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.

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