IT and finance leaders are increasingly working together to innovate and operate at the speed of agile, finding ways to effectively finance tech initiatives.
Delivery of emerging technologies to drive business outcomes is fast becoming today’s competitive battleground. Recent Deloitte research found that 56% of CIOs expect to implement Agile software development, DevOps, or a similar flexible IT delivery model to increase IT responsiveness and help spur broader innovation ambitions.
But there is an obstacle currently slowing these efforts, and it is formidable: the sourcing and distribution of funds. IT operations and development processes are becoming nimbler and product-focused while the finance function continues to budget, fund, and report the same way it has for decades. The result: tension between IT’s needs and finance’s procedures. If left unaddressed, this issue could impair the CIO’s innovation agenda and undermine an organization’s strategic goals.
Nowhere is this tension felt more acutely than in funding strategic innovation and transformation agendas, which currently accounts for just a small percentage of overall IT budgets.
The average IT department spends 56% of its technology budget on maintaining business operations and only 18% on building new business capabilities.
This is especially true for development initiatives that emphasize agility and speed. Finance processes are typically still tied to a project mentality, where the fallacy of predicting the future for unique product development (with unknown unknowns) is locked into a project plan with associated fixed project funding. Instead an ‘agile’ approach—referring in this context to a state of being nimble or flexible rather than to Agile software development methodology—is capacity funded with a focus on maximizing outcomes.
Moreover, agile initiatives typically feature cross-functional teams working in iterative sprints. In many companies, this clashes with the finance organisation’s funding processes, which are commonly optimised for functionally compartmentalised teams. This more traditional and compartmentalised team model hails from an era that emphasised repetition and scale of knowable or tangible assets, unlike today’s innovation-focused digital age.
Over the next 18-24 months, we expect to see more IT and finance leaders working together to develop flexible approaches for funding innovation at the speed of agile. This does not mean they will replace annual budgeting cycles with a shiny, unproven alternative. Indeed, balancing fiscal control and appropriate spending with value creation and financial results is a non-negotiable requirement. There are multiple approaches that can help maintain the balance:
- Change within finance. Finance should explore opportunities to tailor budgeting, funding, and reporting processes to better meet the business’s evolving needs for its portfolio of technology investments. This will likely include developing new methods for investing across time horizons, accurately measuring the somewhat unpredictable long-term value that products built with agility can generate, and accounting for value in ways that meet accounting and reporting standards.
- Change within IT. The future of the IT organization includes structural changes such as organizing resources around products and outcomes, creating a clear road map for foundational tech investments, and evolving traditional roles in procurement and vendor management.
- Creative funding. Creative funding sources can amplify and accelerate change. CIOs and CFOs can explore opportunities for funding innovation such as co-investing within and across their industry, ecosystem subsidies, carveout leasebacks, and other models.
- Shifting from capex to opex. Transitioning from on-site to cloud-based systems involves shifting a significant amount of spending from capital expenses (capex) to operating expenses (opex). In fact, teams will be doing a little bit of capex and opex all the time. The new mantra is “you build it, you run it.” From an accounting perspective, short-term opex growth can affect quarterly results, which CFOs must explain to investors and financial analysts.
- Measuring elusive ROI. Technology innovation initiatives are often experiments that fall short of internal rate-of return expectations and may or may not deliver positive returns. Investments in innovation do not typically offer traditional IT projects’ level of confidence, financially or temporally, so they are often hard to confidently champion through standard governance processes. In some instances, this leaves the finance function struggling to develop an accurate process for tracking ROI long-term. This challenge becomes more complicated in tracking fixed budget investments in things such as platforms that can be reused over an indefinite period.
- Calculating value delivered. CFOs rigorously track returns on capital and associated risk models across areas of investment. But for technology investments, few organizations show similar discipline in tracking and measuring the magnitude and timing of solution value—when CIOs make their own calculations, they may use assumptions that differ from those typically used by business or finance. In Deloitte’s 2018 Global CIO Survey, 65% of respondents said they measured the impact of IT investments on a case-by-case basis, rather than as part of a regular reporting process. Clearly, CIOs and CFOs are not on the same page when it comes to assessing the value IT delivers.