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The Case for CFO Involvement in IT Governance and Investment Decisions
 

The Case for CFO Involvement in IT Governance and Investment Decisions

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For organisations to view IT as a strategic differentiator, it's key for CFOs to be actively involved with IT governance and calculate IT ROI in a structure manner.

For organisations to view IT as a strategic differentiator, it's key for CFOs to be actively involved with IT governance and calculate IT ROI in a structure manner.

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    The Case for CFO Involvement in IT Governance and Investment Decisions The Case for CFO Involvement in IT Governance and Investment Decisions Document Transcript

    • • Cognizant 20-20 InsightsThe Case for CFO Involvement in ITGovernance and Investment Decisions Executive Summary Five Common Problems of In most large organisations, information IT Governance technology (IT) is still viewed as a support Large organisations face largely common IT function. In fact, many business executives still governance challenges, even though IT’s impact find it difficult to accept the potentially transfor- on the business may vary significantly. The mative role of IT. They are unable to embrace process by which these benefits accrue lends and accept IT as a change catalyst, given the itself to common management and governance supportive role IT has historically played across issues. These challenges are tackled in different industries. organisations at different levels, although it is most common for executive management, Business and IT priorities are considered by senior especially the CFO, to be detached on a day-to-day leaders to be vastly different from one another. basis. Thorny issues typically ensue, including the Executive managers in most large organisations following: are expected to manage business priorities; it is rare for executives outside of the COO or • Customer-facing applications are allocated CFO organisations to focus on the strategic a disparate share of the technology budget. management of IT. However, if these executives Every year during the budgeting process, are not closely connected with the business, it the business tends to provide a wish list of becomes difficult, if not impossible, to measure needs, with impacts as important as maintain- any return on IT investment. Creating a tight and ing market relevance or creating competitive lasting connection between the corporation’s advantage. However, many of these items business needs and IT returns can be established are related to how customers perceive their by the active involvement of the CFO in the IT experience of interacting with the company. governance process. Consequently, a large portion of the annual budget tends to be spent on IT systems and CFOs should view IT as a strategic differen- infrastructure that is customer-facing. As a tiator for their organisations. The return on IT result, core processing or business operations investment should be calculated in the same remain reliant on old, legacy infrastructure type of structured manner that is necessary for that is badly in need of a fundamental overhaul all large initiatives. The CFO’s involvement is key but making do with piecemeal changes. to driving this behavioral change, as this brings more accountability to and correlation with the • The business has limited involvement in organisation’s business objectives. the process of IT delivery. Having provided cognizant 20-20 insights | july 2011
    • a wish list and won agreement on the IT involved with transformational IT initiatives programs for the year, the business does in most large organisations. IT programs not tend to get actively typically require heavy organisational change The CFO can and involved with the process of management and buy-in from power centers should help the IT delivery. While expected to team would be no business across the organisation. Lacking an executive writ, they tend to fail more often than not. organisation achieve manage technology projects, The real investment made into these large greater business-IT this behavior creates a chasm programs is not fully realised by the business, alignment and bring standing the business’s under- between of technology risks as various stakeholders establish individual primacy and guide program direction to suit the IT function to and priorities and the real their business unit requirements. the mainstream by implementation situation. CFO Involvement in the Management personally assisting Business users’ involve- ment tends to become very of IT: Setting the Right Precedents with the definition of episodic in specific phases In most large organisations, the technology the IT vision. of the software development function reports directly to the CFO via the chief lifecycle (e.g., requirements information officer (CIO). Within the executive definition and user validation), but they don’t management team, the CFO is best situated to understand the impact that an IT lifecycle can change many of the aforementioned governance have on core operations. challenges, in a permanent manner. The CFO can • Little effort is spent on prioritising IT ini- and should help the organisation achieve greater tiatives. The prioritisation of IT initiatives and business-IT alignment and bring the IT function the real definition of the value they bring to to the mainstream by personally assisting with the business lack sufficient the definition of the IT vision. This includes the following: CFOs can play attention. In effect, effort is sum of money and a great an active role in spent on running the organ- • Link corporate objectives