Paul Lewis

Financially speaking, understanding BusinessDefinedIT

Blog Post created by Paul Lewis on May 6, 2014

 

The ceiling fans in my kitchen have two speeds: 1) barely moving, leaving me to wonder why the speed exists in the first place; and 2) GALE FORCE, apparently in an attempt to rip from the ceiling and fly to a far (far) away place.

 

Given the amount of toys I step on throughout the minefield I refer to as “every room in the house”, I’ve often (note: I pronounce the “t”) wonder whether Lego blocks could be used as currency…at the very least for ongoing podiatry services.

 

Replacement infrastructure in my house (carpets, furniture, large appliances, cabinetry, décor and pets) requires the original equipment to be on their last legs, barely hanging on, with a minimum of 6 guests describing them as “hideous”.  I require a thorough cost justification that would de-risk my inherent laziness before releasing the resting moth from my old school batman Velcro wallet.

 

I’m cheap.  However I like to refer to it financially responsible.  The Polynesian resort is not a cheap place to hang your Mickey towel.

 

It all comes from the phrases “treat this money like it’s your own” and “you better not be adding any more expenses” and “No”…famously articulated by every single CFO I have ever had the privilege to waste their precious time meeting.

 

Financially speaking, a few concepts are top of mind for all technology executives, especially relevant to the ones reporting directly to a CEO or CFO:

 

  • Cost savings for today, cost avoidance for tomorrow:  There will always be pressure to reduce expenses in a push to become more “efficient” with the precious cash resources allocated to the team.  Cost reduction will be achieved by reducing the current recurring or near term forecasted spend “now”, or implementing changes to avoid potential future spend.  Both strategies are valuable but cost savings is more valuable.  In other words cost savings are more sought after than cost avoidance, as cost avoidance could simply be implemented by delayed purchasing decisions in some future year. A CFO wants savings today; because tomorrow is the quarterly investor call.

 

  • Calculated value of the company determines how you spend:  Certainly the customers and employees are important stakeholders in a company; but let’s not forget the impact of investors and future buyers perception in financial decision making. Depending on the type of organization; publicly traded, private, or government; the “health” of the organization by the investors (or in the case of government,  the taxpayers) will likely be a well-known and widely publicized calculation.  It may be incremental share price, consistent and incremental dividends, a multiple of revenue or gross margin, or simply established and predictable cost reductions over time (ie what percentage of my tax dollars are attributed to this ministry).  The calculation will determine how you spend.  For example: If distributions are calculated from gross margin, then you likely would prefer to spend capital over operating expenses.  If revenue growth predicts the health of the company, then money spent would be on new product development versus cost savings.  If the industry vertical predicts the value of the company, you might acquire companies that exist in marketplaces that have higher multiples than your current marketplace.

 

  • Percentage of revenue (or expense) is watched closely:  The internal financial health (or value) of the IT organization determines both the level of importance of IT within the company, and acts an industry comparable to appreciate how well the CIO manages the IT organization.  For companies that create products and services that are not IT centric (however may be IT enabled), you would expect a relatively low cost as compared to revenue, likely less than 10%, as compared to production facilities, logistics, retail costs, etc.  For companies that create IT products and services, you would expect the IT percentage of revenue to be significantly higher, if not the majority of the costs related to the company, likely in the 60-80% range however a very large portion of those expenses would be related to product development versus internal IT infrastructure.  The complexity, and source of disagreement will be based on companies that build and sell a “mix” of IT and non IT relate products and services.  It will be near impossible (without bottom up and LOB specific allocations) to fully appreciate what a reasonable percentage of revenue should be for IT, and therefore will likely lead a series of justification sessions the CIO will lose.  The end result will likely be a cost savings roadmap without an appreciation of the impact to future innovation resources.

 

  • All decisions have a dollar figure attached:  Business cases are simple spreadsheet templates that contain all the math needed to justify a purchase, a hire or a decision. However, not all IT decisions can be easily calculated within a pre-built Excel formula.  Some decisions affect infrastructure and software currency, IT risk, employee satisfaction and turnover, and probabilities of change. Effective decision making requires an assessment of the problem and weighting the impact of various solutions.  Determining the often-subjective value of those solutions against each other, ultimately is calculated by assessing a financial impact to the company.    Currency decisions weight the cost of maintenance to the financial impact if the unsupported infrastructure fails; IT risk decisions weight the cost to protect the organization to the financial impact and probability of the risk event occurring; and employee decisions weight the cost of people programs to the costs related to employee turnover.

 

Our role as IT manufacturers, IT economics professionals, and trusted advisors is not only to understand these corporate financial concepts, but to provide a technological and financial means to achieve the goals as determined by the stakeholders of the companies…and make you look like a rockstar.  Check out this: http://www.hds.com/solutions/it-strategies/it-economics/?WT.ac=us_mg_sol_iteco

and www.hds.com/go/build

 

I’ve always been told…it’s all about cash flow.  As long as revenue is coming in, you are in full control of how the money is spent.

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