CFOs are on track in 2021 to spend more on information technology than ever before, spurred on by forecasts that vaccines will curb the coronavirus and open the way for a robust recovery.
IT spending worldwide will surge 6.2% this year to $3.92 trillion as CFOs speed up their pre-pandemic plans for digital transformation by at least five years, according to Gartner.
"You're going to see a lot of increase in spending because of pent-up demand and a lot of return on investment that people can get and need now," said Omar Choucair, CFO of financial software company Trintech.
CFOs will need to ensure they don't throw too much of their record spending away. At least 30% of the typical IT budget is wasted, Flexera said in a survey that identified digital transformation as the top item on technology budgets this year.
Limiting waste is one of many challenges confronting CFOs as they seek to emerge from the pandemic with a competitive edge in digital technology, according to CFOs and business technology experts. CFOs also need to align technology spending with business strategy, trim the number of vendors hired since the onset of COVID-19, and refine how they measure the cost of their digital tools — to name just a few key advances.
Digital transformation can reach into every corner of an enterprise. Companies can shift operations from on-site computers to external cloud servers to improve flexibility, speed software upgrades and cut costs.
Companies can also use analytics and artificial intelligence (AI) to boost customer satisfaction or mine near real-time insights from mountains of data. Or they can streamline accounting and finance with robotic process automation (RPA) software that increases efficiency, reduces spending and frees up staff to do higher-value tasks.
Demand has spiked since the final months of 2020 for a range of technologies, including analytics, cloud computing, supply chain management and enterprise resource planning (ERP) software, according to Anthony Coletta, CFO at SAP North America.
High performance and digital adoption go hand in hand. The best-performing 10% of digitized companies earn as much as 80% of their industry's digital revenues, according to McKinsey.
Yet failure is common. The typical digital transformation stands a 45% chance of undershooting profit expectations, McKinsey found in a survey of more than 1,700 C-suite executives. The odds of exceeding profit expectations are just one in 10.
CFOs and business technology experts say financial executives can improve their chances of success in digital transformation by avoiding some common mistakes:
1. Underestimating digital transformation
While CFOs shouldn't shirk their role to carefully review budget requests, they need to be ready to back bold, creative initiatives with ample capital.
"You need to take an aggressive position," Coletta said, noting how at the start of the pandemic some bricks-and-mortar retailers gained by adapting to social distancing mandates through heavy investment in e-commerce, delivery and curbside pickup operations.
"You can lose ground to the competition and your first-mover advantage if cost savings becomes the No. 1 factor," he said.
2. Allowing vendor contracts to proliferate
Many companies that have embraced a software as a service (SaaS) strategy have hired vendors that are redundant or not adding value, Choucair said.
"If somebody's not looking at this holistically you can wind up with 30, 40 or 50 vendors," he said. A CFO should then ask, "‘Wait a minute, are they all working together, do we need all of them, do we only need 15 instead of 25?'"
CFOs often discover a glut of vendors months after pushing down autonomy for spending on technology to lower levels and reclassifying outlays from a capital expenditure to an operating expenditure.
For example, they may have moved from on-site computing with hardware purchased every few years (capital expenditure) to cloud computing purchased from a vendor such as Amazon or Microsoft as needed (operating expenditure).
By giving lower-level staff more leeway on spending, the new budgetary approach often sparks innovation. In-house software developers gain flexibility to spin new creations into the cloud or test a new product from a vendor.
Yet outlays can exceed limits, Snow Software CFO James Denena said, adding that remote work during the pandemic has further impeded oversight of spending.
"With more and more workers operating remotely, it's especially hard to monitor SaaS applications and cloud services often acquired by business units without IT input," Denena said in an email response to CFO Dive. "That can result in expensive annual contracts with little or no governance."
3. Failing in 'change management'
A top-to-bottom overhaul of technology can jolt all company stakeholders — from staff and customers, to investors and board members. A financial executive needs a plan for informing and rallying every group, according CFOs and experts in business technology.
"Soft skills, communication, engagement are not part of the DNA of the CFO, but they're extremely important," Kearney CFO Christine Laurens said. "I've seen it myself over and over again — underestimating change management is one of the biggest mistakes" a CFO can make when leading a digital transformation.
Before pushing ahead, a CFO should consider mapping out the different needs and potential concerns of all groups of stakeholders and identifying those who will likely champion or resist digital transformation, she said. Change management "has its own work stream, and I think it's really a big risk if you don't have a plan."
Employees will need training in new skills and roles, as well as an understanding how digital technology advances long-term company goals. The C-suite and board will need regular updates on benchmarks, KPIs and budgets. Vendors will need to know in detail about technical changes such as new coding and shifts in company expectations.
"CFOs don't place enough focus in change management and communication in adoption — the kinds of things that prepare their organization" for a leap forward in technology, according to Chip Cohron, national leader of digital transformation services at BDO.
Financial executives will more likely succeed in adopting technology by following some best practices, including ensuring spending aligns with their company's long-term business strategy, according to CFOs and experts in business technology.
"You need to have your roadmap defined" with company strategic goals as the destination, Coletta said.
When considering whether to replace legacy computing with digital technologies, financial executives need to choose metrics that account for the different ways old and new technology incur costs, the CFOs and business technology experts said.
"What I'm really trying to do internally — and we're also encouraging our clients to do — is to think through the Total Cost of Ownership" (TCO), gauging both direct and indirect costs over the lifecycle of a technology, Laurens said.
TCO analysis of computing measures several types of costs, including support, maintenance, training, security, insurance and tangible expenses such as needed floor space.
The calculations should be comprehensive. For example, when determining cloud computing costs, financial executives should include the expense of syncing on-site and vendor software with software upgrades in the cloud.
CFOs weighing whether to shift computing from in-house systems to the cloud can find useful comparative insights from TCO analysis. The comparison is especially complex because a move to the cloud may require a capex-to-opex reclassification of computing, prompting different accounting and tax outcomes.
CFOs should also consider initially focusing digital transformation on their own operations, CFOs and experts in business technology said. That could mean building a full suite of ERP tools or, on a smaller scale, installing a digital accounting or quote-to-cash system and adding on from there.
CFOs are well positioned to lead digital transformation. In the face of the coronavirus, businesses have relied on CFOs to cut costs, tightly manage cash and investments and provide the forecasts that underpin business strategy.
"The whole business is looking to the CFO to maneuver through the pandemic," Choucair said.
Many financial executives are already leading digital transformation. Since the outbreak of COVID-19, CFOs have become "catalysts of digital strategies" and their companies' "digital stewards," Accenture said. Seventy-two percent of CFOs now have the final say on technology strategy, according to an Accenture survey.
Some CFOs are guiding their companies in new directions, according to Peter Ulrich, EY-Parthenon principal for digital strategy and transactions.
The CFO at a producer of steel, aluminum and other metals prompted the company to embrace sustainability and cut costs by using blockchain to track its use of recycled metals, Ulrich said.
With blockchain the company aims to use more recycled metal and shrink its carbon footprint, he said. The CFO took the lead "in being bold about defining the next digital agenda for the company."