Pat Brans sat down with Hervé Marcotte, a twenty-eight year veteran of the CFO role for several companies, including Otis Elevator and Axxes, and active member of what one might call France’s “CFO club” - l’Association Nationale des Directeurs Financiers et Contrôleurs de Gestion (DFCG).
Since Hervé has so much experience, and since he has worked in the US, France, Europe and Asia as a Finance Director, sometimes in charge of IT, I thought he could provide excellent insight into how CFO’s view the CIO role.
Was I right? You be the judge.
Pat Brans: What do you think scares CFOs most about CIOs and IT in general?
Hervé Marcotte: The first thing that scares us is that the CIO and the CFO don’t speak the same language. The CIO ‘s language is too technical, and not quite the same language typically used in business discussions. From my experience, CIOs and CFOs don’t always understand each other. The CFO might request something very simple, and the CIO comes back with a complicated response.
Because of this fundamental difference in communication styles, it’s often difficult for the CFO and CIO to be friends, or to develop a sense of camaraderie.
The second thing that scares us has to do with how one views an investment. I don’t think the CIO has the same understanding of risk management as the CFO. Also a lot may be hidden under the complexity of IT architecture. CFOs are very much afraid of sunken costs, and they sometimes think IT systems are poorly designed or too big, too complicated, and too hard to maintain. That’s the conclusion any CFO comes to when he or she looks at the finances behind large systems.
The third major issue is the underestimation of costs – and related to that, taking the wrong costs into consideration. I think that when dealing with new technologies, CIOs know the build costs, but they miss a lot of the other important costs, and do not always know precisely what the run costs will be. The CIO and the CFO may get together to make up a budget, but the CFO is at a loss, because he or she doesn’t know the details first hand.
Because of this lack of information, it is easy to underestimate costs. Sometimes costs are overestimated too. Of course it’s better to overestimate cost than to underestimate cost, but neither situation is ideal for the CFO, who loves predictability. Remember too that when you set aside too much money for one investment, that’s money that could have been spent on another investment.
The fourth thing that scares CFOs about IT is that, because CIOs talk in such technical terms, they cut other employees out of the conversation, which is not a good way of keeping staff motivated. What the business needs are project managers who understand the technology, but who are also able to speak in business terms.
The fifth thing that’s scares CFOs are schedule overruns, which usually affects testing – and therefore quality. When an IT system is not tested enough, there are big risks. The problem is, when a project runs late, testing is the first thing to go.
Or sometimes schedules are overrun, and testing gets delayed. Then when it comes time to do the testing, people who were assigned to run the tests aren’t available at the new times set aside for testing. In the end, quality assurance is not done properly.
PB: Who do you think CIOs should report to in an organisation and why?
HM: That’s a very difficult question to answer. It depends on the size of the company, the kind of business it’s in, and the company strategy, among other things. But before I try to answer that question, let’s think about what the role of the CIO is.
CIOs have two big priorities. The first is to put in place a system or a process through which users can easily and freely express their needs. Second, IT needs to build and run the services that meet users’ need.
Those are the CIO’s two key priorities. Now let’s talk about two important dimensions inherent to the CIO role. The first is the strategic dimension – IT should provide services that support strategy.
The COO is the person most responsible for strategy and he or she looks out over a three-year horizon. It’s important for IT systems to be designed not just for today, but also for the future. So it follows that the CIO should work closely with the COO.
The second dimension is the cost dimension. Of course, IT systems should be cost effective. Many CIOs have a good understanding of finance – especially in the UK. But what’s important is that there be security in the information systems.
When I say security I’m not talking about security against risks of unauthorized access or against risks of violation of data privacy. I’m talking about process security - that there are good internal controls, that the processes are well managed, and that the business intelligence systems are delivering what business leaders expect. CIOs don’t usually have a good understanding of this kind of process improvement.
You have to remember also that IT is increasingly important to CFOs and COOs. The CFO role is extending into IT, especially when it comes to the use of cloud computing - the CFO has a say in the choice of applications. Similarly, COO is getting more involved with Big Data, because the COO is the one who has the final say in what to do with the data.
Except for information-intensive sectors or financial services, where the CIO reporting into the CEO might be okay, I think it makes more sense for the CIO to report to either the COO or the CFO. Which of those two would depend on the size of the company. In either of the two cases, the CFO can then be more relaxed about the business value of IT.
Let’s not forget that IT is a supporting function.
PB: Have you seen cases where a CIO reports directly to a CEO, and has this worked?
HM: Yes. I’ve seen two examples of this. One involved the rollout of an ERP system; and the other involved a project that was make-or-break for the company – the future of the company depended on the success of that IT project. I don’t think this reporting structure worked in either case.
In cases where the CIO reports directly to the CEO there is a conflict of interest. The CIO wants to succeed in technical terms. The CIO is happy to implement something new and please the CEO. But when the customers look at the results of what was developed, it’s a disaster. In the cases I saw, IT projects weren’t what the initial requirements called for.
Business unit leaders, the COO, and the CFO usually spend a lot of time in meetings deciding on requirements, but when the CIO reports to the CEO, the results do not conform to what was agreed to by the business, and users suffer. In these cases, the COO and the CFO get cut out of the loop, and that is not a good thing for the company.
PB: When you evaluate IT investments, what kinds of things do you look for? How far out do you amortise and how do you deal with hidden costs?
HM: It’s a common understanding everywhere – including the UK, I think - that IT systems should be amortized over five years. Most of the time people do this, but they only do it for the initial investment. You also have to look at the maintenance costs, which come to around 20 to 25% of the initial price every year. If you don’t take this substantial ongoing cost into account, you aren’t really reflecting the total cost.
The key in that sense is that the Activity-Based Costing (ABC) should be used, so that the costs are charged back to each user. If you do this, any hidden costs will show up very quickly.
The IT department should be an expense center where the expenses are charged to the business customers, just like you would have cloud services charged to business units, or just like any IT service provided externally would be charged.
PB: What do you think about the consumerisation of IT?
HM: In terms of human relations, it’s a good idea. However, the cost of not standardizing - having standard equipment price, standard set up and maintenance costs, and standard warranty - can be high. Also if you don’t have standard replacements on hand, the company loses on productivity when a device is lost or gets broken.
Consumerisation is fine when you’re dealing with smartphones or small devices - as you commonly see with BYOD. But when people do real work, it should be on company-supplied systems that are maintained and updated with all the latest software and hardware.
When it comes to smartphones and handhelds, it can be a good deal to have the employees bring in their own devices and have the company pay some of the cost. It’s a good way of motivating people. But the company should make sure cost of BYOD doesn’t surpass what they would pay if employees used company-provided devices.
PB: You are French, but you have worked in different cultures, in different legal systems, and in different geographies. Can you talk about how you view the UK enterprise culture from the perspective of the CIO-CFO relationship?
HM: I know far more US companies than UK companies, but I think the culture in those two places is similar. What I’ve observed is there is a strong financial understanding among CIOs in the UK and in the US. This is not the case in France, where CIOs tend to be very tech savvy, but maybe less business oriented.
Companies in the UK were the first to do offshoring and to hire IT support firms. The UK and US are also usually ahead on technology. In France we tend to copy them. In the UK, CIOs tend to be stronger on strategy; and I think this has an impact when it comes time to decide on reporting lines.
One final thought is that I don’t want to say Finance is more important than IT, but I will say that the CFO should be involved in the big decisions on where the company wants to go. These decisions shouldn’t be made strictly on technical grounds.
In the end, the company and its IT systems need to follow what the customer wants.