Challenges in Funding Innovation. In Review: "Finance and the Future of IT."
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Innovation is at the heart of Olsen Consulting’s service offering, but this can present significant challenges for our clients in terms of their funding and financial reporting. Deloitte published an article called “Finance and the future of IT” which enumerates some of the challenges faced by companies that are attempting to use an Agile Approach in their IT operations.
An Agile Approach requires businesses to adopt an iterative strategy, and to nimbly adjust their plans as they move forwards on a project. The Agile Approach is often contrasted with a more traditional Waterfall Implementation Strategy – the Agile Approach structures the product development cycle into “sprints” which are treated as a collection of several smaller projects, versus the “phase” approach that is used as part of a Waterfall Implementation Strategy. An Agile Approach requires flexibility. Such a strategy is best suited to IT projects because it focuses on incremental progress, which reduces risk and ensures that the quality of the final deliverable is maintained.
Despite it’s advantages, the Agile Approach also presents several challenges with respect to the intersection of finance and IT innovation. Deloitte identified some of these challenges as:
The shifting of capital expenses to operating expenses. By continuously developing IT processes, quarterly results are adversely impacted and this requires CFO’s to explain significant increases in operating expenses.
Technology innovation initiatives don’t typically provide a traditional ROI, nor offer a positive return. This is partially due to their experimental nature, as well as when traditional financial reporting methods do not account for tracking investments in platforms that can be reused over an indefinite period.
Calculating the value delivered is often assessed separately for CIO’s versus CFO’s. CIO’s tend to make their own calculations based on assumptions that are not the same as the metrics used by finance or business reporting.
Despite it’s challenges, the use of an Agile Approach is specifically tailored towards innovative IT developments. As such, there are several steps that can be taken by both IT and finance departments to successfully leverage such a strategy.
CFO’s should shift their thinking to consider investment into innovation as investment in a risk-based portfolio rather than a series of individual investments. By focusing resources on developing the governance and attributes of the portfolio, valuations will be more accurate, and it will be easier to mitigate future risks. Secondly, when considering investments that would result in shifts in expenses from the capital expense column to the operating expense column they should be valued with both their potential to create future revenue streams, as well as their potential for cost reduction. Finally, CFO’s may want to consider funding business-critical innovative investments separately from the general IT budget. This is because a strong ‘digital foundation’ has positive impacts on every area of the organization.
IT departments also have a role to play in ameliorating the tension between finance and technology professionals. Several techniques to bridge the gap between IT and finance departments include having a product-focused operating model. This allows organizations to define the required skill sets and how they can be sourced, as well as defining new expectations and incentives which innovative IT can assist with. Additionally, the burden of communication falls on CIO’s to explain how their budget will specifically be utilized. The rationale behind each initiative as well as predictions for year-to-year efficiency will help in bridging this gap. IT change-makers should work on becoming “architects of creative contracts and ecosystem partnership vehicles.”