CIOs, Meet Your New Boss

By Edward Cone  |  Posted 01-16-2008

CIOs, Meet Your New Boss

Kevin Moultrup is running with a different crowd these days.

As executive vice president of North American operations for Micro Focus, the British enterprise software company, Moultrup used to spend a lot of time dealing with CIOs of large companies. Now, not so much. He's hanging out with the chief financial officers instead, because that's where the power increasingly lies in corporate IT.

"We rarely do a significant deal where the CFO is not involved," Moultrup says. "I deal with them all the time, sometimes to get permission to talk to the CIO." And when CIOs act on their own, the stakes are often low. "Discretionary spending for CIOs is way down," he says. "We have been doing $49,000 deals with one CIO at a very large company, because his discretionary spending cap is down to $50,000."

Research backs up Moultrup's observations: According to the latest member survey from the Society for Information Management, nearly 30 percent of CIOs and senior IT executives report to their organization's head of finance. That number is up from 25 percent in 2006 and 22 percent in 2005.

More CIOs are reporting to chief operating officers, too--more than 22 percent in 2007 versus the recent peak of just under 21 percent in 2005. And the decline in the number of CIOs reporting to their company's chief executive is precipitous, too: 31 percent of those surveyed report to the CEO, down from 45 percent the year prior.

The increasing prominence of the CFO in IT management signals a change in the way companies view technology strategy and deployment. "There's a lot of blurring and sharing of responsibilities across the traditional, stovepipe functional categories," says Erik Brynjolfsson, the Schussel Professor at the MIT Sloan School of Management and director of the MIT Center for Digital Business.

It may be that the conventional model, in which a CIO oversees all aspect of technology, is being unbundled. The job of maintaining installed systems on which CIOs tend to spend much of their time--sometimes referred to as "keeping the lights on in the data center"--is increasingly seen as an operating function that falls under the CFO's purview. "There is a trend of CFOs expanding beyond finance to more functional area responsibilities," says Mike Nuzzo, vice president of finance at retailer Abercrombie & Fitch.

Meanwhile, other key elements of the current CIO job--the purchase and deployment of information technology and the shaping of information as a strategic asset--are more often being driven by the business units that use the tools on a daily basis. "Decisions have to be made in the field, close to the sound of the guns," says Steve Player, president of the consultancy Player Group and North American director of the Beyond Budgeting Round Table, an international group that works to improve practices and processes for financial officers. "A lot of technology projects fail because IT organizations don't understand what the users are looking for, and they don't change with the needs in the field."

Page 2: Broken System?

Broken System

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Still, CIOs and CIO wannabes who dream of being the CEO's strategic information visionary may not be disappointed as some innovative organizations create positions for high-ranking specialized information--not IT--executives.

But Player's words reflect the widespread sense that conventional IT management just hasn't worked very well. After years of calls for closer alignment with business units and a sharper focus on strategy, companies are deciding that the CIO function as configured is inadequate to the tasks at hand, and that the system itself is broken.

Reports to that effect are thick on the ground. Bobby Cameron, a vice president and principal in Forrester Research's IT leadership team, estimates twothirds of CIOs are not moving in a strategic direction, and many are marginalizing themselves by focusing more on IT operations than business results. Micro Focus' Moultrup says CFOs have a much better understanding of return on investment than the average CIO, who is focused on maintaining budget and staffing levels. "The CIO often does what's cool for him, and what's good for his career, not what's best for the company," he says.

Says Ian Campbell, president of the IT consultancy Nucleus Research, "Technology has grown past the CIO."

Nonetheless, at least one influential thinker says it's plain wrong to have the CIO report to the CFO. "It's clearly not the right way to go for several reasons," says Jerry Luftman, an associate dean and distinguished professor at the Stephens Institute of Technology and author of the SIM survey. "If you want IT to be strategic and an integral part of the organization, having the CIO report to the CFO is not effective."

Luftman's research indicates that companies in which the CIO reports to the CFO have the worst business/IT alignment. "You want the IS executive to be treated like one of the other top executives, and if they report into the CFO, it's hard for them to do that," he says.

Changing Times

Despite Luftman's admonition, the timing of the transition to a new kind of IT management seems natural, coinciding with a new level of control and confidence about technology across the enterprise. "All the standards and common IT frameworks like ITIL just mean that more of the capabilities are moving out to the business," Cameron says. "Most of the senior business executives saw IT as a utility, but now they fully expect technology to be driving the future."

CFOs and business users are more comfortable with technology than ever before. "Technology has fallen from a pinnacle where only a few people understood it to something everyone appreciates," Campbell says. A generation after the advent of the personal computer and well into the age of Web 2.0 applications, information technology has become part of the culture, woven into the fabric of everyday life and routine business practices. "The CFO is very savvy, many of them have an MBA and an understanding of IT, and the CEO does, too," says Moultrup.

