July 25, 2022
July 25, 2022
Contributor: Jackie Wiles
CFOs and CIOs need to speak the same language to have productive digital investment conversations. Many do not.
Seventy-eight percent of CFOs plan to maintain or increase enterprisewide digital investments in the next two years — despite planning cost reductions if inflation persists. At the same time, global IT spending will likely keep rising. This seemingly rosy outlook for digital spend doesn’t mean, however, that you will find it easy to get the CFO to fund your specific digital initiatives.
Gartner research shows that only 30% of CFO-CIO relationships can be described as strong digital partnerships — capable of outperforming their peers in financial management practices that are unique to funding digital.
Drill down on actions for leaders as recession threatens:
Strong CFO-CIO relationships are:
51% more likely to easily find funding for digital initiatives
39% more likely to keep digital spending in line with the budget plan
18% more likely to achieve the intended business outcomes
“Digital funding is smoother when CFO-CIO relationships are business-centric and collegial,'' says Randeep Rathindran, Vice President, Research, at Gartner. “That means the CFO relies on their CIO as a business strategist, rather than as a budget owner, and the relationship is marked by mutual respect for one another’s insights and abilities.”
“Organizations have a lot more tools and digital capabilities at their disposal than they did during the financial crisis of 2008-2009", says Sanil Solanki, Managing Vice President at Gartner. "A recession offers organizations the opportunity to experiment with disruptive innovations and to redefine the next decade. The CFO-CIO relationship is key in ensuring these innovations are given appropriate funding and the appropriate risk appetite is set in order to leverage digital against today’s economic headwinds and set up for a healthier future."
In collegial, business-centric partnerships, CFOs and CIOs act like members of the same digital team instead of creating decision-making friction by behaving as if their counterpart is trying to hold them back. But today the two sides often differ on who understands what about digital funding.
The 2022 Gartner Funding Digital Initiative Survey polled both CFOs and CIOs and found that 59% agree that digital capabilities drive their organization’s customer value proposition. But there were also plenty of divergent views:
94% of CIOs believe they understand how technology impacts corporate financials, but only 62% of CFOs agree that’s the case.
CIOs are significantly more optimistic than CFOs about their organization’s achievement of digital initiative outcomes (because IT measures the performance of digital investments more broadly than finance).
CIOs most commonly consider user engagement and participation metrics (e.g., the number of users or percentage of interactions that are digital), while CFOs most commonly consider cost.
80% of CFOs believe they understand how financial management needs to adapt to support enterprise digitalization, but only 55% of CIOs agree.
Organizations with strong CFO-CIO partnerships share a greater understanding of enterprise objectives and the intended role of digital investment in achieving those goals. Collaborative CFOs and CIOs also share an understanding of how technology impacts corporate financials and how financial management needs to adapt to support enterprise digitalization.
For more productive conversations on digital investments, take an enterprise-level view of funding the digital portfolio and ensure clarity and transparency in the following ways.
Today’s accounting metrics, created during the Industrial Age, cannot accurately capture the tangible and intangible value created by digital initiatives. CFOs and CIOs need tailored financial management practices and must exploit the power of leading indicators to support planning and reporting of digital initiatives.
For one, shift the focus of conversations from capital expenditure vs. operating expenditure to focus on long-term value creation. For example, recognize the value of options that digital initiatives can generate in the future if they were scaled across business units, geographies or functions.
Also consider adopting product-line-funding models. In a collaborative, transparent product-funding model, CIOs highlight the operational and strategic benefits of digital investments funded from opex and instead of focusing on EBITDA alone; CFOs track how digital investments impact metrics related to things like workforce productivity, operational margins and revenue-generating activities.
You will need to expand/rethink your metrics. Highly collaborative CFO-CIO partnerships are 33% more likely than less-collaborative relationships to do so.
Most digital initiatives run as IT projects and use IT metrics for decision making. CFOs and other executive leaders often find these metrics too technical to comprehend and face challenges in quantifying the business benefits. This is even more challenging when the digital initiatives offer indirect benefits. Such initiatives need nonmonetary ways of expressing value or stakeholders won’t see sufficient justification to provide or sustain investment.
Metrics such as those related to user engagement and participation (e.g., the number of users or percentage of interactions that are digital) are often a better fit for digital investments than traditional financial metrics. They can also be useful in highlighting the intermediate outcomes through which digital investments contribute to economic value creation.
Only by expanding/rethinking your metrics can you set realistic expectations for “success” to maintain cross-functional buy-in on digital strategy.
Reporting on the performance of digital initiatives requires a common set of key performance indicators (KPIs) that will show how digital investments impact the business. For example, link technology KPIs (e.g., user engagement), intermediate outcomes (e.g., higher sales volume) and financial outcomes (e.g., increased revenue).
While reporting the performance of digital initiatives, apply the “Three Whats” technique:
Organizations with strong CFO-CIO collaboration are 29% more likely than others to make sure finance is involved early in the IT team’s technology roadmapping process.
CFOs should use early roadmapping discussions with IT as an opportunity to share expectations for how technology should be used to advance the enterprise’s big-picture strategy and how digital investments impact corporate financials.
For example, application programming interfaces (APIs) are one of the top investments CIOs are making in 2022, and CFOs should identify the area in the financial statement that APIs will directly impact (i.e., cost of goods sold, selling, general and administrative expenses, research and development).
Getting finance involved early in technology roadmapping ensures mutual understanding of both functions’ goals and a common focus on what success looks like.
CFO-CIO partnerships that exhibit strong collaboration are 21% more likely than others to have adequate digital-cost-structure transparency — that is, an understanding of how digital initiatives contribute to enterprisewide value relative to their costs.
CFOs must help their technology counterparts understand how approaches to creating digital-cost transparency vary based on the goal of that transparency. For instance, many CIOs’ most immediate priority is to recover IT costs and fund IT budgets, and they use chargeback to do so. While chargeback can also shed light on how digital services are being consumed within an organization, a chargeback approach alone does not help provide transparency into the value of those costs.
Finance should collaborate with IT to communicate the value of digital costs in the context of measuring performance improvement in, and IT’s contribution to, the business objective of maximizing organizational value. For this reason, service-based costing models that are less detailed but emphasize the “output” created by a cost are most likely to create the kind of transparency CFOs need.
Strong CFO-CIO relationships are more likely to find funding for digital initiatives easily and to keep digital spending in line with the budget plan.
While most CIOs believe they understand how technology impacts corporate financials, their CFOs rarely agree that’s the case.
Digital funding will lag if CFOs and CIOs don’t align to take an enterprise-level view of how to measure the outcomes and success of digital initiatives.
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Recommended resources for Gartner clients*:
CFO-CIO Partnership Actions for Unlocking Digital Investment Success
Securing Digital Growth Investments in the Long-Term
Use Gartner’s Business Value Model to Make Better Investment Decisions
*Note that some documents may not be available to all Gartner clients.