What's technology worth?

What CFOs are saying when they're asked...

Many CFOs worry that their companies can't quantify the value of technology. They need more tools to make informed buying decisions and determine the return on technological investments. Are you losing sleep over the same

In virtually all companies, information technology is integral to daily operations. In most companies, financial executives are increasingly called upon to participate in major IT decisions and to quantify the business value of key IT investments. In addressing these issues, senior financial executives have a unique vantage point. Often, they are simultaneously supervisors of the IT function, primary guardians of the corporate assets and, almost certainly, major IT users. One might think that, as a result of their nearly universal involvement with the IT function, financial executives uniformly regard technology as a strategic resource. However, barely half of all respondents to a recent survey by Financial Executives Institute and Computer Sciences Corporation consider IT a core competency; in fact, only 42 percent note that their entity has a strategic IT plan.

These and other survey responses hint at a fundamental disconnect: Financial executives often manage the IT function - and, to a large extent, control its destiny - but in most of their companies, IT has not been positioned to perform as a strategic resource. And, beyond that, while many companies appear to be acknowledging IT's strategic role as a marketplace differentiator, they're not taking the necessary infrastructural steps to make it happen.

Part of the problem may be the difficult dichotomy financial executives face as managers and stakeholders in the information systems function. First, they must keep their companies' financial house in order, which requires a clear understanding of the relationship between investments and return. But often, CFOs can't readily quantify the value of technology. This may explain respondents' number one technology issue - "prioritizing information systems investments" - and their number three issue - "identifying the appropriate level of system investment."

The Big Headaches

Over 60 percent of respondents cite "prioritizing technology investments" as a very critical concern; it appears to plague most companies.

Inherent Year 2000 deadline pressures (fourth among respondents' "very-critical" issues) complicate prioritizing, since virtually every company must develop an organization-wide compliance strategy. In the case of Y2K, doing nothing is a non-alternative, yet organizations must make costly and far-reaching decisions without the benefit of proven approaches to predict and measure IT value. Interestingly, an exceptionally high percentage of companies with more than $1 billion in revenues deem "ensuring Year 2000 systems compliance" and its sister issue, "upgrading/replacing legacy systems," as "very critical." Across industries, in fact, the larger the company, the greater the proportion of "very-critical" responses in reference to Y2K and legacy-replacement concerns.

Another factor that complicates prioritizing technology investments is the growing need for convergence of business strategy and technology strategy. More corporate leaders need to recognize that concurrent development and fusion of business and IT strategies are often critical to marketplace success. Because most businesses have access to the same basic technology, true marketplace differentiation often becomes a function of doing more with the same tools in a much shorter timeframe than anyone else - attaining corporate goals through innovative and expert deployment of technology resources.

The bottom line? Financial executives are expected to provide objective counsel on which technology investments have the greatest impact on a company's achievement of business objectives and what the economic returns are likely to be. In virtually all industries, CFOs clearly feel this pressure.

Nearly as important, respondents say "establishing and maintaining an effective dialogue between IT and users" is the second very-critical issue. This highlights the evolving role of technology from "enabler" to "integral part of corporate strategy." It may also suggest that the age-old communication problem between the technology and user communities isn't getting any better.

A third concern is "identifying the appropriate level of technology investment," which clearly works in lock step with respondents' number one concern, "prioritizing technology investments."

Finally, it's interesting to compare the views of financial executives to those of their technology counterparts. In its 1997 report, "Critical Issues of Information Systems Management," CSC reports that CIOs cited "determining the value of IT" as their least critical IT issue. This divergence may help to explain why prioritizing technology investments and determining appropriate technology spending is so challenging for financial officers: It often seems that CIOs are not particularly focused on cost/benefit justification. However, this explanation raises more questions than it answers. Is the difference primarily due to the organizational role (i.e., the CFO is expected to be concerned about the return on investment while the CIO may view return on investment as an issue for the business process owner/CFO)? Or is it the result of the reporting relationship where most CIOs report to the CFO?

When it comes to looking ahead, 58 percent of respondents state that their organization does not have a written IT strategic plan. In a clear deviation from the composite, entity size has a direct relationship on the probability of a respondent's company having an IT strategic plan. Approximately 81 percent of respondents in entities with less than $100 million in revenues indicate that their business lacks an IT strategic plan.

Responses by industry are also diverse. Not surprisingly, insurance (73 percent) and financial services (53 percent) - information-intensive fields in which information is a product as well as a vital operating tool - are most likely to have an IT strategic plan. Three additional industries - retail, transportation and computers/telecom (in which information is regarded as a salable product or, at a minimum, a tool for maintaining customer relationships, entering new markets and capturing additional customers) - are most likely to rank IT as a core competency.

Where's the Return?

When asked about the payback they receive on their IT investments, 30 [TABULAR DATA OMITTED] percent say, "we don't know," while another 19 percent identify their IT returns as either low or negative. The bottom line is that nearly half of all respondents are unhappy with - or baffled by - technology's ability to improve their business! And less than 12 percent of the overall survey population indicate a high-level of return on IT investment.

