How Your CFO-CIO Partnership Drives Digital Funding — Or Not

Seventy-eight percent of CFOs plan to maintain or increase enterprisewide digital investments in the next two years — despite planning cost reductions if inflation persists. At the same time, global IT spending will likely keep rising. This seemingly rosy outlook for digital spend doesn’t mean, however, that you will find it easy to get the CFO to fund your specific digital initiatives.

Gartner research shows that only 30% of CFO-CIO relationships can be described as strong digital partnerships — capable of outperforming their peers in financial management practices that are unique to funding digital.

Drill down on actions for leaders as recession threatens:

• Keys to Digital Strategy and Technologies for IT leaders

• Actions for CFOs and other corporate leaders

Strong CFO-CIO relationships are:

• 51% more likely to easily find funding for digital initiatives

• 39% more likely to keep digital spending in line with the budget plan 

• 18% more likely to achieve the intended business outcomes

Organizations with strong CFO-CIO partnerships share a greater understanding of enterprise objectives and the intended role of digital investment in achieving those goals. Collaborative CFOs and CIOs also share an understanding of how technology impacts corporate financials and how financial management needs to adapt to support enterprise digitalization.

For more productive conversations on digital investments, take an enterprise-level view of funding the digital portfolio and ensure clarity and transparency in the following ways.

Today’s accounting metrics, created during the Industrial Age, cannot accurately capture the tangible and intangible value created by digital initiatives. CFOs and CIOs need tailored financial management practices and must exploit the power of leading indicators to support planning and reporting of digital initiatives.

For one, shift the focus of conversations from capital expenditure vs. operating expenditure to focus on long-term value creation. For example, recognize the value of options that digital initiatives can generate in the future if they were scaled across business units, geographies or functions. 

Also consider adopting product-line-funding models. In a collaborative, transparent product-funding model, CIOs highlight the operational and strategic benefits of digital investments funded from opex and instead of focusing on EBITDA alone; CFOs track how digital investments impact metrics related to things like workforce productivity, operational margins and revenue-generating activities.

You will need to expand/rethink your metrics. Highly collaborative CFO-CIO partnerships are 33% more likely than less-collaborative relationships to do so. 

Most digital initiatives run as IT projects and use IT metrics for decision making. CFOs and other executive leaders often find these metrics too technical to comprehend and face challenges in quantifying the business benefits. This is even more challenging when the digital initiatives offer indirect benefits. Such initiatives need nonmonetary ways of expressing value or stakeholders won’t see sufficient justification to provide or sustain investment.

Metrics such as those related to user engagement and participation (e.g., the number of users or percentage of interactions that are digital) are often a better fit for digital investments than traditional financial metrics. They can also be useful in highlighting the intermediate outcomes through which digital investments contribute to economic value creation.

Only by expanding/rethinking your metrics can you set realistic expectations for “success” to maintain cross-functional buy-in on digital strategy. 

Reporting on the performance of digital initiatives requires a common set of key performance indicators (KPIs) that will show how digital investments impact the business. For example, link technology KPIs (e.g., user engagement), intermediate outcomes (e.g., higher sales volume) and financial outcomes (e.g., increased revenue). 

While reporting the performance of digital initiatives, apply the “Three Whats” technique:

• What are the evidence-based facts we can agree on? Find digital KPIs that all sides involved in digital initiatives can agree on.
• So what? Translate the facts into business impacts that the stakeholders care about.
• Now what? Expand on the trade-offs and decisions faced by the stakeholders.

Organizations with strong CFO-CIO collaboration are 29% more likely than others to make sure finance is involved early in the IT team’s technology roadmapping process.

CFOs should use early roadmapping discussions with IT as an opportunity to share expectations for how technology should be used to advance the enterprise’s big-picture strategy and how digital investments impact corporate financials. 

For example, application programming interfaces (APIs) are one of the top investments CIOs are making in 2022, and CFOs should identify the area in the financial statement that APIs will directly impact (i.e., cost of goods sold, selling, general and administrative expenses, research and development). 

Getting finance involved early in technology roadmapping ensures mutual understanding of both functions’ goals and a common focus on what success looks like.

CFO-CIO partnerships that exhibit strong collaboration are 21% more likely than others to have adequate digital-cost-structure transparency — that is, an understanding of how digital initiatives contribute to enterprisewide value relative to their costs.

CFOs must help their technology counterparts understand how approaches to creating digital-cost transparency vary based on the goal of that transparency. For instance, many CIOs’ most immediate priority is to recover IT costs and fund IT budgets, and they use chargeback to do so. While chargeback can also shed light on how digital services are being consumed within an organization, a chargeback approach alone does not help provide transparency into the value of those costs. 

Finance should collaborate with IT to communicate the value of digital costs in the context of measuring performance improvement in, and IT’s contribution to, the business objective of maximizing organizational value. For this reason, service-based costing models that are less detailed but emphasize the “output” created by a cost are most likely to create the kind of transparency CFOs need.