Tags Know-how, Strategy, Bottom Line

In fear of finance

For years, small and medium-sized businesses viewed IT as a cost, no matter what benefits it might bring, no matter how it might improve a business model. But the times they are a’ changing. Richard Young asks FDs what return they expect on their IT investment.

Finance directors like numbers. But there’s much more to the role these days than just “keeping score”. It’s a question of “decision support” – those numbers, properly interpreted and communicated to people throughout the business, can mean the difference between success and failure.

Which means that FDs are well aware of the importance of information and of the technology that provides it. But we’re not talking purely about financial data or accounting software.

While at one time, the FD was interested in technology to help him or her crunch the p&l, today it’s about laying bare the things that create those numbers.

“We installed our ERP system back in 1997,” says Alan Smith, FD of Bolton-based industrial paints company, Firwood Paints. “It’s still doing the original job as well as it ever did – it’s a real transaction grinding engine. But I’m now looking for more. You can’t manage what you can’t measure, so I’d like to get more analysis on our data.”

That poses a problem. The FD is still accountable for making sure the company invests wisely. While it’s easy to calculate the return on investment (ROI) in a “transaction grinding engine” – you just look at the number of man-hours you’ll save in the finance function – measuring the return on sophisticated analysis is tougher.

This is particularly challenging for mature businesses fighting for market share. IT budgets are scrutinised as much as any and there’s no urgent requirement to go beyond keeping the systems up and running. And the money spent on systems maintenance – which is not discretionary spend, in any case – doesn’t require you to calculate ROI.

But you can exploit opportunities to improve your IT capabilities this spend offers, bringing the system up to date, for example. To some extent the IT industry makes this easier. First, it creates upgrade paths for most systems. So when you spend on maintenance, there’s a good chance you’re going to get extra functionality. Second, prices drop all the time, so the same spend gets you more power.

“Far more of our IT spend is written off straight away as consumables these days – even office PCs,” says Andrew Litchfield, FD at plastics group AAC. “But the IT service and support costs are far more and now receive far more attention.”

Software has got a lot more complex, Smith reckons, which helps to bump up those support costs. And even if you’re getting a “maintenance dividend” by upgrading existing systems, you still have to be prepared to spend on new projects.

“Our IT budget is set by looking at ongoing costs,” he says. “If we’ve agreed on a new project, that will get added into the budget. Take our investment in Web technology – we’re concentrating on how IT affects and improves customer service. The increased competition and a declining market have forced us to make that a priority.”

Mind you, few FDs are easily dazzled by tech spending: “We have one site where the server is more than five years old and we know that it needs to be replaced,” says Litchfield.

“The information is all backed up, so our IT consultant says wait until it fails – it could keep going for another two or three years. If it was critical to the business, well, we’d have a back-up plan or would have already replaced it. But if it ain’t broke…”

In other words, prolonging the life of individual investments increases overall ROI dramatically. And if you’ve already got the strategic systems in place, you’ve got less to worry about.

For example, a decent analysis and reporting package will provide the high-end decision support tool that many FDs crave, providing management information and top-end reporting at the push of a button.

Fundamentally, real-time decision support technology is a must-have in today’s finance function.

“If I had an unlimited budget, I’d want to join up all of our systems,” Smith says. “We need to get key performance data to the people who need it in real time. I’d like the MD to be able to see how the order book is looking each morning or how product margins are moving. The finance function is at the heart of those questions, but we can only provide answers if we have the right technology.”

A few years ago, that ability might have been considered pretty advanced and rather costly – suitable, perhaps, only for companies on the “bleeding edge”.

The fact it’s now a must-have for SMBs also scotches the idea that FDs are only interested in quantitative analysis. In any case, Litchfield argues, the benefits of his IT investments are too intangible to quantify in an ROI number.

“No doubt there are people making a living from such recommendations, but it’s not something we’ve ever tried to do,” he says. “I can say what I would want from an ideal system: ease of use; excellent reporting; flexibility to adapt to our business; reliability – no bugs; available and helpful support company that knows its product and how to adapt it; and a support contract linked to how frequently we use it – if we incur costs employing better people, who make fewer calls to the support service, should we not benefit?”

Smith agrees that IT spend is not always a cold calculation these days: “There are lots of benefits you can’t put a number on,” he says. “But when we’re evaluating IT spend, we do try to get people to at least describe what the effect of the investment will be, even if they can’t attach a number to it. We try to look at it holistically and it often comes down to gut feel.”

The good news, then, is that the finance function sees IT assets as providing strategic value. And today’s FD, more than anyone else on the board, knows that enterprise value is now based as much on what you know about your customers and your other stakeholders as it is on fixed asset values or cash flows.

After all, a properly maintained and exploited customer database is the well-spring of those cash flows. But FDs will never commit money that isn’t available. And they’ll never allocate investment without a good reason.

The verdict? It seems that the mantra in most finance functions these days remains, “if IT ain’t broke, don’t fix it”.

The ROW: return on web?

Is spending on your company website the exception to your IT investment rules? Quite a few FDs seem to think so, slotting Web development into the marketing column instead of IT. The distinction is fair enough, as most websites are all about self-promotion, but the fact is that they fall under an IT umbrella – and its the IT experts who will be the ones to help your business get the most out of your Web spend.

Case in point: at Firwood Paints, FD Alan Smith wants to spend money on analytics tools, but the cash just isn’t there just yet. However, the company’s website budget is, relatively speaking, generous.

“We could have got on the Web for less money than we spent, but we knew that
it would be a nightmare in the long run and would require much higher maintenance year-on-year,” he says. “That’s partly why we went for WebSphere – it’s scalable and has really solid back-office functions for the site. So our Web presence cost more, but it’s much more reliable.”

That investment has paid off: “We sell a lot of paint from Web enquiries,” he says.
“It’s a great shop window. Just recently, the site brought us a deal worth £500,000.”

Not bad for an industrial paints company – about as far from Amazon.com as you can get.

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