Financial Practices are Outdated for the Transformation Era - (And here's what you can do about it)

In talking with technology leaders about their transformational programs, the discussion often evolves to a gripe session on the mismatch between ingrained financial practices and the types of organizational practices required in transformation programs.

Agile, cloud objectives misaligned with financial practices

Outdated accounting practices
The gripes look like -

  • We’re practicing agile on sprint and release cycles that are days to months in duration, but the finance team needs yearly and sometime multi-year financial forecasts on “project” costs. 

  • We want to be agile with our customer facing technologies, but financial practices more often drive one-time capital investments and hard to justify ongoing investments to support enhancements. Our "projects" should be run more like ongoing agile programs.

  • We want the versatility of the cloud but have not adjusted to higher operating and lower capital investment options to support this transition.

  • We want to experiment, pilot, and even “fail fast” but expect business cases that forecast ROI before making pilot investments.

I confess, but I don’t have a one size fits all solution to drive change in mindset and financial practices. As a CIO and now as President of StarCIO I have to work with the financial chiefs and auditors to determine where they would permit stretching or changing our financial practices.

But I can offer some recommendations

1. Take charge of your spend

Driving Digital by Isaac Sacolick
If you’re not doing this already, take charge of your financial spending by tracking it rigorously. More often than not, your ERP doesn't have the level of detail to run IT like a business. If you are a large enterprise, there are many tools that you can select from to manage the total cost of ownership of IT, but these may be out of reach for medium/small enterprises or small IT shops who must be creative on adopting tools, methodology, or level of detail to track. In my book, Driving Digital, I provide some advice on developing a financial tracking tool on lowcode platforms.

Tracking financials rigorously gives you much deeper knowledge on where you can cut costs to drive new investments. It's also your vehicle to have a more detailed financial discussion with your finance teams.

2. Address agile mindset factors first

This is important:
Manage to budget and quality first, timelines second, and scope a distant third. 

This requires a deep change in cultural and developing an agile and digital mindset around scope and what is an MVP - which is more critical to address in transformation programs versus deeply ingrained financial practices. By managing to budget first and tracking finances rigorously (my first recommendation) you'll be better positioned to provide accurate financial forecasts. Then, you have to manage to this budget by debating scope or adjusting timelines.

Secondly, partner with the CEO on developing an innovation portfolio that operates with a separate set of KPIs aggregated at a portfolio level. It is a mistake to try calculating ROI to early in a program, and CEO often support the idea of an innovation budget that's backed with sound management practices.

3. Find the timing and levers to pull to adjust CapEX and OpEX spending

As you move more infrastructure to the cloud, it should free up capital that you can use to drive the upfront investments needed in transformation programs. So make use of your CapEX to fund the initial release of new products and platforms. Work with your CFO and auditors on the governance of applying CapEX to innovation and MVP product or application releases.

To offset the increased costs to support cloud, SaaS, and ongoing application development you’re likely going to need to find offsetting cost savings. This can be done by proposing projects to increase automation, consolidate SaaS providers and sunset legacy platforms. You're going to have to be creative with how to shift this spend, and the best CIO find ways to either capture larger budgets from business teams or to shift costs into line of business P/Ls while still retaining appropriate controls.

4. Find IT capabilities outside of IT

Shifting OpEX spend from infrastructure to ongoing application development isn't going to be sufficient.
The elephant in the room is that as organizations invest more in digital transformation programs, they are going to have to support a larger and more complex portfolio of applications. 
This requires funding for resources especially if you're going to continue to invest in enhancements and avoid seeing today's applications become tomorrow's legacy.

CIO have another lever to pull and that's using resources outside of IT to do some of the technical work. CIO must consider growing their organizational technical capabilities with citizen development and citizen data science programs, reducing the level of “IT” investment and skill to drive technological change.

5. Network and learn from peers

I am shocked by how many CIO and IT leaders that I know personally that don't get out of the office to network with peers. I just published 500+ global events for CIO and IT Leaders, so there are plenty to choose from!

Great CIO and IT leaders network with other CFO and CIO in and out of their industry to learn modernized financial practices that they have instituted. At conferences, seek out IT leaders from your industry or size of enterprise and ask them how they are shifting spend from CapEX to OpEX, what tricks they are learning to find investment dollars for transformation programs, where they are having success with citizen development programs, or how they've gotten buy in for innovation budgets.

This is the third article of a multi-part series on What I Learned about Digital Transformation from Speaking to Hundreds of Leaders. You can read the previous articles on Developing a Strategy for Putting People First in Transformation Programs and We are doing agile but are not Agile. The next article on We are More Successful Onboarding New Tech Versus Maturing It is now published. Signup for my newsletter if you would like to be notified when new articles in this series are published.

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