Selling IT Investments to the Board
The goal in business is simple: get to the top and stay there. But as the new digital economy emerges, the process of getting to the top threatens to change the traditional rules of business forever. So how does a finance director justify new IT expenditures to a traditional--and somewhat skeptical--board?
The traditional cost/benefits analysis cannot always be carried out in the e-business world where IT infrastructure must be in place before the company even enters the race. Pundits argue that a new strategy is needed for selling IT to the board--a cross-business competitive analysis describing the landscape of the digital world in simple terms. Some clever tricks might also win senior management over.
Jim Norton, president of e-business policy at the Institute of Directors, suggests: "Give the board a little demo as to what e-commerce can do, such as shopping over the Web. It will go a long way. Directors then realise how technology can be used for business benefits."
Playing Catch Up
As it stands, the UK lags far behind the U.S. and Scandinavia in IT investment. A recent report by IT industry analyst IDC predicts that Western Europe's three percent spend of its GDP on IT last year will, if maintained, overtake U.S. IT expenditure. Companies must critically examine how money is poured into e-business if they are to guarantee success. There is, however, evidence to suggest that board directors are not even discussing IT and e-commerce investments.
Research commissioned last year by the Institute of Directors showed that 50.5 percent of UK directors had never even had a technology briefing. This year, ClearCommerce, a vendor of e-commerce transaction software, conducted a survey that suggested that only 42 percent of strategic e-commerce decisions are made at board level.
In fact, Y2K was the first time IT was properly scrutinised by the board, as it became increasingly clear that getting Y2K risks ironed out was critical to the survival of the business. James Dobree, president and CEO of catalogue vendor Zygon, says: "We are all trying to climb Everest. The U.S. is at base camp, because it has realised that it must spend money on IT and e-commerce; we are lagging behind as we don't yet think like that. The U.S. has been thinking for the past five years about how technology can drive the economy forward and we haven't, so we're panicking now."
Paul strassman, president of information economics at Butler Group, and author of a series of studies weighing up the competitive advantage delivered by IT, adds that throwing money at the problem will not guarantee success. "IT is not a ticket to heaven, but is an enabling way of achieving a strategic business, revenue generation and competitive viability." He adds: "IT is becoming a weapon of choice in competitive confrontations and it deserves attention. But to focus on technology doesn't automatically mean that a company will achieve competitive advantage; it has to survive first and then get ahead."
To persuade the board to listen and accept new ways of working, the finance director needs to throw out the idea of presenting standard business cases and instead take a broader view. National Computing Centre CEO John Perkins says: "An IT project must never be presented to a board as an IT project, it must be presented as a business benefits project, because that is what boards understand."
ROI calculations, meanwhile, have become meaningless. Strassman suggests that ROI comes from cash generated by employees and that the organisation itself is the ROI. An organisation generating cash gets its return from a variety of sources: people's skills, different motivations and technology. "It is a bundle of things, he says. "Each is an ingredient to success, and is nothing without the others."
Today's ROI calculations are taking place in a different market that is moving at a breakneck pace. Norton says: "FDs must look at their project and rate the risk perspective of how much risk will be put in and what the gains will be. It's a different business approach--companies should get into the market quickly and invest incrementally. They shouldn't plan for the next five years as the world is changing too much."
In the past, a business case would have looked at product development, manpower and infrastructure, but today's business case needs to extend beyond these considerations. Companies are more open and receptive to IT as they turn away from back-end, internal automation to focus on using technology to increase sales. Consumer demand puts pressure right through the supply chain and boards need to pull together as a team that encompasses each department, realigning the way in which the company can add value.
strassman suggests that a company should consider a number of scenarios, engaging teams of people in marketing, IT, finance and development to prepare versions of how the future might look over the next five to seven years. From these, risk-adjusted discounted cashflows can be worked out. He explains: "It's like a fork in a road: one way ends up in hell and another in heaven, but you need to know which is which to have the best chance of success." Each scenario is then presented to the board with its risks and costs outlined, and a recommendation of one or two.
