Develop Your IT Leadership Team’s Financial Literacy

Start thinking and talking like a business leader.

Analyst Perspective

Being financially literate helps you see where you fit into the scheme of things.

“I’m in IT, not accounting.” True enough – you should focus on what you were trained to do and excel at it. However, knowing the financial impact of your decisions and actions and how money flows in and out of your organization are critical capabilities for a leader or manager of any business unit.

Financial literacy is on the decline with leaders and managers in every department and in every industry. This growing gap in knowing how to speak and understand the language of business is a serious impediment for IT effectiveness as well as the career paths of those who hope to join or remain in the management ranks. Luckily, this is a fixable problem.

Developing basic financial literacy involves not only learning some core financial concepts but also recognizing what they mean in the context of your organization and how to apply them in the real world to gain insight, avoid potentially expensive mistakes, and make better decisions overall.

Assess your IT management team’s financial literacy and collectively commit to making improvements to develop your business savvy and fundamentally understand how your organization actually operates.

Jennifer Perrier

Principal Research Director, ITFM Practice
Info-Tech Research Group

Executive Summary

Info-Tech Insight

You can read a book to learn about finance, but real financial wisdom happens when you apply what you’ve learned and experience the impact of your decisions and actions.

Executive Brief

Financial literacy is low everywhere

And IT is no exception.

An Oracle survey of 9,000 consumers and business leaders found that financial literacy is low across every demographic (2021). This is not a new issue, and it appears to be getting worse instead of better.

However, if IT wants to:

• learn how to speak to the business in a language that it understands,
• have meaningful conversations,
• form strong relationships, and
• collectively make better decisions,

then IT management staff and IT project managers must learn some key financial concepts and how to apply them in their jobs.

“...67% of CIOs say that the creation of new revenue-generating initiatives is among their job responsibilities."

Source: CIO Magazine, 2020

“Asked to take a basic financial-literacy exam – a test that any CEO or junior finance person should easily ace – a representative sample of U.S. managers from C-level executives to supervisors scored an average of only 38%. A majority were unable to distinguish profit from cash. Many didn’t know the difference between an income statement and a balance sheet.”

Source: Harvard Business Review

“...non-finance department heads who manage their own budgets, profits, and costs centers may miss signs that the numbers they’re working with aren’t accurate and make poor decisions based off those bad numbers."

Source: Oracle

Communicating its value to the business is a casualty of IT’s low financial literacy

This may be IT’s biggest current challenge

Info-Tech’s CEO-CIO Alignment Diagnostic reveals some interesting facts. When CXOs and CIOs were asked about the effectiveness of IT performance measurement:

• 79% of CXOs and 88% of CIOs said there needs to be some or significant improvement in business value metrics.
• 63% of CXOs and 70% of CIOs said there needs to be some or significant improvement in cost and salary metrics.
• 74% of CXOs and 85% of CIOs consider business frustration with IT’s perceived failure to deliver value is a point of pain.

All of these metrics rely on one thing: IT’s ability to understand, apply, and communicate financial concepts.

Historically, IT has struggled to demonstrate its contribution to business performance and the value it’s delivering. This can be partly attributed to a lack of knowledge around financial fundamentals.

Source: Info-Tech Research Group, CEO-CIO Alignment Diagnostic, 2021-2022; n=76

IT staff also perceive obstacles when it comes to executing IT financial functions

Info-Tech’s IT Staffing Assessment asks IT staff the degree to which they agree with a range of statements about financial and administrative functions in IT.

Source: Info-Tech Research Group, IT Staffing Assessment, 2021-2022; n=114

While most IT staff feel okay about how well financial and administrative functions are being executed in their departments, the results are underwhelming.

What’s interesting is that IT staff are most positive about their financial skills, yet financial literacy is a known gap. There may be a disconnection between perception and reality.

The causes of low financial literacy in IT are rooted in old, persistent problems

Scenario: A CIO looks at cost reductions

Situation…

At a senior management meeting, the CFO is talking about the need to reduce costs in the next budgetary cycle.

She’s describing how their COGS has increased by 15% last quarter and their pretax profit margin is shrinking.

The CIO has been with this manufacturing company for six months. This will be his first full budget cycle with the company.

The low-literacy approach…

• The CIO assumes that the CFO thinks the company’s operating costs are too high.
• He immediately looks to cut IT’s budget by 15% by deferring capital projects and finding additional OpEx efficiencies.

The high-literacy approach…

• The CIO knows that COGS means “cost of goods sold,” which is the total direct costs for producing their products that were actually purchased by customers last quarter, including materials, labor, and manufacturing overhead. Production costs are the main driver of shrinking margins.
• He asks if the company uses first in, first out (FIFO) or last in, first out (LIFO) for the COGS calculation. They use LIFO, which increases the size of COGS and shrinks net income, the number upon which profitability is calculated. He also asks about their operating profit margin (i.e. profit when production costs are taken out of the equation) to see how it’s performing, and it’s steady. It may not be as bad as it sounds.
• The CIO determines that the increased COGS is due to pricing increases from their suppliers and not operational or labor costs. The CFO is attempting to mitigate increases in supplier prices that may be permanent and is looking for longer-term cost control measures to offset this.
• The CIO schedules a meeting with the CFO to review ongoing IT expenditure and areas where long-term efficiencies can be gained, as well as to find out more about other measures being considered, such as increasing the prices of their own products. He also plans time to talk to the head of production about task automation and streamlining projects they can tackle together to bring production costs down.

Scenario: An I&O director has a downtime issue

Situation…

The IT management team is talking about improving the redundancy and failover capability of its data center.

Recently, there was an organization-wide disruption in operations that lasted half a day due to unplanned system downtime.

All data center services are on premises. They’re considering outsourcing elements to gain more dynamic and reliable capacity.

The low-literacy approach…

• The infrastructure & operations (I&O) director sees this as a strictly technical capacity problem.
• He suggests upgrading several core servers and using an external managed failover service to deal with peak load times.

The high-literacy approach…

• The I&O director knows that outsourcing offers more flexibility and redundancy, but also has financial ramifications.
• By having all data center equipment in house and on premises, it’s classified as capital expenditure, which means they’ll be able to depreciate the costs of any new servers or equipment over several years instead of taking a hit to the bottom line all at once. Using a managed service provider constitutes a subscription-style operating expense, which means they’ll incur monthly service fees and be subject to annual price increases, possibly driving up the total cost of operating affected IT services overall. They need to talk to the CFO about this implication.
• With outsourcing they’ll gain the ability to dynamically scale, which means they can ramp up capacity as needed, but their monthly bill will also go up. If they pursue this option, they’ll need to put governance mechanisms in place that include affected business unit leaders, finance, and IT engineers to set protocols around thresholds for capacity increases, decision making, and how to downscale again post peak.
• The I&O director recommends to his colleagues that they create two business cases focused on total cost of ownership (TCO) – one that’s 100% on-premises and another for a hybrid on-prem/managed service provider (MSP) solution – and take them both to the CFO and business unit leaders for a pros-and-cons review.