by Richard Pastore

CFO Says IT Not a Cost Center

Jul 01, 200511 mins
IT Leadership

Southern Company is a model of stability. As the dominant utility holding company in the Southeast, Southern has paid a dividend to shareholders every year since 1948. It’s made Fortune’s list of America’s most admired companies for the past three years, with high satisfaction ratings on reliable service from its 4 million electric customers. Meanwhile, the company’s retail rates are 15 percent below the national average.

To maintain this low-cost, high-level service, and to keep those dividends coming, Southern leverages IT to drive efficiency and reduce risk across its five major utility companies and cross-enterprise business functions. At the same time, Southern needs IT to be a responsive growth enabler for its more aggressive, competitive businesses—such as wholesalers Southern Power, Southern Company Gas and Southern Telecom.

Tom Fanning became executive vice president and CFO at Atlanta-based Southern in 2003. Fanning, 48, joined the fold in 1980. Although he most recently served as president and CEO of subsidiary Gulf Power, much of his Southern career has been as a CFO for its subsidiaries. (His master’s degree from Georgia Tech is in finance.) However, he also did a stint in the mid-1990s as Southern’s CIO, initiating wholesale restructuring of the IT function, centralizing authority for IT, and launching a chargeback program to build transparency and financial discipline (see “Seeing Is Believing”).

An exultant Boston Red Sox fan, Fanning eagerly shows off his Sox memorabilia to a Massachusetts-based visitor and points out the friendly war he wages with office rival Mary Weaver, executive assistant to the chief marketing officer, a flagrant Yankees fan whose prominently displayed team ball Fanning must pass by daily. Fanning spoke with former CIO Editor Richard Pastore about how IT reduces risk, why CIOs should not report to CFOs and how IT governance works at Southern.

CIO: Most CIOs bristle when people label IT a utility—something that mainly keeps the lights on. But one could assume the one place that label would be accurate and appropriate would be at a utility company. Do you see IT’s role that way at Southern?

Tom Fanning: No. For us, IT is a differentiator. It is absolutely in Southern Company’s interest to keep prices as low as they can be. Our success is driven in part by running the most efficient systems we can and, therefore, relying less and less on rate increases. So from a financial perspective, the differentiator is how we create an efficient infrastructure.

What’s a good example of how IT has made a competitively efficient infrastructure?

To garner as much efficiency among all of Southern’s power companies, we have a very mobile workforce. For example, I was at three companies yesterday. I went to Alabama, went down to Florida and also traveled around Georgia. And in all these different points, I was able to get on a desktop computer and, through my own unique password and ID, call up my own desktop setup. We’ve taken the P out of PC. In other words, there’s no such thing as a personal computer anymore. They are no more personal than a desktop telephone. That allows a tremendous amount of flexibility in terms of location, in terms of being able to communicate. Our ability to do that comes from having a simplified, standardized, ubiquitous IT infrastructure called Home Run, which was a project led by IT. Having that also means your support costs go way down. I learned in my time as CIO that the cost of [not having standards] is way bigger than we all think it is.

As the CFO for Southern, what are your top concerns? Assume we know nothing about the CFO mind-set.

Piece of cake. At the end of the day, I want to make sure the share price is as good as it can be. And therefore, what I focus on are elements of risk and return. Return is driven by how much top-line growth I can have—and then by how much I can keep expenses in line with that growth. That produces my profit. So I want to be as efficient as I can from an operation standpoint; I want to have the broadest and deepest relationships with customers; I want to have products that will incentivize growth of our revenue streams. IT is fundamental to each one of those things. But I think what is ignored more often in corporate America is risk. Given the kind of company we are, risk is as important as return. We are able to reduce risk by running a much more integrated utility system, and frankly, this flies in the face of some moves in other parts of the United States to [break up] utilities. Because of our standard, ubiquitous IT infrastructure, we have much greater operational control across the integrated business lines that are making, moving and selling electricity. When there is a problem, we don’t have confused lines of communication on how to solve it. Everything is in one tent, if you will.

Many companies, often following a CFO’s vision, have turned toward outsourcing IT to create greater efficiencies. How do you view outsourcing?

I think inflexibility causes risk. That’s the premise of my judgment on outsourcing. When you outsource, you are cashing in your options. You’re making a bet that certainly could provide some near-term gratification, but you preclude your options in how you run your business and how you deal with customers. To the extent you have introduced a third party into your operation or into your interface with customers, that creates a tremendous amount of risk. And unless the payoff is not only significant but also long-lasting, that is a risk I’m not willing to take.

You’re talking about more widespread outsourcing rather than primarily niche applications?

I don’t mind outsourcing niche applications. And if you want to use a rule of thumb, I’m more willing to outsource things that the customer never sees or very seldom touches.

