The CIO Relationship With the CFO Is Based on Managing Risk

Michael Hugos, Principal, Center for Systems Innovation | 3/5/2014 | 15 comments

Michael Hugos
CFOs can appear to be a smug and self-assured bunch, but underneath that smug exterior there lurks much uncertainty and doubt.

This is because CFOs tend to be a risk-averse group. Most of them started out as accountants and they like things to be neat and orderly and predictable. Since things are often messy and hard to predict these days, finance people are under pressure to figure out how to make a profit and also make sure the company doesn't run out of money to pay its expenses.

We are in a period of major transition with the rise of the real-time, mobile, social, big-data economy. Technology is changing fast and customer desires are also changing fast, so product lifecycles are short and sales and revenue numbers are harder to predict than they used to be. Because CFOs are risk-averse, they like to keep debt low and figure out how to use company revenue to fund company operations. Here is where the CIO can help in a big way.

In order to grow, companies need to increase (not decrease) their spending on IT and related services. This is because business operations have merged with the technology that supports those operations (as any COO will tell you). And companies need to increase their IT capabilities to connect with customers (as any CMO will tell you), and increase the value proposition they offer to customers (as any VP Sales can testify). So what are companies to do?

The traditional way companies increase IT expenses is to borrow money to build or acquire assets like more servers, bigger data centers or new software applications. This is known as a "capex" business model, and it is funded by debt. The revenue produced by the new assets is used to pay back the loans and produce profits if things work out as expected. But if things don't work out as expected... well that's called risk.

CFOs don't want to borrow money and get stuck with high levels of debt (even though interest rates are low), because if company revenues and profits do not meet projections, banks have a habit now of calling in loans. That puts a company in a difficult situation if they have more debt than they can easily repay.

Another way for companies to pay for increased IT expenses is for companies to just pay for the resources they need month to month as they use them. This is better suited to our present economy because it reduces the need for debt to pay for capital expense investments. It is less risky because expenses are tied to business activity. Expenses rise when business activity (and revenue) rises, and expenses also decline when business activity declines. This is an "opex" funded business model, and you probably already figured out this business model is based on effective use of cloud computing.

Because product life cycles are shortened (often to months instead of years), and because the predictability of industrial mass markets from the last century is now replaced with the uncertainty of a global real-time economy and rapidly evolving customer desires, capex funded business models are much more risky than opex business models.

Opex financed business models reduce business risks by doing away with the need to make large up front capital investments to enter new markets and develop new products. Companies can protect their operating cash flow because operating expenses become a function of business volume. Companies can more easily and quickly enter new markets because they don't have to buy and install lots of IT assets. They can also exit markets more easily because they do not have to write off large capital investments and related costs that they incurred to enter those markets.

Cloud computing does have risks in areas such as data security and service continuity, but those risks pale in comparison to the financial risks related to a company getting into too much debt and not having enough revenue to cover its expenses and repay its loans. CFOs lie awake at night worrying about that financial risk.

The CIO who shows their CFO how to effectively leverage cloud computing and move their company toward an opex operating model will become a trusted advisor to the senior executive who controls the company's money.

View Comments: Newest First | Oldest First | Threaded View
<<   <   Page 2 / 2
Michael Hugos   The CIO Relationship With the CFO Is Based on Managing Risk   3/7/2014 12:12:25 PM
Re: Cloud Computing Risk
@soozyg - I'm not sure I understand your logic here. Opex, cloud-based business models pay for services as they need them. There is no prediction involved. If I need more capacity this month because a product takes off then I rent more capacity. If I don't need more capacity next month, then I decrease the capacity I rent that month. 

Business expenses are tied to business activity. I don't try to predict demand. I just meet demand as it occurs.

 
User Ranking: Blogger
soozyg   The CIO Relationship With the CFO Is Based on Managing Risk   3/7/2014 9:23:49 AM
Re: Cloud Computing Risk
[The opex model] is less risky because expenses are tied to business activity.

Wouldn't this involve prediction? If a product suddenly becomes popular or one company buys another, you'd have a hard time predicting what months (or period of time) you'd need the services. I could see the short-term model easily become a long-term need, which would means reverting back to the traditional model.
soozyg   The CIO Relationship With the CFO Is Based on Managing Risk   3/7/2014 9:16:52 AM
customers
Technology is changing fast and customer desires are also changing fast

Also, with the advent of social media and digital marketing, marketing and sales have now become customer driven, instead of company-driven. Makes issues even more complicated and "grey."
zerox203   The CIO Relationship With the CFO Is Based on Managing Risk   3/6/2014 2:54:53 AM
Re: The CIO Relationship With the CFO
This was a very useful read Michael, and it dovetails nicely with your series on CIO relationships with the other executives you mention, thanks. Nuts-and-bolts finance stuff is a little outside my comfort zone, and even though these are general concepts that anyone can grasp, I have to admit I'm hearing some specifics info here that is new to me. That's no problem, though - in fact, it's for that reason I find it that much more valuable to see something like this when I come to the place I go for my IT info.

