Finding a common ground between Finance and IT
Regardless of the size of the business, in most companies IT leads and heads of finance speak very different languages. It is this barrier which all but defines the Business-IT divide and largely because of it, IT struggles to establish a strategic role for itself, forced to continually manage costs as little is understood by Finance of each “IT expense” line item’s value.
As an IT specialist myself, to identify the problem I had a heart-to-heart with a business associate who is an expert in his particular field of finance – auditing. Werner Kleinschmidt has been an auditor for well over a decade and knows intimately exactly how business values internal operations and investments, so I was determined to discover from him precisely how IT is viewed from the perspective of the business professionals who understand the finance side of this equation.
DEFINING THE PARAMETERS
Before even getting going on technology specifically, I wanted to confirm how much influence the finance expert has in the business, what the extent of their decision-making powers over IT investments actually is. It turns out that finance has almost ultimate power – even if the company’s CEO seeks to implement some grand scheme, if Finance says there is no money, then the project (usually) does not go ahead.
We proceeded to discuss pure language definitions. Specifically, the abbreviation “IT” as opposed to the word “technology”, and the degrees of separation the head of finance sees between these concepts. Technology, he explained, are often the things that the business feels they know how to value – usually made up of the hardware the business has purchased as well as the software suites it understands are required to operate. IT, on the other hand, tends to be the blanket term for those recurring costs which push up the monthly spend simply because they are required – so items like ADSL, internet-related costs and even managed services (support) contracts.
WHAT AM I PAYING FOR, REALLY?
Which very quickly lead us to the next critical point: what worries the accountants and finance specialists most about IT spend? Since we’d agreed to be brutally frank with this discussion from the outset, Werner laid it straight before me. Finance experts cannot marry the actual costs with the business value obtained from that spend. Which often leaves them questioning why must so much be spent on a particular solution, his example being the various Microsoft license renewals, each year? Is there not a better or perhaps cheaper option to explore? The finance team only has the word of the IT specialist to rely on in these decisions.
This is where another interesting fact surfaced. These finance people are taking advice on significant business investments and expenses from a person who can usually claim relatively little in the way of formal qualifications, other than, possibly, work experience. However, despite their far more extensive and formal qualification, these finance leaders are unable to critically evaluate the advice because the technology world is just not something they understand. In addition, the IT specialist appears unable to describe the value in the business terms that finance understands. This example of the business-IT divide, especially as it relates to the Finance role, inspired our cartoon which illustrates how Finance often feels about the regular expenses incurred by IT.
My own experience and qualifications only slightly bruised, we moved on. Is there a significant difference between the understanding finance people have about money spent on technology versus money invested in other aspects of the business? Very much so, he confirmed, in most cases all other line items are dealt with first and what is left is for IT. The reason being that the finance expert does not comprehend what IT actually does, and so lumps everything to be spent on IT into a single box.
THE WAY IT COSTS ARE ALLOCATED IS NOT MUCH HELP
Interestingly, Werner revealed that technology costs usually fall into two quite clearly-defined categories. Capitalised items which are recorded separately, while all non-capitalised items are entered as expenses. This seemingly minor detail makes all the difference to one who is looking at monthly financial reports and making investment decisions based on this data – the capitalised items are associated with having greater value (PCs, servers, and software), while the expense items relate to those costs which are often questioned and targeted for reduction (labour, internet connectivity).
Further exacerbating this understandable perception, is the anomaly of depreciating IT assets over 3 years in financial records even though these assets are these days sweated for 5 or more years. This results in IT assets costing unrealistically low amounts for their last few years in service until an upgrade cycle is forced through to avoid technological stagnation.
Some companies do prepare an IT budget which provides the finance specialist with at least a 12 month view of anticipated IT spend. However, this does not really help the non-technical financial assessor with understanding where the money is going and how this spend could be optimised to yield better results for the business. He must still rely on the IT expert entirely for this allocation.
TRANSPARENCY OF IT COSTS IS NEEDED
Having identified several distinct hiccups in the communication stream between IT and finance, just how do we go about resolving these issues? Because meaningful recording of money spent is high on Finance’s agenda, this is surely a good place to start. If each IT (and “technology”) cost is allocated in a way that made it possible for finance, and business people to understand how the money is being used in the business – for example, by department and by IT service, or even how much they are paying for a service versus other alternatives – they would be empowered to evaluate the spend in much the same way they are able to evaluate other non-IT costs. By revealing where this money is going, finance people will be able to make decisions based on opportunity, need and risk without needing to know the technology terms that add little value to their lives today.
A MODEL FOR IT SPEND
It is the clear need to unpack the current “black box” of IT spend into understandable terms and structures that drives part of our Relevant IT research. We already have models which allow these costs and associations to be visualised, allowing questions to be asked about what services, applications and hardware components are being paid for – in much the same way business people now visualise their company data without having to be a business intelligence specialist.
Is this how IT spend will be simplified for business and finance people in the future? Will we start to see more IT cost transparency within the business? We certainly think what we are working on is a start. If you would like to know more, or work with us in our quest to bridge the business-IT, or even the finance-IT divide, I would love to hear from you.