How to create the right business case for a technology issue

CIO reports to the CFO: IT as a cost center

In many cases we see that the CIO reports to the CFO. This typically means that the CFO perceives the IT department as a cost center and focuses on cost reductions.

CFOs have an eye on improving the bottom line. So when the CIO reports to the finance department, the CIO typically needs to focus on reducing IT spending.

CFOs tend to discourage investment in enterprise technology and otherwise direct CIOs to keep IT costs down. In response, CIOs must defer maintenance of IT systems and keep legacy systems running instead of moving to new, more modern technologies. CFOs are reluctant to extend contracts and postpone maintenance work. Life cycles of three to four years become significantly longer life cycles.

In the CIO reporting structure to the CFO, the CIO rarely has budget approval. If the CIO has budget approval, it is typically at a low threshold, around $10,000 to $40,000. IT leadership autonomy typically only exists for tactical operational costs. The CFO typically needs approval for most IT costs, although the CEO must approve the largest expenses.

The CIO-reports-to-the-CFO structure only works well when standardized, non-strategic IT is sufficient to support business goals. Industries where this might make sense include smaller manufacturing companies, smaller community banks, and companies where most IT functions are largely outsourced. This CIO reporting structure only makes sense if the company fundamentally focuses more on cost savings and cost avoidance than on innovation.

Advice on justifying technology spending

If the CIO reports to finance, the best way to get approval for technology investments is to create a business case that sets out a clear financial justification for the investment. For example, CIOs should argue that spending $100,000 will save $400,000, rather than focusing on more strategic goals like improving customer service or reducing errors.

CIO reports to the COO: IT as a source of efficiency

CIOs report to COOs when the organization’s focus is on process improvement, consistency and scalability – i.e. efficiency. This orientation is typical of large manufacturing companies and very large service companies, where developing repeatable processes that large numbers of people can follow is critical to business success.

Like the CFO, the COO is usually concerned with cost savings. But when the CIO reports to the operational leader, process efficiency is just as important as cost savings. The COO knows the importance of scalable standards, training and documentation. This CIO reporting structure gives the IT director more investment opportunities. However, the litmus test for investment is how spending money can replace staff or enable operations to scale better. The CIO typically has greater budget signing authority. However, spending is usually limited to items that the finance department has already approved.

This CIO reporting structure makes sense in process-oriented organizations that rely on standards development and refinement.

A CIO who understands his position in the company can better align with business goals.

Advice on justifying technology spending

CIOs reporting to COOs should advocate for investments based on how a particular technology supports operational usability, repeatability, and scalability.

CIO reports to the CEO: IT as a strategic differentiator

The group of people who report directly to the CEO are those who, in the CEO’s opinion, lead critical functions that determine the company’s success. So when a CEO decides to make the CIO a direct report, the top business executive views IT as a function that has a direct, strategic impact on the business.

CIOs who report to the CEO have the most control over technology budgets because IT is strategically important to the company and may have a significant IT budget. While CEOs or the board will likely still need to approve large capital expenditures, the CIO has an important role in justifying and influencing those investments. Examples of such expenses include large data center migrations, such as moving internal systems to cloud IaaS services such as AWS or Azure, or setting up an online marketplace for a previously physical service or product. The CEO will likely view a new product or market as strategic, while reducing operating costs is more of an efficiency play.

Advice on justifying technology spending

A CIO reporting to the CEO should focus on business value to make the case for a particular technology investment. CIOs should focus less on saving money and more on creating new opportunities for business growth. IT companies most often have this structure, while in IT services companies the CIO tends to play the main role.

How CIOs can align with business strategy

Regardless of the CIO’s position in the company, it is advisable to always consider the impact on the company when making every IT decision. Ultimately, all positions fall to the CEO. The better a CIO can demonstrate how IT aligns with the business, the more likely their initiatives are to be funded.

One way for the CIO to increase effectiveness is to create a justification matrix that combines values, benefits and risks as column headings versus leadership roles in rows. The CIO should then think about what value an investment they want to make will have to the other person so that they can articulate the value of that investment in a way that is most likely to resonate with the intended audience.

C-level value matrix