Of all the executive relationships we've been talking about recently, I would say the CFO might be the most underdiscussed, and yet it may also be the most important by far. It's a complex relationship, one that will affect you for as long as you stay at an organization no matter what, so it's worth putting a little bit of time into building it. As part of that, it's very worthwhile to take the time to learn a little bit of finance knowledge to understand what your role as CIO is in your company's finances. Thanks again.
MDMConsult   The CIO Relationship With the CFO Is Based on Managing Risk   3/5/2014 11:09:15 AM
Cloud Computing Risk
The way in which big data scales will bring challenges towards these new and existing approaches. An entire enterprise is prone to risk. If the organization has a risk management framework in place it can help address the most critical threats. We can look at using sophisticated analytics to improve overall decision making in these areas. Cloud will become a more standard platform. The market can be demanding of the business model with timing a crucial
<<   <   Page 2 / 2


The blogs and comments posted on EnterpriseEfficiency.com do not reflect the views of TechWeb, EnterpriseEfficiency.com, or its sponsors. EnterpriseEfficiency.com, TechWeb, and its sponsors do not assume responsibility for any comments, claims, or opinions made by authors and bloggers. They are no substitute for your own research and should not be relied upon for trading or any other purpose.

More Blogs from Michael Hugos
Michael Hugos   3/11/2014   9 comments
CIOs and COOs generally play a more supporting role than their more glamorous counterparts in marketing, sales, and finance. You can turn that to an advantage if you want to build a better ...
Michael Hugos   2/25/2014   26 comments
In our continuing series about whom the CIO should make friends with, the next most pressured person in your company (behind the CMO) is probably the VP of Sales. There might be ways to ...
Michael Hugos   2/19/2014   21 comments
If you are a CIO who wants to ensure your place in the organization, a good place to start is with the CMO. That is because the CMO is most likely the C-suite executive under the most ...
Michael Hugos   2/5/2014   30 comments
At present we are living in the twilight of the Industrial Age from the last century, just as people in 1914 were living in the twilight of the Victorian Age from the century before that. ...
Latest Archived Broadcast
We talk with Bernard Golden about accelerating application delivery in the cloud.
On-demand Video with Chat
Register for this video discussion to learn how tablets can provide true business usability and productivity.
E2 IT Migration Zones
IT Migration Zone - UK
Why PowerShell Is Important
Reduce the Windows 8 Footprint for VDI
Rethinking Storage Management
IT Migration Zone - FR
SQL Server : 240 To de mémoire flash pour votre data warehouse
Quand Office vient booster les revenus Cloud et Android de Microsoft
Windows Phone : Nokia veut davantage d'applications (et les utilisateurs aussi)
IT Migration Zone - DE
Cloud Computing: Warum Unternehmen trotz NSA auf die „private“ Wolke setzen sollten
Cloud Computing bleibt Wachstumsmarkt – Windows Azure ist Vorreiter
Like Us on Facebook
Twitter Feed
Enterprise Efficiency Twitter Feed
Site Moderators Wanted
Enterprise Efficiency is looking for engaged readers to moderate the message boards on this site. Engage in high-IQ conversations with IT industry leaders; earn kudos and perks. Interested? E-mail:
[email protected]
Dell's Efficiency Modeling Tool
The major problem facing the CIO is how to measure the effectiveness of the IT department. Learn how Dell’s Efficiency Modeling Tool gives the CIO two clear, powerful numbers: Efficiency Quotient and Impact Quotient. These numbers can be transforma¬tive not only to the department, but to the entire enterprise.

Read the full report
The State of Enterprise Efficiency in the Virtual Era: Virtualization – Smart Approaches to Maximize Gains
Virtualization is a presence in nearly all enterprise data centers. But not all companies are using it to its best effect. Learn the common characteristics of success, what barriers companies face, and how to get the most from your efforts.

Read the full report
Informed CIO: Dollars & Sense: Virtual Desktop Infrastructure
Cut through the VDI hype and get the full picture -- including ROI and the impact on your Data Center -- to make an informed decision about your virtual desktop infrastructure deployments.

Read the full report
SPONSORED BY DELL
CASE STUDIES
EBOOKS
PUBLIC SECTOR RESOURCES
VIDEOS
WHITE PAPERS
WINDOWS SERVER 2012 RESOURCES
A Video Case Study – Translational Genomics Research Institute
e2 Video


On the Case
TGen IT: Where We're Going Next

7|11|12   |   08:12   |   10 comments


Now that TGen has broken new ground in genomic research by using Dell's storage, cloud, and high-performance computing solutions, the company discusses what will come next for it and for personalized medicine.
On the Case
Better Care Through Better Communications

6|6|12   |   02:24   |   11 comments


The achievements of the TGen/Dell project could improve how all people receive healthcare, because they are creating ways to improve end-to-end communication of medical data.
On the Case
TGen IT: Where We Are Now

5|15|12   |   06:58   |   6 comments


TGen is breaking new ground in genomic research by using Dell's storage, cloud, and high-performance computing solutions.
On the Case
TGen IT: Where We Were