Yet Southern’s IT function operates as if it is competing with outside providers, continuously benchmarking its costs and service levels against the market.

In the mid-’90s, we went through a really large market test that compared internal IT to outside, third-party providers. We found that if we keep the service quality constant, our ability to deliver is better than the external market’s ability to deliver. But the world never stands still; if our ability to deliver is not as good as the third party’s, then we need to improve how we’re doing it, stop doing it or think about outsourcing it. That provides a great discipline to run IT as a business internally. You know, this notion that somehow we’re regulated and insulated from competition, that absolutely is not true. We compete [as a company, and the IT group competes] with the outside world every day. And I think adopting that rigor is a great discipline for us all to follow.

Our research has shown a steady increase in the number of CIOs reporting to CFOs in the past few years. Why do you think that is, and why doesn’t Southern’s CIO, Rebecca Blalock, report to you?

I think the model of the CIO reporting to the CFO is for companies that view IT as a cost center. And I think that’s an incorrect ongoing business model. IT should not be viewed as a cost center. IT is inextricably intertwined with the different business units of Southern. For example: They’re involved with generation; they’re a part of transmission; they’re a part of marketing. There’s very little of IT that is just IT; I suppose that would be the backbone infrastructure, the network, the mainframe.

Becky reports to our general counsel, but her larger interface is with the different business units. Becky has an advisory council of very high-ranking members from [our different business units]—really, a board of directors of her major customers. She’s as much a part of those businesses as she is running her own business.

Yet she is not a member of Southern’s top management council.

That’s only because Southern’s a pretty big organization with lots of different subsidiaries. We’ve got to keep simple, to some extent, how many participants sit at the table.

Then how do you expect her to be a key business player?

When I was CIO, I always thought I had an absolute free avenue to express my views with the chairman of the company. Number one: You need to depend upon the CIO, in a very collegial manner, to advance the interests of the strategy of the corporation. Number two: Make sure that you’ve got effective sponsorship at the management council level. Becky’s boss, [Executive Vice President and General Counsel] Ed Holland, is certainly able to represent the interests of IT. And frequently Becky comes to the management council and directly represents her issues.

What, for example, would she bring to the council?

Recently, it was a whole budget discussion around the notion that one of the ways we’re going to become more efficient, more reliable and keep prices low may be to spend more money in IT. If I just viewed IT as a cost center, then I would view success as keeping IT costs down. In fact, you may want to spend strategically more money on information resources.

You may be the first CFO I’ve ever heard say publicly that it might be wise to spend more money on IT. How do you decide whether to make an IT investment?

We’re a big EVA [economic value added] shop, and we have the business unit be the sponsor. The CIO in charge of generation will work with the management of generation to advance an idea. The sponsor, then, becomes not IT but generation ultimately. Generation is the unit that will have to commit to the cost, the implementation schedule, the functionality and the forward-looking improvement in its operation. That is, we remove the expected efficiencies and benefits from future business budgets. In advance.

Some systems are tougher because the ownership is not so clear. For example, CSS, our customer service system, is a hugely integrated dynamic customer management system common to all [our] companies. It enables us to do virtual call centers so that even local towns in southern Georgia, if they need to, during peak periods, can handle calls that originate out of Mississippi. With this, we can virtually guarantee that 90 percent of our customers will have the phone answered within 20 seconds. This type of system requires teamwork—broad cross-company, cross-functional representation and support—and we’ll set up metrics to track it. When we put a system in place and commit to the cost, we follow it like hawks. Our success rate in putting in a new system, in having it work the way we want, in extracting efficiencies, is up, I think, in the 80 percent to 90 percent range.

What role do you personally play in IT governance?

Every business unit has something called a technology leadership team, with representatives from the IT organization and from the functional business unit. What they do is talk strategically about the issues facing the organization and how IT can best solve those problems. These teams report through the different business units, but also report to the CFO functions in all the businesses. What we [company financial officers] are interested in is driving as much efficiency in the organization as possible, and we see technology as the point of the spear in helping to drive that. We want to make sure that IT’s process improvement ideas have a sponsor, that they don’t have to only rely on [business unit sponsorship].

What’s something you want to see improved in IT?

I’ll give you a selfish viewpoint here: [Southern Chairman and CEO] David Ratcliffe and I have to sign these certification statements every quarter; we have a legal liability for everything inside the corporation. It is so clear now to me that ignorance is not an excuse. We really need to know everything that’s going on. The lines of communication, the sharing of information and the import of that information are so much more highlighted now. But what you find in a big organization is data overload; there is data everywhere. What I tell folks is, give me information and not data. IT can really assist in turning immeasurable amounts of data into important, usable information. That’s something everybody’s got to get better at.

Former CIO Editor Richard Pastore is now managing director of content development with the CIO Executive Council. He can be reached at