On day one of any new technology project at travel rewards provider Airmiles, Matthew Young can be found visiting the finance director’s office. As the firm’s IT director, Young believes technology projects can only succeed with the full involvement and co-operation of the finance department.

‘Business is ultimately about making money, so it is vital to know if your project is going to generate money,’ says Young. ‘And given how critical IT is to the business, the IT director has to have a good relationship with the finance director.’

Chief information officers (CIOs) are increasingly being expected to work alongside the finance department because the nature of IT spending has fundamentally shifted, according to Jon Fuller, operations director with IT consulting group Centrix.

‘IT investment used to basically be a case of ticking a few boxes, but finance is now a lot more interested in talking to the CIO about the details of what is being spent and what you have achieved,’ he says.

Publishing and exhibitions company DMG Media has gone a step further, creating a new position of vice president, technology and finance – an executive responsible for signing off all IT expenditure.

New IT projects are proposed and planned by the IT director, who works with the finance director to create the costings. The complete plan is then presented to the vice president. ‘It means we know from the outset that the numbers meet corporate reporting standards, and will deliver value to the business,’ says DMG’s UK IT director Ken Sawyer.

Working alongside a finance executive can be challenging for many IT managers, says Martin Curley, director of IT innovation with Intel.

‘It can be intimidating to feel you don’t know what’s going on, and the two departments tend to attract very different personality types,’ he says. ‘Finance is still doing things the way they did it 100 years ago, whereas IT has to reinvent itself every few years.’

Despite the challenges, CIOs must focus on improving communication with finance executives and chief executives, according to Bobby Cameron, an analyst with Forrester Research.

Cameron says too many CIOs talk about projects and technologies at the expense of value and benefits. The result is that IT is seen simply as a cost-centre within the organisation – and IT is less likely to deliver real business benefits as a result.

The key to communicating successfully with your finance director is regular contact and mutual respect – and that means making some effort to understand the role of finance in your organisation. ‘A working knowledge of finance is essential no matter who you report to,’ says DMG’s Sawyer. ‘As a senior manager, it is your job to understand money.’

This does not necessarily mean signing up for an MBA tomorrow – although this could improve your financial knowledge and career prospects. A quicker route is finance training for non-finance managers.

‘There are plenty of courses covering things such as how to read a balance sheet, or how to calculate return on investment,’ says Airmiles’ Young. ‘Nobody is asking you to become an equity banker – but you need to know enough to understand information that is presented to you.’

The most important thing for any CIO to understand about finance is their own budget and spending, says Young. ‘You absolutely always have to be 100 per cent on top of your own numbers,’ he says. ‘As IT director, you will control a huge amount of the company’s budget. You will never earn your stripes if you cannot control and understand your budget.’

If you are a financial dunce, in the short term you should consider what expertise is already available in your organisation – asking your finance director to explain the company’s financial reporting procedures will help build a working relationship, and could save a lot of time and frustration later. Understanding your company’s financial position may allow you to pitch for new funding during a quarter when the company could write off the costs, or to spot opportunities to spread the investment across multiple budgets.

Another good option is to hire people into the IT department who have a financial background, says Young. ‘It is worth appointing someone to a project who has some accounting training,’ he says.

But it is important to realise your limitations – and maintain a level of professional respect for your colleagues in finance. ‘You have to acknowledge that it’s not your profession, and you aren’t the expert,’ says Sawyer.

‘It’s like someone presuming to tell you how to run an IT infrastructure because they have just bought a PC at home.’

Best practice – the bluffer’s guide to finance

• Return on investment (ROI) - A measure of operating performance and efficiency in using assets, calculated in its simplest form by dividing net income by average total assets. 
• Depreciation - The process of cost allocation that assigns the original cost of equipment to the periods benefited. The most common method of calculating depreciation is the straight-line method, which assumes assets should be written off in equal amounts over their lives. 
• Net present value (NPV) - The value the project will return over a set period of time, with future cash flows being discounted at the cost of capital (opportunity cost) appropriately. It is measured over an arbitrary set period and if the project returns a positive value it should be undertaken. 
• Net return - The revenue that a project or business generates after tax and other deductions. 
• Amortisation - The process of cost allocation that assigns the original cost of an intangible asset to the periods benefited. It is calculated in the same way as depreciation. 
• Internal rate of return (IRR) - A discounting rate that can be used to achieve zero NPV. The higher the IRR the more agreeable the project becomes. It makes no allowance for the fact that the largest IRR may be for a very small project that may not give the maximum total return to the business. 
• Capital expense - An expenditure recorded as an asset because it is expected to benefit more than the current period. 
• Hurdle rate - Required rate of return above which an investment makes sense, and below which it does not. Often based on a company’s cost of capital, plus or minus a risk premium. Also known as required rate of return. 
• Chargeback - The redistribution of costs to the units within a company. The percentage cost allocations are worked out arbitrarily and therefore can lead to a skewing of the results of the various units of a business involved.
  

Further reading:

Case study: Scottish Power