Think Like a CFO: IT Investments, Strategic Alignment and the Cash Cycle
Cash, risks and benefits: Those are the key issues a CFO evaluates when considering an IT investment. And they’re the same issues a CFO thinks about whether the project in question involves new enterprise-wide computer software or a fleet of delivery trucks.
Because big IT investments require large outlays of cash, they will attract a significant level of scrutiny and require a commensurate level of commitment and management. A two‐year, $8 million project needs to be precisely that: $8 million and not a penny more or a day longer.
Every CFO worth his/her salt will have a contingency built into the capital budget, but half of that will simply be to cover variability in available cash flows, with the other half being split among all scheduled projects.
CIOs need to understand that a lackadaisical attitude about the time and money involved in a big project could mean the board of directors will be looking for a new CIO soon.
Staying on budget also means staying on time. No 18‐month IT project that stretches to twenty‐four months remains on budget.
Within the capital budget, IT competes against investment opportunities in plant, property and equipment across all functions from warehouses and trucks to a new production line to energy‐efficient building improvements.
If IT emerges a winner after all those hurdles, then IT better deliver on time and on budget as promised because the decision could easily have been made to invest that cash elsewhere.
The CIO needs to know how the company’s portfolio of IT projects - both ongoing systems and new projects/investments - fit into the overall strategic objectives that eventually drive the final allocation of cash and capital budget in the long-range plan. The CIO needs to be prepared to answer this question: How does IT enable the company’s core values, strategy, mission and vision.
For example, consider the process by which IT projects might be funded in a company that has a renewed focus on quality. The company has several new quality initiatives in play across the organization, culminating in a big marketing push that will emphasize quality in next year’s messaging and advertising campaigns.
Many factors will go into the specifics of these quality-related aspects of the strategic plan:
- What to build versus what to buy?
- Which suppliers to choose?
- How to monitor both supplier and internal product quality?
- How to handle returns, repairs, service and customer complaints?
- Which production lines need to be upgraded to ensure quality products?
- Which employees need additional training so they keep quality top of mind?
IT Analytics
An enterprise-wide quality initiative could also be supported by IT with the help of analytical technology.
Social media analytics could help the manufacturer learn what customers are saying about the company and its brand.
Warranty analytics can help create an early warning system that identifies problems during the production process so brand equity is protected.
Service parts optimization could mean having the right parts in the right place at the right time so customers are happier when a product experiences a maintenance hiccup.
But, none of these IT investments can show a tangible return if the other supplier, production, training, and quality initiatives are not also successfully implemented.
In addition to these specific funded projects, an overarching integration project that ties together the smaller individual projects and promotes sharing, synthesis and coordination can make all the difference in the world.
Not only will the whole be greater than the sum of the parts, but no ‘whole’ will exist if all of the parts aren’t synchronized and successfully completed on time.
When it all finally comes together, the company will have more than just a completed set of projects. It will have a unique strategic capability and a differentiating competitive advantage that took root as part of the company’s long-range plan.
When the CFO compares the IT investment’s operational cash flow to the projected strategic plan and sees that it lines up, she’ll chalk this one up in the win column and perhaps look more favorably on the next IT investment proposal.
Leo Sadovy is responsible for marketing in the Manufacturing Industry and for the Performance Management solutions at SAS.
