IT is the king of capital expenditure in the Hotel Group of Cendant Corp., according to the company’s CFO, so a good working relationship between the CIO and CFO is important to the success of the entire division. The group is the world’s leading franchiser of hotels, counting Travelodge, Ramada, and Days Inn among its nine brands.
“As a franchising business, our sole capex area is in the IT and infrastructure side,” Cendant Hotel Group CFO Bob Loewen said. Loewen dedicates one of his three finance directors solely to working with the IT department.
Mike Kennedy, the CIO of the Hotel Group, is thankful that Loewen has taken the time to understand that IT has different methods of allocating labor—whether it be for projects or core services.
Kennedy also appreciates that he and Loewen can work together to see that some large IT costs, such as communications, are allocated properly to the different business units rather than just coming from one big IT pot.
Kennedy and Loewen have avoided most of the common misunderstandings that occur in these executive relationships by keeping the lines of communication open and working together to ensure that IT projects make good business sense. CIOs have to take time to learn about their colleagues and their work in the financial department to have a similarly successful working relationship.
Mastering a different language
One source of conflict between CIOs and CFOs is language, said consultant Tom Pisello, a former Gartner VP and current president of Alinean, a financial consulting company. CFOs think about revenue; cost of goods sold; sales, general, and administration expenses; depreciation; and shareholder equity, Pisello said, while CIOs tend to talk in project terms—schedules, budgets, technical architecture.
“Until those two kinds of languages are married, I think this problem is going to continue,” Pisello said.
Kennedy has learned to speak in financial terms and understands the importance of the business side of IT projects. When preparing budgets, he tries to make sure that he, like Loewen, is speaking “that kind of universal language—the dollar sign.”
If a CIO doesn’t take time to make a compelling dollars-and-cents case for a project, CFOs have good reason to be skeptical of its feasibility. Pisello cites a Standish Group survey from 2000, which found that only 28 percent of IT projects are completed on time, within budget, and with all features functioning as planned.
With that high risk of failure, companies often have stringent standards for deciding whether or not to fund projects. In addition to ROI, CFOs may want to know the payback period (breakeven point), net present value (NPV), and internal rate of return (IRR).
Learn more about financial terms
The CCH Business Owner’s Toolkit and Alinean’s glossary offer definitions of common accounting terms.
“I really think that the CIOs need to actively learn more about how accounting is done at the particular company where they work,” said Linda Hughes, a business and technology consultant with North Highland. Hughes worked with CFOs as a CIO for a large nonprofit corporation and, prior to that, as a divisional CIO for a major consumer products company. In her current position, she helps IT departments communicate their business cases to executive management.
Hughes also recommends that CIOs who don’t have a rudimentary understanding of finance take an all-day seminar or attend a conference on managing IT spending.
Peter Faletti, a former CFO and Hughes’ colleague at North Highland, said that the biggest issue from the CFO’s perspective is to understand how the IT initiatives proposed in the budget relate to business strategies and objectives.
“A lot of times, people feel that the IT pool becomes one great big bundle, and it’s hard to separate what applies to any of the specific initiatives that the company might have underway—whether it’s breaking into a new market, launching a new product, or creating a different approach for dealing with its customers—people want to see that linkage,“ Faletti said.
One way to begin to sort out IT expenses is to place each budget request in one of three categories, Faletti said:
- Operating expenses
- Upgrade expenses
- New project expenses
The first category is the money needed to support all current systems and infrastructure. The second is money to be spent on enhancing current systems—an upgrade to the accounts payable system, for example. The third is anything that’s a new project. The new projects, especially, need to be prioritized according to their importance to the overall business strategy, in case money runs out at the end of the budgeting process.
Revising the role of the IT department and its budget
Unfortunately, when learning about accounting at their companies, some CIOs are frustrated to find that IT is seen mainly as a source of short-term operational efficiencies rather than as a long-term strategic advantage. Larry Downes, business technology consultant and author of The Strategy Machine, said, “The CFO, in many companies, still is laboring under the old paradigm of thinking about IT that has a 12- to 18-month return on investment.” In those companies, an automation project that would cut the bookkeeping staff with a six-month breakeven point would sail to approval, but efforts to ready the firm for Web services might be rejected.
Hughes’ experiences, on the other hand, give her hope that the old paradigm is fading away.
“A lot of CFOs are being asked to be more than the traditional bean counters,” Hughes said. “They are really trying to understand the business reasons for why things need to be done, so treat your CFO as any other business partner and don’t only talk numbers with them.”
Collaboration allows more innovation
Establishing a solid working relationship with the financial department can help CIOs with short-term and long-term budget needs. Cendant’s CIO Kennedy and CFO Loewen are acting as business partners in a new initiative that goes far beyond the old role of IT. The IT department is building a customer loyalty program for all nine Cendant hotel branches that will also have the participation of some other Cendant brands, such as RCI vacation time-sharing and Avis car rental. Like a “traditional” IT project, Loewen said the company will realize some operational efficiencies in its Parsippany, NJ, offices. But he says the project will excel at the second criterion he uses for evaluating projects, revenue generation, by adding value for the customer.
“We think this will allow us to improve our competitiveness within the marketplace, allowing our customers to earn points across all our different units and to be able to redeem them not only for hotel rooms, but also for time-shares or car rental,” Kennedy said.
And, just as Kennedy is aware of the business goals of the project, Loewen knows that the project to link the 6,600 locations is technically complex.
Kennedy and Loewen have settled on a project plan that includes outsourcing about 50 percent of the work. The IT department will also do some original coding, principally to integrate third-party tools.
“We’re working with partners of Cendant, like Trilegiant, who will actually be providing us with some of the back-end fulfillment capabilities,” Kennedy said. The system will also use Informix database software, Tibco messaging middleware, and Trillium for data cleansing. It will integrate customer information from a number of sources, including point-of-sale systems at the hotels, call centers, and consumer Web sites.
CFOs like Loewen, who consider the strategic value of IT projects in addition to short-term payoffs, can help IT get the funds for innovation. But, like Kennedy, CIOs also have the responsibility to make the business case for those longer-term projects.
Hughes has a final piece of advice for CIOs who want to work successfully with CFOs: “Talk with CFOs at times other than just when the budgets are due.”