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How to get beyond Finance vs. IT

Bart Perkins | Jan. 19, 2017
IT leaders need to understand the financial policies that control the way IT buys infrastructure and systems.

If your company uses EBITDA, take advantage of it. Structure projects to be capitalized and to have minimal operating expenses. Some companies go to extraordinary lengths to transform monthly operating costs into capital expenses. One creative company engaged a second-tier cloud provider and required it to use dedicated servers that the company purchased (along with perpetual software licenses augmented with multiyear support). This added operational complexity to the cloud provider, which had to operate the customer’s equipment separately. However, the monthly charges from the cloud provider were lower than they would have been if the cloud provider owned the servers and software licenses. When the buyer capitalizes servers and licenses, monthly operating costs under EBITDA are lowered, since depreciation is not included.

  • The company is in bankruptcy. Companies operating in bankruptcy have to get permission from the presiding judge for any expenditure beyond normal operating costs. Bankruptcy is designed to be a short-term, temporary state until the company can work through its problems. As a result, most judges are reluctant to allow any new expenditure without a very short-term payback. Even if a new system would significantly improve longer-term operations, it can be difficult to justify.

If you believe it is important to make an investment that does not have a very quick payback, be prepared to convince the judge that without the new investment, the value of the company will be lowered significantly within one or two years.

  • The company is financially stable. Profitable companies with strong balance sheets have the financial flexibility to analyze each situation separately and determine the approach that provides the best return to shareholders. Mature organizations normally have more bureaucracy and controls, because their financial analysis processes are designed to analyze all rent-or-buy options completely. These processes are usually logical and well designed, unless they have grown organically over time and have not been examined for years.

Unfortunately, many Finance groups do a poor job of educating the rest of the organization about capital structures and the rationale for accounting practices. If you don’t understand, ask Finance to explain them. You may not like the apparent control that Finance can have on IT architecture or package selection, but it is a business reality. It’s important to realize that the Finance group is just doing its job and is not picking on IT. Every department will face the same restrictions when they want to invest in new capabilities.

When you are unhappy with Finance-imposed constraints, it is usually difficult to get the decision changed without a very good reason. But if you are truly convinced that financial restrictions are creating a bad decision, prepare a very compelling argument, build a strong political coalition and get ready for an extremely long discussion. Most of the time, it’s not worth the effort, and you may still lose in the end.

Don’t tilt at windmills. It’s exhausting. Save time, effort and frustration by learning how to work within your enterprise’s financial constraints.

 

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