26 November 2014

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Great minds think alike? CIOs and CFOs

09 March 2014  |  1141 views  |  0

Cost reduction has become a strategic driver for businesses. As a result, tech-savvy CFOs are becoming the popular choice to lead technology investment decisions.

But this paradigm shift in the CIO landscape presents additional complexities and ultimately does more harm than good. Enterprise IT run as a cost centre rather than an ‘enabler’ struggles to provide sustainable competitiveness and stifles growth and innovation. So, what do CIOs need to do to reclaim more power over IT strategy and decision-making?

There is a lot CIOs can learn from CFOs and rest of the C-suite. The biggest flashpoints to address include capital planning and IT investment governance. CIOs can adapt the investment decision-making framework and models utilized by their business counterparts in order to analyze and calibrate IT investment proposals similar to the way investment decisions are made by business lines. Think risk-adjusted returns by deploying capital in a diversified portfolio.

Instead of using a lightweight valuation method, CIOs should strengthen their capabilities by deploying sophisticated valuation and cash flow analysis techniques that demonstrate an understanding of the cost and benefits profile of the proposals. Apart from the standard Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index, and Payback Period, they should also consider quantifying embedded options and flexibility in project proposals.

IT can liaise with Finance to establish quantitative attributes to ensure alignment of parametric valuation model. One of the key parameters is the discount rate for which the weighted average cost of capital (WACC) could be a reasonable starting proxy for estimating the opportunity cost.

Once all relevant input factors are established, the proposals with different time horizon and risk profile should be scaled and standardized for comparative analysis. Equivalent Annual Annuity (EAA) or Least Common Multiple of Lives (LCML) methods are often used to bring proposals to comparative scale. Subsequently, discount rates are adjusted to reflect the riskiness of the projects – think project-specific beta.

Depending on the level of sophistication and maturity, CIOs can use scenario analysis or Monte Carlo to simulate sensitivity of various factors on the outcome of the corporate portfolio. The extent to which the projects are aligned or misaligned with strategy should also be part of the quantification.

Finally, Enterprise Architecture (EA) can play a strategic role for CIOs, when used to decipher correlation between proposed projects, in order to establish P&L attribution and formulate the portfolio balance sheet.

Investment governance is more art than science for executives who ultimately use qualitative judgement for their decisions. However, applying quantitative rigour and mature analytics-driven due diligence will aid their gut feel and assist with alignment of views in the C-suite.

In short, great minds thinks alike a lot less often than the old saying would have you believe, even though CIOs and CFOs (along with the rest of C-suite) are the wheels on the same vehicle propelling and steering the business.

In a two-way process, constantly changing business needs are satisfied through technological enhancements, while business growth enables organizations to push IT further up the maturity curve. Alignment and co-ordination between CIOs and CFOs are therefore more important than ever to create strategic visions and a pragmatic roadmap towards this goal. 

 

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