Meanwhile, the tools available to CFOs have evolved. "There's a revolution in measurement going on that is leading to a revolution in management," says Brynjolfsson of MIT. "We are moving beyond financial accounting to managerial accounting, with multiple metrics that are not all dollars and cents. More and more measures are not just financial measures, but measures of information flows, the way you can track information flows to understand what your workers are doing. That's a whole set of micro-data that wasn't available to companies in the past. If you have a CFO who is open to and interested in looking at that kind of data, it's a good idea for that person to get involved."

Page 3: The Business End of IT

The Business End of

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As technology matures as a corporate function, the CFO must bring its financial management up to the standards applied to the rest of the enterprise. This is an area in which a surprising number of companies are deficient. A recent report by Soumitra Dutta, chair of business and technology at French business school INSEAD, says 60 percent of CFOs and CIOs don't understand the scale or value of their core software assets and CIOs are poorly positioned to figure it out. "CIOs are hard-pressed to make assessing the value of software assets a priority for themselves and their teams," says the report, Recognizing the True Value of Software Assets. "The costs and complexities of determining the business value of software assets, especially older systems, is seen as giving little return to CIOs and their teams on the use of their precious time."

External factors--particularly the changing regulatory environment--also pull the CFO into the technology realm. The federal government has unleashed a torrent of financial regulations, including Sarbanes-Oxley and HIPAA, that put a lot of IT resources to work on jobs that fall naturally to the CFO. "Compliance is a big driver of this," says Robert Keefe, senior vice president and CIO at Mueller Water Products, a $1.8 billion provider of water equipment in Atlanta.

Ultimately, the decision to push more of the traditional CIO role into the CFO's portfolio looks like a simple math problem: If a large proportion of the time and money spent on IT involves operational matters, and the CFO has a growing role in operations, then the CFO is the natural overseer of those IT functions. "People might look at a billion-dollar IT budget and think they can do something with all of it, but a vast amount of the typical IT budget is not subject to discretion," Player says. "If 60 percent or more of the budget is locked in to keeping the phone system and the backbone up, then it should be under the CFO." The remaining part of the IT budget that is dedicated to strategic spending also falls under the CFO's domain as capital investment, he says.

The Business End of IT

"The business unit managers and the CEO have to be leading the drive, with the CIO and CFO supporting it," MIT's Brynjolfsson says.

If the CFO is the natural heir to much of the IT portfolio, the business units are inheriting some of the choices parts: influence on choosing the stuff that actually makes money for the shareholders by helping people do their jobs better, and the visionwork that creates fresh opportunities for future growth. Micro Focus's Moultrup points to the popularity of business intelligence software as evidence of the underlying need for change. "Why is business intelligence so big? Because end users are begging for information about systems the CIO can't deliver," he says. "The end users and the CFOs are buying it, and then going to the CIO and telling him to make it work."

Page 4: CIO as Referee

CIO as Referee

The way companies make IT decisions is changing. "The business is driving new projects these days," Campbell says. "It's the head of sales saying, 'We need CRM.' Instead of a business analyst within IT translating that into specifications, the business leader makes a short list of preferences, and makes the case to the CFO, who makes a decision based on ROI, and mandates to the IT department."

The risk in business-driven projects, Player says, is the rise of "little IT," stand-alone projects that are not optimized or integrated into the rest of the company's infrastructure. Coordination across the enterprise is critical to success. "The CIO or CTO needs to be a referee," Moultrup says. At Abercrombie & Fitch, an IT oversight committee that includes representatives from merchandising, stores and other areas is working to define the technology needs for a chainwide revamping of core systems. Abercrombie CFO Mike Kramer came to the company from Apple's retail arm; he brought in another Apple vet, Kristin Bloom, as CIO. "If you just let CIOs run off on their own and create a solution, it can cause a lot of problems with the integration into the rest of the organization," says finance VP Nuzzo, who reports to Kramer. "It creates bureaucratic infighting and budget overruns."

One example of a CIO who has moved successfully into the business is David Furnas, CIO at Gila Regional Medical Center, a county-owned hospital in Silver City, N.M. Furnas used to report to the CEO. But about six months after he took the job, he was moved under the chief medical officer. "We wanted to demonstrate our commitment to health and the role of IT in improving the quality of outcomes and care," Furnas says. The results of the shift have been dramatic. Furnas says he has gotten much closer to the medical staff and now understands the physician workflows intimiately. Physicians call him directly for help, and they discuss IT issues directly related to care. In a hospital, it doesn't get much more strategic than that.

Furnas also is involved in a major effort to make Gila Regional Medical Center paperless by 2012. The project requires working closely with all the physicians practicing at the hospital, many of whom have outside offices as well, to convert their patient records to digital forms. "As long as I am still fully engaged as a member of the strategic team and the board views me as a strategic executive, I have no issue with not reporting to the CEO," Furnas says. "To be honest, it keeps me out of a lot of board meetings I don't need to be in." --with Dan Briody