The CFO and CIO: transitioning to a digital IT function
To read the full report from which this article is drawn, follow the link at the bottom of this article.
New digital technologies are transforming companies in all sectors, and this demands changes to how the IT function operates. Our global survey of financial leaders shows that CFOs are playing a bigger role in this change and in the delivery of the resulting organizational value. To perform effectively and drive profitable growth, close collaboration between finance and IT is mission-critical.
As companies embrace cloud, SaaS and other flexible IT models, they are shifting to a more agile infrastructure. These technologies also provide greater flexibility and scalability, allowing companies to expand and contract more easily with changing demand. This provides a platform for growth.
Among the 652 CFOs we surveyed in Partnering for Performance, 50% of those who have made transitioning the IT function to a digital world a very high priority report EBITDA growth of 10% or greater over the past three years. Among the rest of the sample, the proportion achieving the same growth rate is just 34%.
Five CFO priorities for leading the transition to a digital IT function with their CIO
1. Ensure strategy drives IT and not the other way round
New technologies are changing the way businesses compete. It is important, however, that the IT function does not drive the enterprise’s strategic response.
The transition to digital must begin with an overarching strategy that articulates:
- How the organization will use digital IT across its value chain
- Whether to improve processes or fundamentally disrupt the whole way the organization operates
- What changes are needed to the business model and value chain
A strong relationship between finance and IT is critical. CFOs must ensure digital IT is focused on profitable growth and shareholder value. And CIOs must bring the understanding of what new technologies can do. Mark Boxer, CIO of Cigna, says: “At Cigna, the IT function has been a catalyst and instigator for change, as opposed to just reacting to needs and being an order-taker.”
David Whiteing, CIO of Commonwealth Bank of Australia, emphasizes the essential role the CIO can play: “If you look at the problems that businesses will face in the future, requiring a cost-effective, high-quality resolution, the majority of solutions will invariably involve technology.”
2. Plot a way out of the legacy trap
Most major organizations have legacy systems embedded in the business, and and the “technical debt” of unproductive and inefficient technology can be a significant barrier.
For example, it can prevent the organization from gaining a single view of the customer, because data is locked into various systems spread across organization silos.
Companies will need to balance the hybrid environment of old and new, while gradually retiring legacy systems.
Decisions about what to retire need to be based on business value and consider:
- What are the operational inefficiencies and costs of continuing with a cumbersome legacy system?
- Can we deliver a better customer experience by retiring the platform and moving to a new solution?
The CFO and the CIO need to work closely together to establish the business case and the value that will result from a refresh or replacement. This is particularly important given the emergence of agile new digital disruptors, as Laurence Buchanan, EMEIA Digital Advisory Leader at EY explains: “You have young, disruptive startups that don’t have the headache of 20 years of IT investment. They can jump straight to the cloud and mobile, creating new business models and distribution models and rewriting the value chain.”
3. Shift the digital IT investment mindset from Capex to Opex
Traditional IT is cost intensive, in terms of up-front investment, people and even dedicated premises. Now, organizations can access the best new technologies via the cloud as a service, for example. In this environment, the traditional argument for preferring Capex (which enables companies to take advantage of amortization and depreciation of IT investments) is less compelling.
Instead, Opex has advantages. Organizations only need to pay for immediate capacity needs and can scale up or down. And, as new technologies rapidly evolve, organizations do not get stuck with outdated technology.
The CFO and the CIO will still need to reach an agreement on the technology that is required and how it will be funded and allocated. For the CFO, though, this will be a different world, in part because the organization’s balance sheet will fundamentally change.
4. Manage digital IT risk exposures as part of the enterprise risk management framework
The CFO has an essential role to play in ensuring that exposures from digital IT are addressed as part of the wider enterprise risk approach. The risk tolerance needs to be agreed upon, vulnerabilities assessed against it and a transformational road map developed.
Senior teams need to review digital IT risks on a regular basis, as changes in business strategy, or to the regulatory and competitive environments, create new vulnerabilities.
5. Unite against digital IT fragmentation
In a digital environment, strategic spend control has been loosened as different parts of the business respond to fast-moving threats and opportunities.
For example, as marketing responds to ever-changing customer needs, research has shown that CMOs now spend approximately 15% to 20% of their budget on technology .
The result may be greater speed to market, but the danger is that systems and infrastructure become increasingly fragmented. And because this spending happens in silos, many CFOs do not know exactly what has been spent, whether it is aligned with strategy or whether there are any potential associated threats. This creates potential for wasted investment and unmanaged risks.
Transitioning the IT function to a digital world is a key focus for CFOs worldwide – and they must partner effectively with CIOs to deliver the full benefits of this transformation, quickly and efficiently.
To read the full report from which this article is drawn, click on this link.