Strategy

Taking a Top-Down Approach to Align IT Spend to Strategy and Shareholder Value

CFOs must shift their thinking about IT spend and understand how to use it to drive growth and competitive advantage.

Many CFOs have often considered information technology (IT) spend as a black box—an increasingly expensive budget item filled with ongoing maintenance costs for legacy systems and new investments that either fall short of expectations or take longer to deliver their intended return. But as the digital revolution pushes technology spend decisions directly into the realm of corporate strategy, CFOs have to shift their thinking about IT spend and understand how to use it to drive growth and competitive advantage.

I experienced this shift during my CFO tenure. Inundated with funding requests for new digital tools and systems, I saw an opportunity to replace the traditional, bottoms-up approach to technology spend decision-making, based on the needs and requests of the organization’s business units and functions, with a top-down approach that focused on prioritizing IT spend according to strategic priorities. Paired with disciplined IT investment governance, this strategy-first approach can help CFOs identify which projects can support growth strategies and drive shareholder value while keeping IT projects on track and on budget.

A top-down process to drive a strategy-first approach to IT spend

Based on my experience in shaping a top-down, strategy-first approach to IT spend requests, following are some steps CFOs can take to get started:

— Get your CEO on board. A top-down approach starts by having a conversation with the CEO to determine what technology investments make the most sense from a strategic and financial standpoint, given short- and long-term priorities. To drive that focus, CFOs and CEOs can view IT requests through four broad lenses:

  1. What’s critical to maintain the business
  2. What will help execute the strategy, outpace competitors and grow shareholder value
  3. What will create efficiencies and savings
  4. What are just “nice to have”

In my conversations with the CEO, I made sure we considered such questions as, “What do we want to accomplish this year and in the next three-to-five years? Does the funding proposal support the strategy and how? How much do we have to spend on IT to get there and in what time frame?”

Forge a close partnership with the CIO. It’s critical that CFOs work closely with their CIOs, to understand the CIO’s pressure points and to show what finance can do to help alleviate some of them. It’s also important for CFOs to work with IT in directing spend to address the organization’s broader strategic challenges.

Embed Finance in IT. It’s not enough to work with IT. I believe that finance needs to be embedded within the IT organization in order to understand what technology is going to drive the business. Don’t spare the horsepower: It takes high-level finance talent with specialized training in technology to be the resource CFOs need to understand where the technology spend is going, where it needs to go, and how to track and validate that what the organization is buying is really better than what it will be eliminating.

— Adopt a longer-term, comprehensive view on IT spend. CFOs should look not only one year out, but also three-to-five years beyond to fully understand the total dollar outlay on technology and where the funds will be going. That time horizon should take into account commitments for maintenance costs, as well as upgrades for new initiatives that may require more than a few years to complete. The longer-term view has to incorporate capex and opex to account for cloud-based, software-as-a-service costs. Taking this more comprehensive approach to understanding IT spend is an arduous undertaking, but if you don’t, you might wake up in two years to discover your IT investments require massive amounts of maintenance dollars that haven’t been budgeted.

— Strategically determine IT investment timing. Even organizations with the strongest cash flow can’t afford to do everything at once. Does the IT project and related investment have to be done all at once, or can some aspects and associated costs be spread out over several years? Implementing a new digital platform or system, be it for merchandising, the supply chain or another business need, can take time and may be a multi-year process.

— Establish disciplined governance for IT spend and execution. I know what it’s like to authorize funding to purchase, implement, and train people on new technology only to find the legacy system in use several months later or both systems working in parallel. IT projects require disciplined tracking to make sure the old technologies are phased out on a timely basis and the new technologies are optimized. It’s critical that IT and finance work closely on process and change management,  validating the goals and benefits originally set, and setting and tracking KPIs and milestones to make sure the project stays on track. When things do not go as expected, which is often inevitable, have a plan to get back on course.

— Train for change and update the talent model. To optimize new technologies, people need to fully understand and adopt them. A well-defined training program is essential, along with a dedicated group of change agents, including end-users and IT and finance team members who are charged with tracking and validating the training. And don’t forget to update the talent model because the new technologies will likely alter the profile of talent needed to operate them.

Beyond Process: Adopting a Strategic Mindset to IT Spend

Making the shift to a strategic approach to IT spend also requires CFOs to adopt a strategic mindset on IT and technology investments. That means getting out their comfort zone to learn how digital and other technologies work, emerging innovations, and how their organization (and competitors) can use them. When I evaluated proposals for new technology initiatives, my questions went beyond costs to how the initiative aligned with strategy. I always wanted to understand how relevant the technology would be to the customer; would it speed up decisions; how would it move the needle for the company; and how was it aligned to the strategy.

Second, adopting a strategic mindset on IT means being willing to take some calculated risks on investing in new, possibly game-changing technologies that may not pay off, but that are worth the risk of failure because of their strategic importance. Technology innovations might not work as planned the first time, but CFOs have to understand that sometimes it is imperative to start down that path, expecting and accepting failures along the way, in order to put the company in a stronger position and defend it against disruption. Determining when that “sometimes” applies requires understanding the business, the competitive landscape and other factors. When a business segment leader requests a major IT, for example, it’s critical to know whether that business has the capability, capacity and talent to make that investment bear fruit.

Technology is playing an ever larger role in driving value and competitive advantage, with its potential to spur growth and to disrupt businesses and entire industries. In this environment, CFOs can have a strong hand by aligning technology investments to corporate strategy and building shareholder value.

Charles Holley is the retired CFO of Walmart, independent senior advisor to Deloitte LLP and CFO-in-Residence of the U.S. CFO Program.