The Rise of Financial Management as a Strategic Tool
Thanks in part to several key mega-trends in business thinking over the last 30+ years, senior business and technology executives face a fairly generic list of tasks today.
- They are working to align information technology (IT) with business goals, turn IT into a strategic asset, and use technology to gain competitive advantage.
- They want to measure the economic value of IT, empirically, to obtain accurate and detailed insight into the total cost of ownership (TCO) of IT assets and services so they can measure the return on investment (ROI) of those IT investments.
- They expect continual improvement in IT services, a process they associate not only with quality, but with TCO optimization. In other words, they expect quality and service improvements and better ROI, at the same time.
- They are wondering how to adjust to a new period of dramatic technological change, cloud technology, mobile applications, big data, etc. and a very challenging business environment, simultaneously.
- Compliance is a thorny issue with regulations such as Sarbanes-Oxley now in place, laws which demand better governance and greater transparency into the economic value of corporate assets and services, and better decision making.
- Managing the demand for information services, efficiently, and forecasting demand is a challenge.
- They are trying to decide the best way to deliver IT services, by outsourcing (single or multi-vendor), in sourcing, smart sourcing, etc.
One can see the effects of the relevant mega-trends at work in the list above. There was the turn away from vertical integration in the late 1970s, to a focus on core competencies and the birth of the extended enterprise, or outsourcing. The influence of applying the scientific method to business management, a movement popularized by W. Edward Deming and the rise of Japan as an economic force in the early 80s, is seen in the use of statistical measurement and programs of continual improvement. Massive corporate fraud and failure show up in the legal requirement for better governance, demanding transparency and operational insight into the economic value of assets and services and better strategic decision-making. One also sees the growing importance of technology as it emerges from back-office cost centers to become a strategic weapon of corporate revenue generation and in many cases, the business product or service itself.
The other thing that is clearly visible in the current list of tasks that consume the attention of executives is the rising importance of financial management as a strategic tool and if it isn’t, it ought to be. Why? Because financial management is about making better strategic decisions, by understanding TCO and ROI, substantiating the economic value of IT assets and the services contained within a “Services Portfolio,” ensuring financial compliance and control, visualizing operational control, capturing and creating value by clearly identifying which services are making the organization money.
A key component of financial management, as it relates to IT, is putting an economic value on the services being offered, whether by an internal IT department, a shared services organization or an outsourcing vendor. Determining costs is much easier than determining value but it isn’t all that easy either. Internal IT departments are more straightforward than the other two because the costs are fixed. Variable and shared costs are more difficult to determine and often suffer from the lack of detail and accuracy. For example, most outsourcing vendors use manual methods to put together service invoices.
Value is much more difficult to determine because to some degree it depends on consumer perceptions and IT, in general, does a very poor job of mapping services to where they are consumed, an essential part of calculating ROI in my opinion. In fact, many people in IT suffer from a lack of financial management and strategic thinking skills. Consequently, they do not do a very good job of communicating the economic value of what they do to senior executives and senior executives, in turn, don’t know much about technology. It isn’t going to be easy bringing these two worlds together but tools and methods are starting to emerge and the bottom line is, uniting them is rapidly becoming a matter of survival.
About the author:Doug Goddard is the CEO of TCSF.COM. They provides turnkey, software solutions and managed services, to ensure the good governance of outsourcing contracts and services. Triton Objects is utilized by consumer and vendor governance groups to automate the core of ITIL v3, Service Strategy, including service portfolio, demand and financial management processes. Triton Objects contains solutions for volumetric service invoicing, demand aggregation, service requests, financial and capacity planning, data center asset management and other governance functions.