In the previous article, i explained how the cio’s job has been turned on its head in a a few short years.

What was once a monolithic position, concerned mostly with building and servicing an internal IT system, is now a diverse entrepreneurial role that encourages IT leaders to look outside the company — at customer behavior, at competitor strategies, and at market potential — for its scope. As IT has quickly become the organization’s key differentiator in every aspect of its operations (advertising, sales, products, market presence, logistics, supply chain, etc.) so the CIO has had to become a business leader first, a technical expert second. But this very transformation has caused profound changes not just to the required skill set of CIOs, but to how their own value is measured. This is a psychological shift that fundamentally alters what a CIO must do to build his or her own professional capital.

The value proposition of the modern CIO

The business case of the “old” CIO was relatively simple: Meet the annual IT budget set for you by the company, reducing costs wherever possible. The “new” CIO, in contrast, has to be able to engineer a business case that is both imaginative and highly analytical about the business’s potential for growth, and then pitch for a budget based on those projections. He or she has to see budget as a proposal for new organizational capability — fully risk-managed, costed and with water-tight data, because the business’s survival may depend on its success or failure. Most of all, therefore, and perhaps for the first time, the “new” CIO’s business case requires them to take true ownership for the bottom-line of the whole organization and to become a salesperson and analyst to his or her own board about IT investment. But to focus improved bottom-line or reduced cost is not always sufficient. In today’s challenging business climate, addressing cost and business value simultaneously is often required . This challenge is illustrated further below.

***See the picture in attached file

To succeed the new CIO has to consider a number of critical questions e.g. how will I know that I get bottom line impact from my IT-investments? Do I have an acceptable balance between tactical and strategic investments? If I have 25 MEUR budget and 35 MEUR in proposed projects, how should I select the ones that will yield the highest bottom line impact?

Answering these questions is clearly no easy task. To set a business case, the new CIO must analyze profit potential across the whole organization, deciding which business lines have the best chances of breakthrough growth via technology development and then apportioning IT funds accordingly. (And every business line nowadays is screaming for its own best-of-breed solutions, so the CIO must be a wily political operator to manage their competing demands.) He or she must look further than that — outside the organization — and cost up innovation on behalf of the organization, weighing the sourcing of new software that could break new commercial ground against the day-to-day IT requirements of the standing organization.

And that is creating an extra level of budgetary complexity, because there are now limitless opportunities for technological innovation in the market and therefore unlimited potential spend. If the organization is willing to build the interface, there is no traditional face-to-face, phone or printed service that your clients could not now access via technology. From a customer in a high-street shop to a student attending a school, or even a citizen paying his bills, today consumers have the means in their own pockets to conduct the same transactions on the go. So the “business case role” of the CIO has become one of understanding the transactional behaviors of his organization’s customers — and devising ways to capture them in a technological package that can be professionally industrialized, at a cost that will show a healthy ROI (and which will take full account of the diversity of operating systems and hardware those customers might be using, and the costs of building compatibility with each.)

In that environment, your standard IT budget can suddenly seem like not nearly enough, so the modern CIO must now make the most difficult business decisions. Is it best for financial growth to invest in improving cross-OS compatibility for the company’s existing applications? Or does the CIO instead invest that money in building brand new, innovative platforms that will take the company ahead of the competition? Does he or she invest it in marketing software, or sales channels, or in entirely new online products? Or does the CIO — foreseeing certain innovations in 2013-2014 — invest instead in moving existing platforms into the cloud, to free up OPEX for the coming years?

As an added layer of complexity, the modern CIO must also weigh the benefits of these entrepreneurial investments against statutory demands and operational risk exposures. Most organizations now face a fast-changing regulatory atmosphere, where IT will often play a key role in ensuring the company’s compliance. We see this especially in the financial services industry, for example, where the introduction of the Solvency II and Basel II frameworks — demanding banking and insurance companies hold increased cash reserves — are heavy with data requirements, and leave the “CIO-as-financial-executive” nowhere to hide: The company must comply with the regulations or it will be shut down.

And so the budget of the CIO has now become a precarious balancing act, with the company itself as the party at risk. The CIO is, in effect, caught in a paradox: He or she needs to spend both on innovation to grow the business and also on compliance and risk to protect it from collapse — but either approach probably far exceeds the IT budget, and probably also exceeds any savings they can make by delivering efficiencies.

