able to work out a relationship that is mutually productive to both. The accountant learns something about how IT projects work, and the project manager learns how accountants work. Now lets get back to the "real" world.

In the past, the worlds of "techno speak" and "finance speak" have been incongruous and therefore at odds. While the economy was at its peak, it wasn't such an issue because companies still made money despite of failed IT projects and there were many. Whether large-scale technology initiatives were related to enterprise resource planning (ERP), supply chain management, or customer support and automation, the success or failure of these initiatives were largely subjective and sometimes, depending on whom you asked, disastrous. But the reality still exists that organizations cannot and will not survive without some level of IT investment. Even if it is at a reduced level compared to previous years, no organization can effectively say, "Its just too much trouble, we aren't going to bother any more!" Optimistically, tough times don't necessarily mean tough times for IT departments. More bearish economics can just as easily translate into new and more challenging opportunities for IT managers if these managers are willing to step up to meet those challenges.

The CIO as CFO

Today's CIO needs to go beyond technical savvy and management skills and tuck away some knowledge about the worlds of capital budgeting. Knowledge about ROI, cost analysis, cash flow, and payback analysis is becoming more and more essential to being a successful CIO, or a technologist at any level for that matter. To go even further, a basic knowledge of even deeper corporate finance concepts such as Net Present Value, IRR and MIRR, can lend a good deal of credence to the strategic planning of IT with principal business sponsors all the way up the CEO and board members. In short, the more knowledge an IT executive has about the business end of business, the more successful they are likely to be.

Again, let's put things simply. Before any IT project can get off the ground, someone has to come up with a good idea (sometimes not so good…), usually to sell or promote a product or service in a way that can create some kind of "competitive advantage" for the company funding the proposal. For example, during the Internet bubble, it was deemed that if you sold socks for instance, it would be easier and cheaper to sell socks "on-line". If you had a chain of sock stores throughout the country, they could be costly to maintain and support. If the company sold socks over the Internet, especially if their sock selling competitors didn't they could do the following in one fell swoop:

a) Since the Internet is global, become available to a global audience over-night.

b) Centralize distribution and inventory at a single location to service their "cyber-customers" since all transactions short of shipping are done electronically.

c) Expand their market and, hopefully, their market share without costly investment in "brick-and-mortar" solutions.

of "technology " spending. For the most part, these ideas are sound, just a bit simplistic. But the gist of these articles is not to explore the ins-and-outs of the Internet, but to explore what business and financial rules support this kind of strategy. I use it because the sock company is not necessarily a "technology" company but it is willing to invest in technology as part of its business strategy. Also it doesn't matter whether these ideas come for product development, the board of directors, or the new kid just hired out of college, on the face of it, the strategy makes sense and it seems reasonable to make the investment. We leave the how much to invest and what returns to expect to later chapters, for now lets jump to the "traditional" IT perspective.

The project has been approved at some level and wheels of implementation begin to turn. We first start with a budget. Someone, somewhere has to start by suggesting just how much money needs to be spent for this project and why. Sometimes this is done with IT's involvement sometimes not, but, hopefully, those responsible understand that whatever projects are funded are aligned with the overlying business strategy and/or initiative. This seems like common sense, but a lot depends on who comes with the initiative. It is possible that business initiatives are not aligned with IT strategy or initiatives and vice-versa. For example, what if our sock company's marketing division but the IT department consists solely of mainframe expertise. They have no formal development or support skills to do any more than COBOL General/Ledger or Human Resource application. This means the sock company must develop its own internal expertise which could take far too much time and prove more costly than expected or to "outsource" its Internet presence. Outsourcing may help meet specific turn-around times in creating an Internet presence, but once the flows of business falls into the hands of a third party our sock company could lose control of its ability meet customer need on demand. They would be totally reliant on the outsourcer to provide any type service, maintenance or updates to their site according to the outsourcers schedule and not their own. We are out of alignment.

On the other hand, the Internet initiative could come directly from IT. They have just hired a whole group of young entrepreneurial types that "get" the Internet. They know it, they understand it, and they use it everyday. In fact, that's how they buy their own socks. But how do they translate this to the business heads that control the purse strings that, most likely, may not be as "with it" as they are. They know they are right, because they know almost their entire "generation" wants to buy socks no other place than on the Internet. In this case, how do we move into alignment?

In the past, this has not always been IT's traditional concern. Technology can be consuming and, unfortunately, static, particularly during the old "proprietary" era. IT, being a cost center, usually received only dictates from up above and moved to fulfill those dictates accordingly, sometimes ardently, sometimes not so ardently, but rarely were they as concerned with where the money came from as where it was going? By the time business initiatives got to traditional IT analysis it was confined to determining costs of hardware and software to support the project and, of course, the projected need for resources and man-hours to complete it. This is essential for determining how much money is being spent but does not lead to determining good reasons for spending it. But as companies and their leadership become more technology savvy and come to expect a good deal more from their technology arms, this simply will not be good enough. IT managers must take a much more active role in determining what their departments and groups work on and predefining what the costs will be even before the project becomes a project. To do this they must first understand the fundamentals of how corporate finance works. This is useful knowledge not just for top executives in Fortune 500 companies, but at any level of American business. In short, in order to do business the IT exec needs to understand the language of business.

Mind you understanding the language of business isn't necessarily the same as being "fluent" in the language but I believe an efficacious target is to merely be "conversational". In Part II of the article we will go into more detail on translating "tech speak" into "finance speak"