4|27|12   |   06:45   |   10 comments


The Translational Genomics Research Institute wanted to save lives, but its efforts were hobbled by immense computing challenges related to collecting, processing, sharing, and storing enormous amounts of data.
On the Case
1,200% Faster

4|18|12   |   02:27   |   12 comments


Through their partnership, Dell and TGen have increased the speed of TGen’s medical research by 1,200 percent.
On the Case
IT May Improve Children's Chances of Survival

4|17|12   |   02:12   |   8 comments


IT is helping medical researchers reach breakthroughs in a way and pace never seen before.
On the Case
Medical Advances in the Cloud

4|10|12   |   1:25   |   5 comments


TGen and Dell are pushing the boundaries of computing, and harnessing the power of the cloud to improve healthcare.
On the Case
TGen: Living the Mission

4|9|12   |   2:25   |   3 comments


TGen's CIO puts the organizational mission at the heart of everything the IT staff does.
On the Case
TGen Speeding Up Biomedical Research to Save More Lives

4|5|12   |   1:59   |   6 comments


The Translational Genomics Research Institute is revamping its computing to improve speed, storage, and collaboration – and, most importantly, to save lives.
On the Case
Computing Power Helping to Save Children's Lives

3|28|12   |   2:13   |   3 comments


The Translational Genomics Institute’s partnership with Dell is enabling them to treat kids with neuroblastoma more quickly and save more lives.
Tom Nolle
The Big Reason to Use Office

3|18|14   |   02:24   |   46 comments


Office and personal productivity tools come in a first-class and coach flavor set, but what makes the difference is primarily little things that most users won't encounter. What's the big issue in using something other than Office, and can you get around it?
E2 Editors
SPONSORED: Mobile Security — A Use Case

3|4|14   |   04:27   |   16 comments


New mobile security solutions can accommodate a wide array of needs, including those of a complex university environment.
Tom Nolle
Killing Net Neutrality Might Save You Money

1|16|14   |   2:13   |   16 comments


The DC Court of Appeals voided most of the Neutrality Order, and whatever it might mean for the Internet overall, it might mean better and cheaper Internet VPNs for businesses.
Tom Nolle
The Internet of Everythinguseful

1|10|14   |   2:18   |   19 comments


We really don't want an "Internet of Everything" but even building an Internet of Everythinguseful means setting some ground rules to insure there's value in the process and that costs and risks are minimized.
Tom Nolle
Maturing Google Chrome

12|30|13   |   2.18   |   25 comments


Google's Chrome OS has a lot of potential value and a lot of recent press, but it still needs something to make it more than a thin client. It needs cloud integration, it needs extended APIs via web services, and it needs to suck it up and support a hard drive.
Sara Peters
No More Cookie-Cutter IT

12|23|13   |   03.58   |   21 comments


Creating the right combination of technology, people, and processes for your IT organization is a lot like baking Christmas cookies.
Sara Peters
Smart Wigs Not a Smart Idea

12|5|13   |   3:01   |   46 comments


Sony is seeking a patent for wigs that contain computing devices.
Tom Nolle
Cloud in the Wild

12|4|13   |   02:23   |   15 comments


On a recent African trip I saw examples of the value of the cloud in developing nations, for educational and community development programs. We could build on this, but not only in developing economies, because these same programs are often under-supported even in first-world countries.
E2 Editors
SPONSORED: Is Malware Evading Your IPS?

11|18|13   |   03:16   |   4 comments


Intrusion prevention software is supposed to detect and block malware intrusions, but clever malware authors can evade your IPS in these five main ways.
Sara Peters
Where Have All the Mentors Gone?

9|27|13   |   3:15   |   38 comments


A good professional mentor can change your life for the better... but where do you find one?
Tom Nolle
SDN Wars & You Could Win

9|17|13   |   2:10   |   5 comments


VMware's debate with Cisco on SDN might finally create a fusion between an SDN view that's all about software and another that's all about network equipment. That would be good for every enterprise considering the cloud and SDN.
Ivan Schneider
The Future of the Smart Watch

9|12|13   |   3:19   |   39 comments


Wearing a bulky, oversized watch is good training for the next phase in wristwatches: the Internet-enabled, connected watch. Why the smartphone-tethered connected watch makes sense, plus Ivan demos an entirely new concept for the "smart watch."
Tom Nolle
Cutting Your Cloud Storage Costs

9|4|13   |   2:06   |   3 comments


Cloud storage costs are determined primarily by the rate at which files are changed and the possibility of concurrent access/update. If you can structure your storage use to optimize these factors you can cut costs, perhaps to zero.
Sara Peters
Do CIOs Need an IT Background?

8|29|13   |   2:11   |   23 comments


Most of the CIOs interviewed in the How to Become a CIO series did not start their careers as IT professionals. So is an IT background essential?
Ivan Schneider
The Internet Loves Birthdays

8|27|13   |   3:25   |   69 comments


The Internet has evolved into a machine for drumming up a chorus of "Happy Birthday" messages, from family, friends, friends of friends who you added on Facebook, random people that you circled on G+, and increasingly, automated bots. Enough already.