CIOs reveal their most essential IT financial management principles

Global IT leaders from PayPal, Farmers Insurance, Qep Resources Inc., Matson, and Warburg Pincus share the most critical elements of a sound IT finance strategy.

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A significant change for technologists in my view is in how to think about structuring technology investments. Some best-in-class disciplines include structuring all technology innovation projects as venture capital bets, defined with narrow and near-term success criterions, have clear financial measures, are organized around individual accountability with cross functional governance, and are structured as “fail fast” bite-sized agile initiatives. A very important concept in failing fast is to celebrate and learn from failures rather than marginalize their value by ignoring them.

The above generally represents a material culture change for most companies that have for decades organized technology initiatives around long-life projects with annual budget approval cycles. This turns all historical technology planning, and budgeting assumptions on their head.

The approach requires adding a rigor for thinking about technology spend in two distinct buckets. The first being the lights-on bucket, which represents the true maintenance costs of technology and should scale with revenue, just like any other operational function. This component should be the only component part of the annual budget cycle and subject to normal cost optimization approaches.

The second bucket, hopefully the bigger bucket, should be the technology innovation bucket, which should be structured as a series of venture capital bets with a level of innovation funding the company is willing to make on an annual basis with an aggregate expectation of 3X quantified returns over a three-year period.

The venture funding should support a portfolio of bets (projects) that have different risk profiles and risk horizons, all structured with near-term incremental success criterions that are brutally transparent and cleanly measurable, and are governed with a venture board like governance comprised of cross-functional leaders. It should be acknowledged and celebrated that about 30 percent of the best will fail, but the balance will deliver a material and measurable ROI, which in aggregate returns 3X money for the annual innovation spend level. Key being a measurable returns requirement, just like a successful venture bet would have.

More progressive companies can even extend the concept by linking variable compensation of teams to venture returns with success multipliers for annual value creation. This venture approach to innovation spending not only creates a maniacal focus on technology-enabled value execution, but it also forces technologists to start thinking about financials and returns more so than they normally would. Also, it forces the discipline of six- to nine-month value creation cycles that can measurably drive variable compensation.

The venture approach to innovation spending can be transformative and represents a culture shift for organizations — from that of managing technology spending to that of technology investing — and a skill set shift for technology leaders — from being technology CIOs to venture-backed CEOs.   

Copyright © 2018 IDG Communications, Inc.

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