In today’s business world, it is no longer enough to walk into a management meeting with ROI and TCO numbers, along with a ”current-projects” list and sheet of demands.
That’s because unless you can justify the IT department’s value and ”sell” its accomplishments in business terms, there is a very real danger IT will be restricted to business-support activities, instead of driving the business forward; or worse: outsourced completely.
It is the CIO’s job to ensure your company’s business processes are as efficient as possible and to provide real, measurable value to the company. Therefore it is imperative to have the business and financial skills to make a business case.
”There is definitely a need for a new breed of CIO — a business person with an IT hat who earns the right to be on the bridge rather than in the engine room,” said Martin Wyke, IT director at telecommunications carrier Energis.
Financial skills matter because articulating the advantages of an IT project to upper management can only be done credibly if done in financial terms. The technology details of the project are usually irrelevant. Whats important is the effect on the bottom line.
”I don’t know how (a CIO) can be successful without understanding that,” said David Simon, CIO of the Sierra Club. ”I actually think everybody in American business should take a basic accounting class, because that’s the nuts and bolts of how decisions are made. It’s a cost/benefit analysis. It’s how (management) people think. They’re all being held accountable to a bottom line and you’ve got understand that same kind of bottom line.”
In practice, you need to be able to justify an IT project in the same way as any other line-of-business manager justifies a project: You must be able to give credible figures for the expected cost savings or return-on-investment (ROI) and payback period for any proposed projects.
But sometimes it simply isn’t possible to justify IT projects in straight financial terms. How, for example, do you measure the financial benefit of upgrading a system for which support is to be discontinued?
In these cases there also may be some measures which are more specific to IT, such as IT spending as a percentage of total revenues, which can be used as benchmarks to compare with historic spending levels, or with other companies operating in the same markets.
”Every IT director needs to find his own twenty ratios, such as IT spending to revenue or IT spend to share price, which are appropriate for his company,” said Sidney Finehirsh, president of CMX Group, a management consultancy.
Applying the Numbers
How can these ratios be used?
In the same way that a company measures investment in research and development as a proportion of total revenues and benchmarks this against others in the same industry. You should be able to show when your company is under-investing in IT and use your ratios to build a case for spending on projects which do not generate a direct return — like upgrading software to ensure continued support or business process improvements.
Today, IT is about providing value, not technology. Joyce Gioia, a principal at the Herman Group, a business management consultancy, says to show the value of your department by approaching executive committee meetings and board rooms in the same way a good sales person approaches an important prospect.