Finance and IT: Value Comes with Harmony

Fall 2010

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?
The value of IT, in the corporate sense, is achieving business benefits through the effective execution of IT management. Business benefits could range from improving company profitability to creating a competitive advantage. Companies that can derive the most value from their IT infrastructure are more profitable and grow faster than their competitors. For example, by automating and integrating its supply chain, a manufacturing company can reduce its inventories and order-processing time, and scale down the number of warehousing facilities. As a result, it will be able to deliver its products faster and at a lower cost. By consolidating its data centers and leveraging the latest virtualization technologies, a data processing company can cut its IT infrastructure costs by as much as half in a relatively short period of time.

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 and business professionals have a tendency to look at IT as an expense or a support function, especially during times of economic recession. IT is more than that: it is a business value enabler. IT is an integral part of any business strategy because technology determines the effectiveness and competitiveness of the organization. Exemplary use of IT drives profits, whether through increased efficiencies or through revenue growth opportunities. There is no doubt that IT improves operations, whether it is via encoded pallets in a warehouse or automated check-out lanes in a supermarket. In fact, the real benefit from retail scanners does not come from clerk productivity or price accuracy (both are benefits), but rather from the transformation of the inventory and reordering processes, as well as improvements in sales analysis and customer awareness. In many industries, IT elements are the principal face of the enterprise, the primary means by which customers interact with the organization. In today’s world, customers may choose to do business with a vendor just because its Web site is easier to use and contains all the information and advice they need.

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.

• Value governance is not about IT governance, but rather about the enterprise governance of IT. Business (not IT) should lead IT investments.
• Val IT reinforces the importance of establishing an IT investment committee at the highest levels of management, including the board of directors.
• IT should be an integral part of the enterprise financial planning process. Benefits, costs, and risks associated with IT initiatives should be captured as part of the enterprise budgeting process.
• Value derived from IT initiatives should be measured as part of the enterprise business reporting process, with relevant business metrics. Val IT reinforces the need for a program management office to monitor IT initiatives and continuously improve IT value management.

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.

• An IT portfolio can be created using a standard report template for all IT programs. The IT portfolio report summarizes the key characteristics and data of each IT program (such as business benefits, costs, risks, business goal alignment) and allows for evaluation, comparison, and prioritization.
• Those involved in enterprise financial planning and analysis should review the IT portfolio as part of the budgeting process.
• IT portfolio management is not a point-in-time analysis, but an ongoing process. Performance of the IT portfolio should be monitored as part of the enterprise performance management cycle, and priorities reviewed as the organization’s business strategies evolve.

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.

• Organizations can improve IT investment management by establishing a business case report template and procedures for all IT initiatives.
• Business case should be owned by the business sponsor, not IT.
• Financial professionals should require full business case-documentation and sign-off as part of the purchase requisition process.
• Just as with the IT portfolio, a business case is not a point-in-time exercise. It must be continually updated and reviewed, throughout the entire IT program life cycle, until retirement.

Integrating Risk and Value Management
An integrated risk-and-performance approach will align the Val IT concept with a forward-looking element to the overall framework.

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.

Conclusion
Financial professionals need to work more closely with IT leadership to improve the enterprise governance of IT and to maximize the business value from IT. To achieve this, financial professionals should consider established frameworks, such as Val IT, to provide a comprehensive guide to establishing or improving three critical IT decision-making functions: value governance, portfolio management, and investment management. In addition, it is critical to integrate the framework with enterprise risk management by using an integrated risk and performance management approach that provides a sharper, more forward-looking understanding of risks and benefits.

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
2 “Why Isn’t IT Spending Creating More Value?” PricewaterhouseCoopers, July 2008
3 “Enterprise Value: Governance of IT Investments – The Val IT Framework,” ITGI, 2006, and “Enterprise Value: Governance of IT Investments – The Val IT Framework 2.0 Extract,” ITGI, 2008
4 “The Performance Manager – Proven Strategies for Turning Information Into Higher Business Performance,” Roland Mosimann, Patrick Mosimann, and Meg Dussault, Cognos Press, 2007

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 john.alarcon@isgn.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.