September 13, 2021
September 13, 2021
Contributor: Rob van der Meulen
CFOs often struggle to fund digital investments, because their traditional funding models don’t work well for digital initiatives that behave more like operating spend than capital expenditures.
The pandemic has sped up digital transformation as organizations fundamentally change their business models or product and service offerings and optimize existing activities. Pressure is on CFOs to prioritize and fund digital strategies, but many of the underlying initiatives are iterative and uncertain, and tend to be undervalued by traditional project-based funding models. Given this, you may need to take lessons learned from IT peers and shift instead to a product-based view.
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“It’s important that a CFO has a clear understanding of digital strategy and how it will impact the business,” says Randeep Rathindran, Vice President, Research, Gartner. “But understanding how digital strategy will affect their organization is not the same as understanding how to fund a digital initiative in a way that maximizes its chances of success.”
Historically, IT delivery was performed through projects, defined by a detailed, well-planned-out approach designed to achieve one or more desired benefits or outcomes. For example, the goals of implementing an enterprise resource planning (ERP) project are to lower costs and secure faster time-to-deliver goods to customers. However, it often takes a while to realize quantifiable value from such large-scale initiatives.
In a digital business, waiting months for project delivery milestones could mean the difference between winning the hearts and minds of your customers and losing your market share to a competitor that does.
Product-centric delivery, by contrast, empowers product teams to explore and deliver outcomes incrementally — as software engineers do by releasing software updates. This allows teams to pivot more quickly based on new conditions in the market, customer preferences or priorities.
For you and your team, the key difference is that product-centric delivery is funded on a continuous basis — and is justified by the strategic importance of the incremental value being delivered.
In the past, digital investments came with substantial upfront costs that were capitalized and amortized over the life of the investment. It made sense, then, for return-on-investment models to be evaluated and funded as longer-term capital expenditure (capex) initiatives.
But as IT itself moves toward more agile delivery, leveraging technologies such as cloud and SaaS usage increases, it’s often more appropriate to judge these initiatives as products via an operating-expenditure (opex) lens than as “big bang” capex projects.
Some initiatives, such as a large, complex, enterprise-wide ERP implementation, might need to combine elements of both products (incremental delivery) and projects (oversight).
“CFOs need to become a bit more comfortable with the inherent uncertainty and iterative nature of digital projects,” says Rathindran. “In practical terms this means changing their existing funding, business case and value measurement processes.”
In a product funding model, “products” are defined broadly as capabilities, services, platforms or goods for a specific customer segment. That customer can be internal or external.
In this context, an organization might define improving employee productivity as a product category with underlying product lines such as developing on-demand training platforms or fostering mentorship networks.
“CFOs can assign pools of money to products according to an organization’s digital priorities and leave the specific details of how that money is allocated to product line managers as much as possible,” says Rathindran. “These pools can be funded at monthly or quarterly run rates and adjusted or terminated if they are not performing adequately.”
This approach to funding digital initiatives can help finance teams maintain regular oversight and controls on the spending of digital initiatives without weighing you down in so much onerous process that small, iterative initiatives struggle to get off the ground.
Moreover, it enables you to prioritize appropriate funding according to the strategic digital priorities of your organization without necessarily needing to get caught in the trap of trying to build vast monolithic technology solutions.
By giving more control over funding to product lines, there is far greater scope for those on the front line to deliver quick, agile projects in response to the needs of the business at the time, and then to scale up the initiatives that show the most promise.
Many CFOs fear that if they evaluate digital investments in a more iterative way, they will lose control of funding — and visibility into whether the organization is really deriving value and meeting business needs.
But if you continue to apply a traditional capex-based view to evaluate digital initiatives, while you may be able to report clearer ROI on certain investments, it will slow down your organization’s ability to respond and deliver business value and undermine its competitive position.
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Recommended resources for Gartner clients*:
The CFO’s Guide to Funding the Enterprise's Digital Investments
The CFO’s Guide to Enterprise Digital Strategy
The CFO’s Guide to Performance-Managing Enterprise Digital Investments
The CFOs’ Guide to Investment Culture
Current Growth Investment Governance Practices Hurt Returns
*Note that some documents may not be available to all Gartner clients.