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How CFOs Categorize IT Spending and Why They’re Leaving Money on the Table

on March 6, 2013

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My Monday morning browse through CIO Journal’s daily newsletter brought my attention to an interesting blurb: CFOs want to see more benefits from IT outlays. The one-paragraph explanation of a recent survey of CFOs reports a dreary opinion of the cost-benefit of technology spending. “Over half [of the CFOs surveyed] said their company needs improvement when it comes to measuring the financial benefit of IT, and 14% said their firms do a poor job in that regard,” the article said.

The report, prepared by CFO Research in collaboration with AlixPartners, provides interesting stats on what CFOs are thinking about their technology spending – and the break up between two categories of such spending: “Keep-it-moving” and “Improve-the-business.” Logically, the former categorization relates to dollars spent on supporting and maintaining systems that the company is currently using. “Improve the business” type of expenses refers to discretionary IT projects that improve or add to the systems that the company is currently using.

The results are foreseeable…

Graphical chart
Source: http://www.alixpartners.com/itaa/IntellectualCapital/MaximizingtheValueofInformationTechnology.aspx

That last box is one we’re particularly keen on here at Mendix. It typically goes into whether we can judiciously recommend our platform to an IT organization (and yes, we are the first to admit when a prospective adopter is knocking on the wrong door). Measuring financial impact of technology, as the report goes on to state, is a difficult task that requires accounting of numerous oft-nebulous variables.

The report echoes a problem that has afflicted CFOs, IT departments, and business units for decades: How do you balance innovation costs with maintenance costs, and which of the three parties has the clarity into those investments to know whether they’re generating returns? I’d like to think that in most cases, business units responsible for those returns can accurately and precisely measure the impact on their results. According to the report, however, a majority of respondents would like to see more insights into IT spending such as Product Profitability, Customer Profitability, Customer Acquisition and Revenue, to name a few.

But this is quickly becoming an antiquated mode of technology investing. It omits the capabilities of an “improve-the-business” investment to effectively renew the value in a legacy system, and therefore “keep-[them]-running” simultaneously. Perhaps the two contrasting categories above were chosen in an effort to give CFOs a clear survey to which to respond. In my experience, though, part of the app-platform-generation as it may be, there is a gray area in between the two, wherein re-use of existing applications coupled with new functionality can minimize “keep-it-moving” costs while still “improving-the-business” and generating returns.

The issue with ignoring this option is that CFOs are leaving money on the table.

CorvetteTake my (alas, hypothetical) 1969 Chevrolet Corvette: It’s sitting in my garage, and it costs me a small fortune to maintain, or to “keep it running.” A mechanic tells me one day that the engine is overheating, and I should replace it with some modern equivalent so that I won’t have to worry about it going up in smoke on a hot summer day. (Mind you, I am more of a drive-and-enjoy-it type of classic car owner, than the look-at-it-only kind. And as you follow this metaphor, all business software is meant to be used, not admired.)

The mechanic is proposing an “improve-the-business” investment that also minimizes my maintenance costs. Now think: What if the mechanic suggested I buy a motorcycle for those hot summer days, and only take the car out when it’s cool enough that I don’t have to worry about the engine overheating? That is what you’re admitting to when exclusively choosing between “keep-it-running” and “improve-the-business” and it’s no wonder why they’re having a hard time measuring financial impact!

All too often, investments in software are thought to expire. Only recently have app platforms made it possible to build new functionality and user interfaces much more easily and quickly than before, alongside or on top of existing less-flexible systems, regardless of when or how they were built. This is where CFOs are leaving money on the table or, even worse, missing new revenue opportunities. Innovative, fast-growing companies know that adaptability is the new imperative. It’s this way of thinking that fills the gray area between “keep-it-running” and “improve-the-business” IT spending.

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