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IT financial maturity survey shows lots of room for improvement

July 26, 2014

IT financial maturity survey shows lots of room for improvement

I ran a workshop on IT financials at the “World of IT Financial Management Conferences” in St Louis MO (USA) in June 2011. To ensure that my key messages on the subjects of investment planning, budgeting, cost management and chargebacks reflected reality, I ran an IT financial maturity survey prior to the workshop, polling senior IT and financial players in large IT departments (mainly billion dollar companies in Europe and North America). The questions were suitably qualified to avoid any ambiguity or misunderstanding, eg there were no simple yes/no answers.

The results were fully in line with my key messages, which put the workshop on a firm footing. They were also validated during the 4 hr workshop when I polled participants by a show of hands on each question (there were between 40-50 attendees present, the vast majority working in IT Finance, from financial analysts and practitioners to senior and executive management). In fact, with very few exceptions, the workshop participants actually scored consistently lower than the survey respondents in terms of the financial maturity of their organizations. As we’ll discuss in the conclusion, this is probably closer to reality than the actual survey results.

Here is a summary of the key findings, based on responses from both the survey and the workshop participants, and a general conclusion at the end:

RESPONDENT PROFILE:

  • LOCATION: The vast majority of respondents were evenly located in Europe (44%) and North America (44%). (Full answer).
  • COMPANY SIZE: In terms of size, the companies were clearly very large – 60%  had over a billion dollars in annual revenue and more than 20% were in the $100m-$1bn range. (Full answer).

PLANNING AND BUDGETING

  • MOST COMPANIES CAPITALIZE THEIR SW DEVELOPMENT COSTS: over 80% of respondents capitalize their software development costs, which is in line with the findings of my previous post, “Capitalizing software development costs – from waterfall to agile”, which showed that IT departments tend to capitalize, whereas product-development companies tend to expense. (Full answer). Workshop participant replies were also in the 80% region.
  • ONGOING DEMAND MANAGEMENT IS FAR FROM THE NORM: just over a third of companies polled use ongoing demand management (through Business Relationship Managers or Account Managers) to capture demand and work intake for projects. The remaining two-thirds use a combination of the traditional annual “call for projects” and demand management, though in what proportion is not known. (Full answer). As low as this may seem, it still shows a far higher maturity than that of the companies represented at the workshop, for whom only a handful did any demand management.
  • ABOUT 50% OF COMPANIES DO “PROPER” PORTFOLIO MANAGEMENT: 54% of companies claim to do proper portfolio management, ie using appropriate investment categories like Run, Grow, Transform and assigning funding and resources accordingly. The remaining 46% use a simple project prioritization approach with a cut-line or strike-line based on available funding – even though many still call it portfolio management. (Full answer). For the workshop participants however, only 20% of respondents said they did proper portfolio management – and even then, many hands were hesitantly raised.
  • FEW COMPANIES RATE THEMSELVES HIGH IN PLANNING AND BUDGETING MATURITY: Only 17% of respondents rated themselves high in overall maturity in planning and budgeting. (Full answer). For the workshop participants, it was about the same, with only around 15% of top scorers.

COST MANAGEMENT

  • ONE THIRD OF COMPANIES RATE THE ACCURACY OF THEIR ACTUALS HIGH: Just over one third, or 37%, of respondents score the accuracy of their actuals as high, ie with a low margin of error. A sizeable 57% rate their actuals accuracy as medium – a high number considering that the question specifically qualified this as meaning “a non-negligible margin of error”. (Full answer). Workshop respondents were less generous in their show of hands, with only 20% rating themselves as high.
  • ONLY 1 IN 4  COMPANIES RATE THE ACCURACY OF THEIR FORECASTING HIGH: Only 26%, of respondents score the accuracy of their forecasting as high, ie with a low margin of error. An overwhelming two thirds, or 66 %, rate their forecasting accuracy as medium – ie, with “a non-negligible margin of error”. (Full answer). Workshop respondents were not far behind, with only 15% rating themselves as high.
  • ONE THIRD OF COMPANIES RATE THEIR COST MANAGEMENT MATURITY AS HIGH: Just under one third, or 31%, of respondents rated themselves high in overall cost management maturity, while the majority (58%) rated themselves medium. (Full answer). Given the low scores on the previous two questions, asked sequentially, I didn’t want to belabour the point and ask the audience for another show of hands on this question.

CHARGEBACKS

  • THREE QUARTERS OF COMPANIES DO CHARGEBACKS: Just over three quarters, or 77%, of companies polled, do chargebacks. Of these, just over 60% charge back all costs, and the remaining 40% charge back only some costs. (Full answer). The majority of workshop respondents – at least two thirds – practiced some form of chargeback.
  • CUSTOMER ACCEPTANCE OF CHARGEBACKS IS GENERALLY LOW: Only 15% of companies rate customer acceptance of their chargebacks as high. A non-negligible 22% rated it low. (Full answer). Amongst the workshop participants, around 15% rated their customer acceptance as high.
  • ONE THIRD OF COMPANIES RATE THEIR CHARGEBACK MATURITY AS HIGH: Just under one third, or 30%, of respondents rated themselves high in overall chargeback maturity, while the majority (55%) rated themselves medium. Surprisingly, the answers to this question did not match well with the previous question, since one might have expected customer chargeback acceptance to generally reflect chargeback maturity. (Full answer). Workshop participant scores were even lower, with only 20% rating their chargeback maturity as high.

CONCLUSION

That the overall financial maturity in IT departments is not very high is hardly news. Both the survey results and the show of hands from the workshop participants simply confirm what most people know or suspect anyway, and is generally in line with other surveys, research, articles and whitepapers on the subject. And when I take the pulse of the audience at seminars and events I speak at, be it in Geneva, London or St Louis, the results are the same.

What can be done to improve the state of IT financials is not the subject of this article, however, (though some answers can be found in my other posts). What we do want to explore though, is why the scores from the workshop participants were consistently lower than those of the survey respondents – even taking into account that about 10 of the workshop participants subsequently also took the survey, thus representing 20% of the total respondents. Both groups were extremely focused in terms of area (both finance and IT) and role (practitioners and analysts to senior and executive management) and were clearly able to represent their companies. I see two possible explanations :

  • the workshop participants answered their questions “within context”, ie after I presented the underlying subject (eg portfolio management, forecasting or chargeback strategies), which then generated discussions and Q&A. So their responses were more likely to reflect reality than those done “out of context”, ie completed sequentially in an on-line survey (despite the qualification of the survey questions and answers to avoid ambiguity or misunderstanding).
  • attendees at a 5-day IT Financial Management Conference, with workshops and seminars oriented towards improving one’s financial maturity based on “best-practice”, are more likely to have problems to fix, otherwise they wouldn’t be there in the first place (tourism in St Louis MO notwithstanding…). So the state of their IT financial practices is more likely to be below par.

In  conclusion, and with those qualifiers out of the way, the overall survey results can be seen as a generally accurate picture of IT financial maturity in the IT departments of large companies in Europe and North America. The true picture could be worse, but it’s unlikely to be better.

MG

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