Mastering the art of delivering IT projects with business value

Today large IT projects often end up too expensive, delayed and also fail to realize business benefits. In a recent study of 5400 IT projects across industries by McKinsey & Co , these IT projects had a total cost overrun of 66 billion USD (more than the GDP of Luxembourg…) and delivering 56% less value than predicted. To master this significant challenge the modern CIO has to facilitate for IT and the business to join forces to deliver on targets. Not only business & IT has to be aligned. In addition, the CIO has to focus on stakeholder management in relation to selection of vendors. Clearly defined project risks should be part of the vendor selection process to ensure that focus is not only on price but the vendors overall ability to succeed in delivering on time, budget and value. Also the CIO has to ensure that the project has a clear and agreed view of the projects strategic value and not only on technical content. Regular checks have to be made with involved stakeholders to assess if the project is on plan or if corrective measures have to be initiated. A key part in this process is the creation of strong business that can facilitate a continuous focus on business objectives for the duration of the project.

How to build a business case as a “transformational CIO”

In this near-impossible juggling act, therefore, what should be the the modern CIO be doing to build the right business case? Just building business cases on Return on Investment (ROI) for example will often not be sufficient since ROI is hard to calculate on a consistent basis across projects, departments and subsidiaries (especially not when non-financial benefits are to be included) . It is also not relevant for maintenance costs and, perhaps most importantly, ROI does not reflect how well an IT-investment support the strategic direction and priorities of the company.

To succeed, you need to first look at the margins of the company: Where are profits being hit? Where is production speed poor or over expenditure hampering growth? What is it that customers really want? The new CIO has no option but to be supremely financially literate: You now simply must understand the complex combination of causes and effects that drive the financial results of the organization.

For example, cash flow is a key driver of company value and share price. If you can use IT investments to impact cash flow positively (from better accounting solutions that will improve real-time budgeting, to software that optimizes product pricing and supply chain efficiency) you’ll be delivering true business value. Look also at the organization’s fixed-capital assets and then work out how to reduce the number of replacements or new investments they require. (and that doesn’t just mean fixed assets like IT infrastructure and datacenters, it might also mean non-IT structures like office space: Can real-time connectivity help eliminate overheads through increased remote working, for example?) Look at working-capital investments too: If you can reduce the business’s investments in stock by optimizing just-in-time delivery through technology, you send a clear signal that you are focused on business value — and you increase your chances of getting a bigger budget approved in later years.

There are no silver bullet solutions that will work for everyone, since so much of it will be contingent upon your own organization’s culture and market needs. You must have a clear idea — and executive agreement — on the right balance between fine-tuning your IT investments and meeting the demands of regulations.

But bear in mind that, when I visit businesses nowadays, what marks out the truly transformational CIOs are that they are clearly looking to save to grow. The opportunities for making IT more cost-effective are proliferating (e.g., by moving services into the cloud, outsourcing, or business process management). So the successful modern CIO who can generate 30% savings on his IT spend through wise budgeting and entrepreneurial investments — and who then sees that extra money as a source of potential for the entire organization and reinvests it wisely — is demonstrating that he is a truly modern CIO; one who no longer sees the IT budget as a sort of “allowed annual expense” for his department, but as a mechanism for creating value for the “clients-of-the-clients”.

If you do that, it will be a lot easier to keep getting the budget you need in the years ahead, while also proving that you have value as a truly modern executive.

1. From Business Strategy to It Action: Right Decisions for a Better Bottom Line, Benson Robert J., Bugnitz, Thomas L, Bugnitz, Tom, (2004), John Wiley & Sons.
2. Delivering large-scale IT projects on time, on budget and on value. Bloch M, Blumberg S, Laartz, J. (October 2012). McKinsey & Co.
3. Making Technology Investments Profitable: ROI Road Map to Better Business Case, Keen, Jack M . Digrius, Bonnie (2003), John Wiley & Sons.

This file has been attached: Budgeting_IT UR_input_final

Carte Blanche edited by Pascal Lanser, General Manager, IBM Luxembourg.