With technology costs representing more than half of all capital expenditures at many companies, CxOs are pressuring IT managers to more closely measure returns on technology investments.
“For the average company, one out of every 50 revenue dollars is being spent on an IT project, and someone is going to watch it,” says Howard Rubin, executive vice-president at Meta Group Inc. But while some companies have taken steps to teach IT managers how to understand and even apply financial calculations such as internal rate of return (IRR) and net present value (NPV), many others haven’t, and the financial acumen of tech managers is all over the map.
“Probably 80 per cent of the companies I work with are using financial techniques” such as NPV, says Barbara Gomolski, an analyst at Gartner Inc. and a Computerworld U.S. columnist. She estimates that half of the mid-level IT managers at those companies have received some financial training, and the rest are assisted by their finance or accounting divisions.
But Mark Cotteleer, an assistant professor of management at Marquette University in Milwaukee, says financial training for IT managers isn’t widespread at all, and companies often rely on vendors to calculate return on investment.
“I hardly think that’s the most appropriate way to do it, since [vendors] have a vested interest to make sure the right answer comes out at the other end,” says Cotteleer, who is also a consultant at Arlington, Mass.-based Cutter Consortium.
An ongoing survey of 180 IT executives from Fortune 1,000 companies that has been conducted since November 2002 reveals that 46 per cent of IT staffs lack a basic working knowledge of financial concepts.
Mark Jeffery is an assistant professor of technology at the Kellogg School of Management at Evanston, Ill.-based Northwestern University, which is running the study. He says companies that invest in training IT managers in financial know-how tend to generate higher returns on their technology investments and have better controls in place than their peers. “Firms that are good at what they do invest in their people to improve their financial skills,” says Jeffery.
Some companies, such as Wachovia Corp., have been providing financial training to IT managers for years. Since the late 1990s, the Charlotte, N.C.-based financial services company has required IT and other managers to apply NPV and break-even calculations to all investments greater than US$250,000, says Ginny Hartsema, chief financial officer for operations, IT and e-commerce. “We believe that financial management is a key competency (for) managers,” she says. “It isn’t sufficient for them to be technically capable and not be able to grasp financial principles.”
Wachovia provides managers with formal training from its corporate finance group as well as more detailed training from Hartsema’s group. Wachovia also plans to roll out a set of training modules by midyear with tutorials that range from understanding corporate earnings and revenue figures to creating accurate financial project estimates, says Hartsema.
At Dublin, Ohio-based Cardinal Health Inc., IT managers use a list of 40 top priorities to ensure that a project is staying on track and aligned with the business. One of those priorities is that a project is meeting its financial targets. The IT division at the US$50 billion-plus provider of health care products and services created a business-integration group three years ago that works with departments such as sales and purchasing to create a business case for each IT project and to determine the best way to measure it, says Steve Peale, vice-president of IT.
Members of Cardinal Health’s business integration group, which now numbers 40 people, have attended seminars and received 520 hours of business-case and ROI training over the past two years. The group initially consisted of business people who were interested in learning technology, Peale explains. “As we’ve grown the group, we hired a number of people with technology management skills who knew how to present a business case,” he says.
To help measure the success of its financial training, Cardinal Health tracks whether IT projects are on time and within budget. In addition, the company gauges the number of projects that have been launched without help from the business integration group, a figure that’s practically down to zero, says Peale.
For the past 18 months, IT managers at Uncasville, Conn.-based Mohegan Sun Casino have received instruction from the organization’s financial consultants on understanding IRR, NPV and ROI calculations, but it’s the finance staff that does the actual number-crunching on IT projects, says Dan Garrow, CIO and senior vice-president of information systems. “I want the objective evaluation of IT from finance,” he explains.
Although Garrow says the company’s 124 IT workers have improved their ability to accurately estimate project cost savings, it’s too early to effectively quantify their success. “We also need to do a better job of following up and measuring whether forecasts have hit their targets,” he says. “Many times, it’s difficult to get back to projects you’ve implemented when you’ve got four or five projects waiting to be started. There’s almost no downtime to give us that time to measure.”
In the end, says Wachovia’s Hartsema, financial training for IT managers can only go so far if you don’t have the right corporate culture in place to support it.
“You can train all day long,” she says, “but if (senior) management isn’t focused on having a culture that ensures appropriate focus on financial management, I don’t think you can be successful.”