Cost Cutting vs. Competitive Advantage: Serving Both Priorities

Originally published October 11, 2010

The continuing economic weakness demands extreme cost consciousness on the part of CIOs. But they also must equip their companies with the tools and services they need to compete, especially as the potential for growth appears on the horizon. Savvy CIOs are finding ways to serve both masters.

IT’s direct ties to finance always have been something of a moving target. While fewer than half (42%) of the IT organizations surveyed recently said they reported to the CFO, that’s more than report to the CEO or any other executive. (The organizations were surveyed in a joint project conducted this year by research firm Gartner and the Financial Executives Research Foundation, an advocacy group.)

At the same time, more than half (53%) of the CFOs surveyed indicated that they would like to move to this reporting arrangement. According to Bill Sinnett, director of research at the Financial Executives Research Foundation, these results indicate that there is an opportunity for CIOs and CFOs “to form a powerful alliance that generates more value for the enterprise.”

Whether they report to the CFO or not, most CIOs are well aware of the need for cost consciousness. “Business productivity and cost reduction” was the number one business concern cited by the CIOs, CTOs and IT managers surveyed by the Society for Information Management’s for its 2010 IT Industry Trend Survey. Scoring second: “Business agility and speed to market.”

So how do IT managers address both priorities? Technology can help.

Cloud computing in general, and software as a service (SaaS) in particular, offer demonstrable return on investment that can both cut costs and improve service. For example, Toby Redshaw, CIO of international insurance firm Aviva, recommends that CIOs make the business side aware of “what is spent on the morass of old clunky HR systems” at their organizations. Then they can demonstrate the cost advantages of employing an HR system in the SaaS model. Then, “get going,” he says.

It’s also important to involve the business side in IT decisions — not just from a financial perspective, but from a business perspective as well.

Angelo Mazzocco, chief information officer at Progressive Medical Inc., which provides services for managed care organizations, reports to the company’s president. He is right now going through the budget process for next year with the president, the CFO, and the head of sales and marketing, including deciding which IT projects get the green light. “As we go through that vetting [process], some things won’t make it,” he says.

Mazzocco’s lucky. He expects his IT budget to increase approximately 10 percent for next year. That’s mainly because the IT budget is pegged at 5 percent of company revenue, and revenue is expected to increase. “We continue to grow,” he says. The company’s revenue grew 18 percent in the 2009-2010 period, Mazzocco says.

As for the budget process, things are getting heated, he says, but in a good way. “We still have a lot of projects that people want to implement that will help us drive revenue rather than just cut cost,” he says.

The biggest single factor in the IT organization’s current effectiveness, he says, is the fact that they implemented the iterative programming model known as agile software development earlier this year. As a result, the speed with which they implement new projects has increased 20 to 30 percent, Mazzocco claims.

Just as important is that the business side is directly involved in the incremental, interactive development process. Business managers, including finance people, sit in with the developers and serve as subject matter experts on IT projects. “We get great participation,” he says, which “leads to us being aligned with the business.”

Mazzocco anticipates still more involvement in the IT budget process from the business side before it’s over. “Some business folks will come in with more projects with deeper ROI,” he says. And when they do, the company will evaluate them in terms of both cost and competitive advantage.

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