to IT objectives. Each year, the business undergoes an extending the isation rather than exploring elaborate process of business planning and organisational transformationalIT is options. Transformative almost defining specific objectives to attain on an financial planning never funded over the long annual or multiple-year basis. This planning forms the basis for IT investments (or budget and analysis term with proper visibility. cuts). The IT organisation should mirror this capabilities to the IT Businesscutcycles, therefore, tend to into budget avail- planning process in terms of creating its own function, ensuring ability and prioritisation planning cycle. The planning process should specifically look at creating greater business better planning and of these programs. IT that alignment and defining IT objectives and goals forecasting, with enables long-term business objectives frequently gets as a function of individual business objectiveslong-term investment side-stepped in favor of and goals. CFOs are well placed to provide this direction, with a solid view of the businessrequirements in mind. immediate business require- thought process, as well as eventual account- ments and priorities. ability for IT. • IT is not considered a strategic differ- • Institutionalise the IT budget allocations entiator, but as a means for delivering process, including required CFO sign-off. In operational benefits. Business teams may not a decentralised decision-making environment, always consider IT as a strategic differentiator IT budgets are typically agreed to by divisional to the business. They look at IT as a support CIOs and divisional business heads. If the CFO is function, more or less essential to keeping the made part of the IT budget allocation approval lights on. Very few business executives spend process, it will create additional oversight for time coaching and mentoring their staffs to ensuring that the budget allocation balances derive undefined and blue-sky value from their short-term business goals with the pursuit technology initiatives. and fast-tracking of long-term organisational • Executive involvement is limited to strategy. reviews and progress tracking rather than active guidance and executive sponsor- • Link IT budgets to business impact at a program level. CFO involvement in the ship. Executive management is not closely cognizant 20-20 insights 2
    • budget approval process will also formalise and priorities, and in the process, it may not the practice of measuring the business impact always be able to leverage IT for driving dif- delivered for each program rather than ferential value beyond the set objectives. abstracting the benefit proposition at the line- A better understanding of the IT return on of-business level. Depending on the size of investment and the future business impact the organisation, appropriate thresholds can of current investments may help change that be determined, beyond which CFOs should behavior. CFOs are, again, placed very well to explicitly approve program-level budgets. make the difference. If current investments are guaranteed for transformational IT not-• Improve the planning and forecasting withstanding the business cycles, the business process for technology requirements, can aim for a multiplier effect on this initial IT providing business a future rolling view innovation outlay. Over time, these investments of investment needs. The effectiveness of can become self-financed and potentially even financial forecasts in any organisation is critical operate as a profit center. However, active to the stability of the business model, as well communication of financial considerations and as the ability of executive management to shift benefits will be fundamental to creating any focus from worrying about quarterly guidance such “IT innovation reserve.” Again, the CFO is to longer term strategic opportunities. While best placed to take that long-term view. most large organisations have effective insti- tutionalised practices in place when it comes • Ensure IT architecture is a function of to demand forecasts, the same rigor is not business architecture. The IT architecture replicated on the supply side. CFOs can play involves the details of how business processes, an active role in extending the organisational organisational units and operational activities financial planning and analysis capabilities are modeled in an IT environment. Various to the IT function, ensuring better planning organisations spend different amounts of and forecasting, with long-term investment time and effort in creating this architectural requirements in mind. IT should be able to alignment. Quite often, several IT programs regularly and accurately articulate a rolling just skip this initial planning and alignment view of investments required to meet opera- phase. However, effective calculation of return tional as well as strategic business needs. on IT investments will necessitate excellent understanding of IT costs and benefits, which• Ensure the organisational risk management in turn can be understood only if the IT archi- framework accounts for IT governance tecture is business-aligned. While this subject risks. Another potential area of synergy that is not an area of active CFO involvement, the CFO can create within his organisation is IT linking the financial evaluation of programs risk management. In most organisations, the or IT outlays to defining this alignment as chief risk office (CRO) reports to the CFO. This a pre-requisite will automatically improve role focuses on external risk management, the financial governance of IT. This will help adopting the best market practices and increase accountability in the way large IT responding to