CFOs and the increasingly powerful procurement offices they oversee are getting more heavily involved in corporate IT outsourcing decisions. But the finance team's priority--cost containment--can be at odds with the IT organization's goals for IT services such as innovation and access to talent.
"The challenge is that the CIO team often doesn't speak the same language as the CFO team," says Daniel Masur, a partner in the Washington, D.C. office of law firm Mayer Brown. "They don't speak in the same terms. They don't use the same concepts. And, as a result, they just talk past each other."
What's worse, the IT leadership is often unable to even compute the current costs for the IT services they want to send out the door--the starting point for any conversation with the finance group.
It's never been more important to know how to have a productive conversation with the CFO about corporate IT services strategy or risk being railroaded into a bad decision. Here are nine steps to take before making your outsourcing case to finance.
1. Calculate Your Current Costs
You'll never make a compelling financial case for outsourcing if you don't know the current all-in costs for the services you want to hand over to a third party.
"It's astonishing how often we end up working on a deal where the response to the question, 'What's your current spend,' is that no one knows," says Masur. "The CIO team needs to be able to create a bulletproof business case. If they don't, they'll walk away without the approval they're looking for, and the CFO walks away without any confidence in the IT team."
"While CFOs are not typically interested in your transition plan for moving to single sign-on, virtualizing your enterprise servers or incorporating cloud computing into your future environment, they will pay close attention to the expected total cost of the deal over the next five years, the extent to which those costs are classified as capital or expense, how the projection compares to the current state, and how the anticipated financial performance compares with alternative models," says Steve Martin, partner with outsourcing consultancy Pace Harmon.
A solid financial assessment will take into account all relevant factors and risks: inflation, deflation, demand management, anticipated growth or contraction, and currency valuation, for a start.
For example, it's important to consider how the vendor calculates cost of living adjustments (COLA) and how that will impact costs over time. "Many IT outsourcing (ITO) vendors have different COLA rates that are country-dependent," says Mark Ruckman, outsourcing consultant with Sanda Partners. " If the ITO vendor is saving you a large amount today by offshoring to a country with hyper-inflation, the cost savings will quickly erode."
2. Think Like a CFO
"The CIO needs to understand CFO's objectives," says Brad Peterson, partner in the Chicago office of Mayer Brown. Finance leaders want cost savings, sure. But they're also interested in cost deferral, trading fixed cost for variable costs, and asset ownership.
"Some favor a light asset ownership model so they can improve their return on assets," Peterson says. It's also important to consider how reported financial results differ from the outcomes IT may experience on the ground. "The results you produce may not be visible in reported financial statements, which is what the CFO is looking for," Peterson says.
"The make versus buy assessment [should] not only include the total cost of ownership analysis, but should also take into account other considerations that are critical to the CFO," says Pace Harmon's Martin. "These include implications to current personnel, impact on business risk, and operational performance -- all of which have financial implications."
Don't know where to begin? Insource some financial know-how into the IT organization. "IT increasingly adding to their staff finance people either borrowed from procurement or brought into IT," says Masur.
3. Consider the What-Ifs
"CFOs are focused on managing risk-- whether it's legal, operational or market-based. But quite often we see CIOs assuming, when they do their outsourcing analyses and business cases, that there's a base case that just continues for years," says Peterson.
Meanwhile, the finance chief is wondering what happens if the business doubles in size or we sell off a business unit or there are some new regulatory changes.
"While CFOs are typically not well-steeped in the nuances of an IT outsourcing deal, they are generally savvy enough to understand one of the key purported benefits of IT outsourcing, namely the flexibility to scale well with business growth and downturns under a wide range of scenarios," says Martin. "Consequently, the CIO needs to communicate not only the day one total cost of ownership to the CIO, but also how the deal will perform financially under a wide range of business outcomes." 4. Quantify Nonfinancial Value
IT wants more than cost cutting from IT outsourcing, but selling soft benefits to finance requires quantification. "If the CIO wants the CFO to consider things other than cost, they need to articulate and quantify the value to be received," says Masur. "It's not enough to say we're going to upgrade our capabilities or we're going to add features and functionality. You need to provide the cost-benefit analysis."
5. Look Outside of IT
The business case for outsourcing may be great for IT cost-cutting, but will it break the CFO's budget elsewhere? "Outsourcing--especially offshore--is great at cutting the CIO's expense line, while increasing it for other areas of the organization, such as audit, travel, security, communications," says Adam J. Strichman, founder of outsourcing consultancy Sanda Partners. "CIOs would be wise to effectively communicate how their cost-cutting measures may increase cost to other groups."
6. Apply Portfolio Management Principles
The CFO thinks about everything in terms of the financial portfolio. To finance, IT outsourcing is just another investment in the mix. "CFOs want IT to use portfolio management thinking," says Peterson. "They want you to periodically reevaluate [outsourcing] and rebalance it and consider diversification."
While outsourcing to a single provider or location may be attractive from an IT management perspective, reliance on a single provider or offshoring everything to Bangalore won't sit well with finance.
7. Get CFO Signoff on Financial Terms
The average IT outsourcing deal has hundreds of moving parts, but a handful of core financial performance aspects including pricing schedules, minimum spend or volume commitments and the implications of not meeting them, asset sale and buyback provisions, business downturn or divestiture terms, and termination considerations. Get finance to sign off on those before a contract is signed, advises Martin. "CFOs don't like to be surprised with a multi-million dollar fee on the eve of a major transaction."
8. Don't Forget the Case for Not Outsourcing
It's just as important to make the case for what you don't want to outsource. "Justify why you haven't outsourced everything to India--even if nobody asked," advises Strichman. "Every CIO should have an offshoring analysis at the ready especially those CIOs utilizing minimal offshoring. Somebody--especially the CFO and board members--is always wondering about this."
9. Measure and Report on Success--and Failure
"At some point the CIO's organization loses credibility with finance because they make all these claims [about IT outsourcing], but after the fact there's no accountability or evidence that the promised value has been realized," says Masur.
CIOs need to establish metrics relevant to the success of the initiative that can be measured later if they want to be taken seriously by finance. "Provide real post project performance impacts--even if not requested--showing projects that exceeded expectations as well as those which fell short on their potential impacts and costs to the entire company, not just IT," says Strichman.