The scenarios need to encompass alternative ideas that look at ways of achieving competitive advantage without imitating competitors. Strassman comments: "Competitive excellence comes from being unique and having a unique offering that is specific to the company. Innovation will be the key to survival in the new economy."
David Taylor, president of Certus, an association of IT directors, is of the same opinion: "Selling IT to the board shouldn't be an issue at all, because a board should be open and have the speed, flexibility and knowledge to allow new and innovative ideas to be accepted. IT should be on every item of the agenda." However, he concedes that: "The traditional view is hard to shake off--that IT is for techies--but if the board reassesses where the company is going and dreams an even bigger dream, it will succeed."
Analysts agree that establishing one's core competencies is key to competitive advantage. FDs must make clear what the company wants to achieve and what it will get out of the Web. Alan Scutt, vice-president of Europe at ClearCommerce, says: "They must work out how they are geared up to the appropriate market and select the technology needed to support that area of interest."
Prepare to Restructure
A board needs a fresh way of thinking through business cases and a bottomless budget. The companies that are getting the rewards are those which integrate their e-commerce strategy into the whole business. Companies should be prepared to restructure, if such restructuring will lead to success.
For example, Smile, the Cooperative Bank's venture into Internet banking, carried a high risk and took the company into uncharted waters, but the gamble has certainly paid off.
"FDs must sell the big picture: why the company must be in e-commerce, how the change will affect it and its place in the market. The board must be made aware of integration and online payment, but what they really need to remember is the contingency planning if things do go wrong. If a customer has a bad experience on the Web it will damage the brand image of the company. A board must accept innovation, but with a back-up clause included. Branding can be damaged for good if ill-chosen e-commerce projects are implemented," Scutt says.
Once the board is on your side, Dobree says the expenditure on marketing, IT and reorganising operations can be restructured. Two to eight per cent of that pie is currently spent on IT, but this should be at least 30 per cent, according to Dobree. This shift will have an impact on all operations of the business. He adds: "This is a tough call for business. They have had the same percentage split for years and now an FD must put his neck on the line."
Spend on IT can be a major strategic contributor to the business and enable access to new markets via new channels. But, in addition to this, objectives, measures and milestones may need to be rethought. The FD must delineate why the IT project is so important, the risks, the benefits, the background, the competition and the paradigm shift in the new market. IT needs to be spelt out as a strategic driving force of the business.
In the U.S., lateral thinking and acceptance of new ways of working are burgeoning, because everyone is keen to accept and use new channels. One pharmacy has become an e-pharmacy, enabling customers to order their prescriptions over the Web. Via its portal, the pharmacy knows every drug a person takes, and if they ask for a new one the portal can work out whether it would conflict with another. The e-pharmacy and its customers no longer need the shops, giving both greater value. In the UK mindset, customers still need the shop, and that is where the board must shake off old concepts.
If finance directors of SMEs believe that it is impossible to push an expensive IT project through the board, vendors are willing to make the online transition easier. Size matters less, as SMEs can use application service providers (ASPs) to provide the infrastructure required to get a new, innovative project off the ground with the board's blessing.
But what companies need to remember is that success in the new economy relies on the appropriate infrastructure to act as a backbone on which to build e-commerce applications and gain competitive advantage. IT has been a back-office function and not perceived as a critical success factor for a business. But integration to the back office now needs to become an essential part of having a successful e-business operation, and this costs money.
However, no company should respond to IT purely as a defensive strategy, because such a project will be doomed to failure. Companies ought to be ahead of the competition and adopt a different approach. Charles Homs, senior analyst at Forrester Research, remarks: "FDs mustn't sell IT for IT's sake, because their peers are out there with e-commerce strategies. An attempt to get on the Web quickly can reassure the company of its position, but this does not necessarily mean that it will make the business grow or position itself accurately. Thought and a careful decision will ensure success."