IT Financial Modelling
Money doesn’t talk, it swears. — Bob Dylan
It can be argued that nothing is more important to executives than knowing exactly how money with which they are entrusted translates into results. This is a fundamental frame of reference for all those who hope to sit at the proverbial table and moves the world of finance into a core competence for CIOs.
Depending on the size of the organization there is a better than average chance that the CIO will report to either a CFO or VP of Finance. Being conversational with your boss in a common framework of finance will go a long way to being in alignment and which will subsequently go a long way to being successful in the role.
Organizations are in business to make money. This fact makes it an imperative that the CIO be very thorough and clear in the understanding and communication of how the money is spent in their department. Documenting this understanding in the form of cash flow and balance sheets are a reality.
From an organizational planning perspective, it is necessary to model the finances within IT. This modelling is necessary to document and describe how the execution against the current budget and forecast the future funding required to operate IT. Without this model it is difficult to stand behind a budget. Conversely, with a solid and agreed upon model the budget can be easily defended and accepted with much less dialog.
Except in unusual circumstances, CIOs have a role to play as change agents. Any significant change the CIO may want to do (or be demanded to do) will have to produce a business case to gain funding. This road is paved with a thorough analysis of all costs (direct and indirect, immediate and ongoing, across cost centers and throughout the enterprise). It is no longer enough to identify, list, and categorize costs, it is also critical to produce a cost benefit analysis, net present value, break even points, and numerous other descriptive measures to persuade the authorization committees of the plans worthiness. Performing many of these assessments requires an understanding of how the enterprise performs these calculations, the weighted average cost of capital (WACC) for the firm, the ROI hurdle the executive committee uses prior to authorization of initiatives, and other measures which are core to the world of corporate finance.
Each of these are topics require financial fluency of the CIO.
Financial skills cannot be left to those in the finance department. There is a heavy dose of finance in IT. The job of the CIO depends on getting the finance part right.
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Totally agree. In fact, I’ve posted similar thoughts frequently on my “CTO/CIO Perspectives” blog. Your last three sentences are about as close to a perfect summary as anything I could have written, though! Great article.
See my related posts: “Financial metrics for IT: the holy grail of ROI, and how it misses the point: Part 1″, at http://www.peterkretzman.com/2008/03/19/financial-metrics-for-it-the-holy-grail-of-roi-and-how-it-misses-the-point-part-1/ and “‘Rithmetic: quantitative approaches necessary in the CIO/CTO role”, at http://www.peterkretzman.com/2007/08/05/‘rithmetic-quantitative-approaches-necessary-in-the-cto-role/
Great post and consistent universal discussion I’ve been having with my network of IT Sr Managers and CIOs. In addition to understanding the language, you must be able to predict, deliver and measure the results of the IT investment. If you can’t, the next time you seek budget approval for a change transformation project, it will be that much harder. Getting the finances right and communicating them up and out of the IT org is a core skill set requirement of the CIO and his/her team.
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Without question, especially for CIOs determining where best to get supply from in order to satisfy business demand effetively. Saas/Paas/Iaas must be measured against costs/throughput/productivity of internal capability/resources before anyone just jumps out to the cloud (not to mention measure the risk).
Thanks Peter. I’ve enjoyed your articles in the past and agree with your points in the finance related posts you have penned. Finance is a big part of IT, especially in light of the percentage of capital budget which typically falls under the IT banner. Keep your posts coming – they are enthusiastically welcomed in by Inbox.
Joanne, I completely agree. While there are several general scenarios which can be addressed with a financial analysis of moving to the cloud, there are many unknowns which will come along for the ride as the “uniqueness” of each company is discovered. Strategic experiments in specific areas are often what uncover these in a safe manner, and provide the analytical juice which will drive not only financial benefits, but in many cases feasibility.
great article, i just bookmarked it to read later. i would love to revisit on future posts. how can i set the rss reader again? thanks!
Sorry for that. The bright orange icon should be doing its job now!