The Power Of Financial Modeling

Over the years, I have found that there are three opposing forces when it comes to the procurement of new technology investment. IT, the line of business, and the sourcing/supply chain. All organizations have a vested interest in these forces, but generally for different reasons and with different outcomes. In order to ensure technology investments are made wisely, one needs to understand the motivation of each responsibility and understand the separation of duties. Often, there is a blurred line that can lead to poor decision criteria when one outcome is favored over another. The weight or prioritization of input for one organization over another is generally an indication of the health of the business, market competition, business transformation, or poor existing processes.

Today’s framework for technology investment

The success of business functions are measured differently: IT by expense reduction, procurement/sourcing by how much they saved on each agreement (which can inhibit the relationship and future support), and the line of business by revenue and profit/loss. Ultimately, the line of business supports the existence of a company; as such, it is receiving a larger share of budget for companies in a transformative stage while IT is seeing a reduction year over year. So, it is line of business that is driving many of the new technology decisions and vendor relationships. But do line of business managers have the requisite skills to assess the underlying technologies and future costs, whether they are fixed, variable, or opportunity?

We are all familiar with the two basic components of technology, the hardware and the software. But different parts of the business have different focuses.

  • IT focuses on the hardware, the operating system, the database, storage requirements, security, capacity, ancillary environments (development, test, QA, DR, promotional/staging), integration, middleware, support criteria, regularity concerns, whether or not they meet existing ecosystem standards, SLA’s, and most importantly, the year two through five operational expense.
  • The line of business, on the other hand, focuses on feature/functionality of the software, the end user experience, and the potential for new revenues and profits. Ergo, support of the going concern, the corporation, and its investors.
Tomorrow: mature your financial modeling

So, the million-dollar question here is: how can an organization reorient the traditional decision and investment criteria to ensure the wisest investment in technology?

The first step is to change how the business makes assumptions. Today, many enterprises are still doing much of their IT financial analysis based on spreadsheets that capture, generally speaking, the “as is” state with generalized roll ups into the financial system categories. There is no detail emphasis on a three-to-five year projection when it comes to accuracy once the capital phase has been completed.  There is no revisiting the original assumptions in the business justification to look for continuous improvement in the process. This in itself is one of the biggest gaps in expense and capital management accountability.

There are, however, sophisticated and automated financial modeling tools that integrate directly with the ecosystems to bring perspective and uncover much of the expense mystery of technology investments for the CEO, CFO, CIO, and the board.  Past investments are an indication of future performance; historical analysis does not have the attention it deserves when it comes to projecting future technology investment wisdom.

Three considerations for financial modeling

While budgets are generally clear on the dollars by category, there is no historical roadmap on how it arrived at the dollar amounts, and more importantly, where it is going.  Without the proper historical, immediate, and longer term data points that clearly and easily articulate the total cost of ownership (TCO), it is difficult to ascertain what is or was a wise technology investment.  Without the proper predictive analytical tooling, investments are a lagging indicator of success or failure. With the complexity of the global market and today’s technology solutions, I think it wise to consider the following:

 1. Invest in a technology tool that can help you assess the wisdom of your investment now and in the future.  As a byproduct and once configured, an enterprise can be less dependent on costly consulting engagements and more confident in its decisions regarding technology spend and transformation.

 2. Take advantage of cloud solutions where possible this provides the fiscal and technological flexibility needed on committed resources.  It also can provide you the necessary infrastructure on a temporary basis while you are executing a transformation.

3. Model future outcomes. The goal of any decision criteria for technology investments should be more scientific and mathematically focused on defining future outcomes through modeling as opposed to the lagging indicator mentioned above.

Without the proper analytics, how does one define success?  How can you limit your exposure to risk? With the complexity of today’s global market and technology solutions, it is time to retire your spreadsheets.

Remember, challenge your organization or yourself to articulate “how we can, not why we can’t.” How could analytics and financial modeling help your enterprise make wiser technology investment decisions? What is holding you back from taking this important step?
The Networking Exchange Blog Team About NEB Team