Strategies for releasing IT funds

Return on investment (ROI) is a phrase that has come to blight the lives of many IT directors over the past 18 months.

In more and more businesses, the decision to begin an IT project hangs on a financial director's ROI forecast. Yet ROI is criticised by many as too crude a tool for governing something as sensitive and crucial as IT investment.

These critics argue that ROI is a clumsy measure that is mainly used to justify cost-cutting measures that bring only short-term benefits. They contend that when the UK economy picks up in earnest, it will be the businesses that have moved beyond ROI considerations to focus on preparing their infrastructure for the future that will thrive.

So how can IT departments best persuade finance directors to release funds for investing in technology? Russell Altendorff has the advantage of having been on both sides of the fence. Currently director of the information systems division at the London Business School, Altendorff is also a qualified chartered accountant and is only too aware of the measures that should be employed to ensure the IT department gets the budget it needs.

"In general, IT directors do not have the necessary financial training to turn the situation around," Altendorff said. "The two most common things that are wrong are the reporting structure to the board and the use of bad accounting policies for evaluating IT."

The biggest mistake a company can make is for its IT director to report directly to the financial director on the board, according to Altendorff. "This [approach] is disastrous," he said. "It dictates the way that IT investment is made because decisions only have a financial focus. [It is necessary to] seek competitive advantage by means of strategic investment."

He called for a split between the roles of chief technology officer and chief information officer, with the CIO reporting directly to the operations director or chief executive. Altendorff added that too much emphasis is currently put on total cost of ownership, so the cost of IT projects is often grossly inflated on the balance sheet.

"IT directors have to become more confident and versed in the economic principles of evaluating projects rather than relying on cost-accounting principles," Altendorff said. He suggests that companies should consider marginal costs and missed opportunity costs.

"Most firms forget that their most important assets are their people and they do not go away," he said. "But financial directors often add the cost of people in the IT department when they are evaluating a project even though they are already there. The costs of IT are sunk [or already accounted for], so if you decide to transfer to outside the department you are paying double the costs - that of the external provider and the salary of the in-house department."

IT directors should concentrate on marginal cost accounting, only paying attention to the additional costs of a particular course of action. "This means that if you are building an Oracle database, the only real cost will be one of coding because the database server and Web-hosting costs are sunk," Altendorff said.

But tight purse strings can also be attributed to the overzealous claims of technology vendors and poor project management skills, which have caused project costs to spiral.

Andrew Holmes, a director of Global Risk Management at services firm PwC, argued that good project management skills ensure more transparency in the budgeting process. "Project managers should talk in terms of earned value," he said. "Every time you finish a product you earn a certain amount of the resources that have been allocated against it. By breaking it into modules, you begin to extrapolate and predict productivity."

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