Finance and IT: Value Comes with Harmony
John Alarcon, CPA, CITP, CTP, and Jack Musgrove, CMC, CGEIT
The recent recession touched all departments within companies, and information technology (IT) was not immune. While many IT departments endured drastic spending cuts, 2010 is expected to end as a rebound year for IT. According to Gartner Inc., an IT research firm, worldwide enterprise IT spending dropped 6.9 percent in 2009. The computing hardware sector was the most affected, with a drop of 16.5 percent. In 2010, IT spending is expected to bounce back with a projected growth rate of 3.9 percent over 2009.1 Despite the projected rebound of IT spending, the time has come for finance and IT professionals to work more closely together.
The two disciplines can improve decision-making by building better business cases and by measuring and demonstrating business results derived from IT spending. The emphasis should be on increasing the value derived from IT and establishing processes to measure it.
What Is the Value of IT?
Popular initiatives include virtualization, cloud computing, software as a service, outsourcing, and social interaction technologies.
Virtualization software technologies enable users to run multiple operating systems on the same hardware machine. This helps to optimize usage of existing servers, extend their useful life, and significantly reduce their number, thus shrinking the number of machines and data centers.
Cloud computing refers to Internet services and Web-based applications that run “on demand” over the Internet, rather than over a dedicated, in-house hardware infrastructure. In a cloud-computing environment, companies reduce expenditures by paying for some IT resources via a usage-based model. Cloud computing encompasses various types of solutions, from software-as-a-service (SaaS) applications to infrastructure-as-a-service solutions for shared storage and computing services.
SaaS has gained traction as an alternative to traditional software applications. The number of SaaS specialists has grown rapidly, and all major software vendors have made SaaS offerings part of their portfolio. SaaS has made inroads in multiple business areas, including customer relationship management, business intelligence, treasury and cash management, expense management, human resources management, and more. By shifting from in-house applications to SaaS applications, companies reduce the demands on their in-house hardware infrastructure and administration, accelerate adoption of new technologies, reduce implementation costs, and increase flexibility.
Outsourcing has become a prominent fact in both IT and business management. Companies are realizing substantial benefits from outsourcing infrastructure management, IT support, and business process management. The benefits certainly include cost savings, but they also increase customer value, agility, and flexibility.
Finally, new social-interaction technologies are a top area for competitive advantage. New generation mobile devices and social media are redefining the way companies interact with customers, especially when it comes to marketing products and services, building a user community, improving service, or increasing customer loyalty.
IT as a Business Value Enabler
Finance professionals have the responsibility to work with IT leaders to ensure that adequate processes are in place, both for regulatory compliance purposes as well as for the realization of the value from IT. Many studies show that inadequate IT management drives waste, frustration, and losses. Indeed, IT spending alone is not a predictor of business value.2
The primary reason for a failure to deliver optimum value from IT is the lack of a structured approach for IT decision-making, especially at the highest levels of management.
Companies can address this by implementing processes that help structure and prioritize IT initiatives. Organizations should consider established IT value management frameworks, such as Val IT.
Val IT is a framework for IT value management that was developed by ISACA’s IT Governance Institute. It is an extension of its CobiT (control objectives for information and related technology) framework.3 While CobiT focuses on IT management execution, Val IT focuses on governance to optimize business value from IT.
CobiT is widely used to assess IT controls as part of Sarbanes-Oxley and other compliance or enterprise-risk-management initiatives. These efforts can now be leveraged and extended to include Val IT. Val IT can also be used by those with no experience with CobiT.
Val IT guides the implementation of three critical IT decision-making functions: value governance, portfolio management, and investment management. These functions help organizations prioritize their IT investments; understand costs, benefits, and risks; and capture return on investment.
Value Governance – This refers to the implementation of the overall enterprise governance policy. It consists of defining the organization’s IT investment leadership and governance processes: roles, responsibilities, and accountabilities, as well as principles and processes for IT decision-making and monitoring.
Portfolio Management – This refers to the definition and monitoring of an organization’s portfolio of IT programs. It includes prioritization based on relative value contributions (benefits vs. costs and risks), and how they tie to the achievement of business objectives.
Investment Management – This refers to the processes by which the organization should develop and evaluate a business case for each IT initiative, and manage the IT asset until its retirement.
Integrating Risk and Value Management
Performance managers4 use a risk-informed view of metrics, plans, and reports within their functional area, and across the enterprise, to make the best possible decisions. They use this same approach to connect with others for visibility to interdependencies. For example, if marketing decisions improve demand, then operations needs to know to ensure the supply is ready. In this way, good decisions cause other good decisions. The end result is better alignment, accountability, and performance.
The usefulness of specific information in decision-making is the primary factor in determining the value of the information and, therefore, the priority of investment necessary to produce or improve such information. Consider a risk-and-performance approach founded upon two complementary concepts: information demand and information supply.
Information Demand – There is a demand for information to support decision-making from all of an organization’s stakeholders: customers, executives, employees, partners, vendors, and others. Businesses need a framework with templates to understand and document this demand.
Information Supply – Information is provided to satisfy demand through an organization’s information supply chains (ISC), which are composed of information technology, systems, and services linked together to store, transform, and deliver information when needed.
Organizations can analyze their ISC effectiveness and risks so they can prioritize IT investments. Decision-makers’ demand for information is virtually insatiable. Documenting the factors that define the business value of decision-making information is central to effective management of IT.
1 Gartner Inc. press releases: “Gartner Says IT Spending to Rebound in 2010 with 3.3 Percent Growth after Worst Year Ever in 2009,” Oct. 19, 2009; “Gartner Says IT Spending to Grow 5.3 Percent in 2010,” April 12, 2010; “Gartner Trims Worldwide IT Spending Growth Forecast to 3.9 Percent for 2010,” July 1, 2010
John Alarcon, CPA, CITP, CTP, is vice president, finance, at ISGN in Bensalem and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at email@example.com.
Jack Musgrove, CMC, CGEIT, is vice president, IT governance and professional services, at Aline GRC Software Solutions in King of Prussia. He can be reached at jmusgrove@AlineGRC.com.
LAST UPDATED 9/1/2010