Conceptions about returns vary dramatically by industry. At one end, 25 percent of utilities and 20 percent of consumer goods companies note high return levels on their IT expenditures. At the other end, 50 percent of insurance companies and (interestingly) 25 percent of utilities note low returns. Finally, 67 percent of nonprofits, 41 percent of retailers and 40 percent of construction companies can't identify their level of return.

In spite of - or perhaps because of - this low awareness, companies are working hard to understand the impact of their technology investments. "Cutting internal costs" (noted by 71 percent of respondents) is the most commonly cited evaluation criterion, while revenue and market share drivers rank ahead of internal criteria such as financial targets. Overall, this distribution of answers indicates that the valuation of technology is starting to line up with corporate strategy, where technology is viewed as a source of competitive advantage.

So what are companies actually doing? How do they decide what to do? How do they measure success? Respondents rank the ability to "meet user needs" as the most important success measurement criterion, followed by the system's potential to "help the company operate more efficiently" and "improve the company's competitive position."

Beyond the top response, answers suggest that many CFOs understand and accept that IT is a business necessity. Although they want the project to come in on schedule, within budget and pay for itself, they place greater emphasis on the system performing as expected and improving either the company's internal or external position.

Financial leaders also understand how important it is for different applications to work together seamlessly. Integration continues to be a serious issue; less than 11 percent of respondents contend that integrating heterogeneous systems/applications is not of concern. This statistic also suggests that, even with the significant resources and effort directed at technology integration, most CFOs think their business has a long way to go to fix the problem.

What's Happening Now?

Given the increasing recognition of technology's role in executing corporate strategy, and the dark specter of the "Millennium Bug," it is not surprising that two-thirds of respondents are involved in a significant systems-development project. Of those, the average implementation time is slightly under two years. The average cost varies with company size: Companies with revenues of less than $100 million will spend about $1 million; companies with revenues in excess of $5 billion will, on average, spend around $37 million.

Not surprisingly, enterprise solution packages are the most popular choices (44 percent of respondents say their systems approaches involve them), followed by best-of-breed packages and custom-designed implementations. Companies with more than $500 million in revenues are somewhat more likely to choose an enterprise solution than smaller organizations.

Increasingly, enterprise resource planning (ERP) is seen as a technology panacea. In general, larger companies with more complex business models often opt for more complex ERP solutions. However, ERP is not the approach of choice for a majority of respondents. Most companies are still more comfortable with either best-of-breed and/or custom development; others can't yet find certain critical functionality in a single enterprise solution.

Interestingly, there are strong solution-development preferences across industries. For example, 70 percent of respondents in discrete manufacturing are implementing enterprise solutions, while in transportation, 71 are going with custom solutions (no respondent in transportation reported current work with an enterprise system solution). Custom solutions are also more prevalent than enterprise systems in the financial, process manufacturing and non-profit arenas. Some of these anomalies can be explained by industry uniqueness, the level of system innovation required and the lack of package solution availability.

Conducting business electronically - whether through proprietary networks or via the Internet - also is [TABULAR DATA OMITTED] accelerating the pulse and success levels of many a business. At present, nearly 30 percent of respondents' companies carry on electronic transactions, while another third are testing the waters by piloting e-commerce applications. Overall, nearly two-thirds of all respondents actively pursue e-commerce applications. Many among the remaining third may find themselves at a competitive disadvantage as more and more of their suppliers and customers demand the ability to do business with a keystroke.

When it comes to the organizational chart, more than half the respondents indicate that the senior information systems executive reports to the chief financial officer. In about one-fifth of respondents' companies, the CIO (or equivalent) reports to the chief executive officer. Less frequently, CIOs report to chief operating officers.

When respondents were asked where the CIO should report, the only clear recommendation was to shift reporting away from administration. This trend will likely continue as more firms recognize the need to incorporate technology considerations in their strategic planning. In the future, look for fewer and fewer CIOs reporting to financial leaders and more CIOs reporting to the CEO.

Finally, of the various messages to come out of the survey, "getting a handle on the basic value of IT" tops the list. More than ever, senior financial executives believe strongly in the need to manage IT investments in support of strategic objectives and overall shareholder value. To follow through, though, they'll need new tools and approaches to prioritize, measure and optimize technology's value.

However, no single issue, solution or approach totally dominates their technology landscape. Perhaps greater levels of agreement will evolve in the future, once the link between technology and business strategy and the link between technology investment and financial benefit become tighter. For now, diversity - of opinion, approach and solution - is the respondents' common denominator.

The first annual survey of "Technology Issues for Financial Executives" includes responses from 417 members of Financial Executives Institute and addresses four areas: financial management, information systems strategies, technology applications and management and organization of information technology. Copies of the complete study can be obtained by contacting Chris Roy, Computer Sciences Corporation, at [phone] or [e-mail].