regulatory stimuli as applicable. programs are managed and delivered. However, the expertise and experience of managing business risk is not fundamentally • Ensure the business is making the right applied to an otherwise internal IT function. investments in high return areas like At the program level, IT executives do look at business intelligence and data analytics. risk management as a critical function, so the All organisations benefit from a greater business expertise available in-house can be understanding of their customers’ behavioral very effectively leveraged by the IT function. patterns. Many organisations, however, miss CFOs are in the best position to create this making the right investments to create the CIO/CRO synergy, leading to more effective IT infrastructure to consistently understand this governance. behavior. If CFOs have a solid handle on IT budgets and related business priorities, they• Invest in IT innovation to drive differential will be well placed to suggest compensatory value. As mentioned earlier, the business may measures, bringing to the fore these impactful take a short-term view of its IT requirements but under-invested areas. cognizant 20-20 insights 3
    • Ensuring IT Advances Business Objectives Business Goals IT Enablers IT Implementation Benefits Framework Corporate Strategy IT Return on Investment Growth, margin improvement, BU A nxA integration, improvements in customer IT Strategy touchpoints, time to market, diversification Scalability, cost optimization Functional Strategy systems and process Rollup of Benefits integration, enhanced Marketing Strategy CRM, process re-engineering and Supply Chain Strategy systems enhancement BU Strategy BU IT Strategy Programs and Benefits of Programs IT Projects and IT Projects BU 1 BU 2 BU 1 BU 2 BU n BU n Corporate, functional and BU strategies inform the IT strategy / roadmap. The IT roadmap is translated into the BU-level IT strategy, as well as IT programs and projects that accrue benefits on implemen- tation. These benefits roll up to provide the return on IT investment, which is then used to provide feedback to refine both corporate and IT strategies.Figure 1IT Strategy as a Business Enabler and • Benefits framework: Each IT program isCFO Oversight subjected to a comprehensive benefits mea- surement framework, where the underlyingWe propose the following framework to ensure evaluation items and considerations areIT strategy is seen as a business enabler and is pre-defined and known well in advance. Thistied tightly to long-term business objectives and helps create greater financial accountabilityvision. and helps the business obtain an instructiveThis framework for IT strategy closely aligns the view of the value delivered by IT. The actualbusiness goals with IT implementation plans. ROI also completes the feedback loop for theDoing this creates a strong, well-defined feedback IT strategy alongside the corporate strategy,loop for IT’s financial returns, which can create an thus providing periodic course correction andinformed future IT strategy. In this way, long-term directional guidance on the effectiveness ofgoals and short-term objectives are equally made the money spent.part of the IT governance process. This requires The CFO organisation is ideally placed to create,a focus on: implement and refine the benefits framework, which forms a key aspect of the feedback loop for• IT enablers: The key inputs to IT strategy from an outside-in perspective are all busi- IT strategy. ness-related — business strategy, business unit strategy and functional strategy. This Moving Toward Strategic IT includes long-term and short-term planning Executive management, led by the CFO organisa- items, which creates a comprehensive input tion, can help guide IT as a strategic differentiator view. The IT strategy is then deconstructed at for the organisation. By making the right invest- the business unit level to ensure proper focus, ments in IT, with measurable outcomes, organisa- while at the same time keeping the overarch- tions can stand out in a crowded and competi- ing vision intact. tive marketplace. Taking a long-term view of IT priorities and balancing it with strong near-term• IT implementation: The business unit level financial management and governance can create strategy is broken down in various IT programs unbeatable business-IT alignment over time. and projects, which form the annual roadmap for the IT division. cognizant 20-20 insights 4
    • About the AuthorsAashish Chandorkar is Senior Manager, Consulting, with Cognizant Business Consulting and leadsbusiness IT transformation and business IT alignment engagements in the capital markets space.Aashish is based in Pune, India, and can be reached at Aashish.Chandorkar@cognizant.com.Gaurav Chattur is a Consultant with Cognizant Business Consulting, specializing in large organisationaltransformation programs and change management initiatives. Gaurav is based in Pune, India, and canbe reached at Gaurav.Chattur@cognizant.com.About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 111,000 employees as of March 31, 2011, Cognizant is a member of theNASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing andfastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters Singapore Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 80 Anson Road #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA #27-02/03 Fuji Xerox Towers Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 Singapore-079907 Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +65 6324 6672 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +65 6324 4383 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: inquirysingapore@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.