Finance and IT

1 Introduction

The syllabus requires you to understand how finance interacts with four other functions – operations, sales and marketing, human resources and IT – using the same three-part structure for each: the function's main role, its areas of interface with finance, and the key performance indicators (KPIs) that measure the relationship. This chapter applies that structure to IT.

Chapter 3 examined technology as subject matter – what the digital technologies are and what finance can do with them. This chapter looks at IT as a function: the department (or external provider) that supplies and supports the organisation's systems, and with which finance must work, day in and day out, to get the information it depends on.

2 The main role of the IT function

The IT function exists to provide and protect the technology the organisation needs to operate. Its role has two named parts in the syllabus:

• IT infrastructure: providing the underlying platform on which everything runs – networks and connectivity, servers and data storage (increasingly cloud-based), user devices, and the core software that ties them together. Infrastructure work also includes capacity planning (will the systems cope with growth?) and keeping the platform secure and current.

• IT systems support: keeping the organisation's applications running and its users productive. This covers selecting, developing and implementing new systems; maintaining, patching and upgrading existing ones; running the service desk that resolves users' incidents and requests; training users; managing access rights; taking backups; and planning for disaster recovery.

Around these two, most IT functions also carry responsibility for cyber security (defending systems and data against attack) and for IT strategy – making sure the organisation's technology plans support its business plans rather than trailing behind them.

The IT function may be an in-house department, a shared service centre serving the whole group, an outsourced provider, a set of cloud providers – or, most commonly, a mixture of all of these. Whoever provides it, the organisation still needs someone to manage the providers, and finance has a large stake in how well that is done.

3 Areas of interface with finance

Finance and IT meet more often, and in more ways, than any other pair of functions. Finance is usually IT's most demanding internal customer – every figure finance produces comes out of a system IT provides – and at the same time finance is the financial steward of IT: the function that appraises, budgets and controls what IT spends. The main areas of interface:

3.1 The systems finance runs on

Modern finance functions run on integrated systems – at the centre, usually an enterprise resource planning (ERP) system: a single suite, with a single shared database, covering accounting, purchasing, sales, inventory, payroll and more. Because every module writes to the same database, a sale entered by a salesperson updates the ledgers, the inventory records and the management reports at once – no re-keying, one version of the truth. (Chapter 6 introduced ERP as the modern descendant of MRP, integrating the supply chain; here the focus is what finance's dependence on it means for the relationship with IT.)

This dependence is why the relationship matters so much to finance. When a system is chosen or changed, finance must specify its requirements (what reports, what controls, what data), test that the system meets them, and plan the transition – historic data must be migrated accurately, and the old and new systems are often run in parallel until the new one is proved. When systems fail, finance's deadlines – payroll, payments, month-end, statutory filings – are what slip.

3.2 Data governance: shared responsibilities

Chapter 4 established that data is one of the organisation's most valuable assets. Governing it – keeping it accurate, secure, lawful and usable – is a responsibility finance and IT share, and the split needs to be explicit or things fall between the two stools:

4 Managing the relationship with IT providers

Whether IT is provided in-house or bought in, the relationship needs formal management. The key tool is the service level agreement (SLA): an agreement defining the services to be provided and the measurable standards they must meet – availability, response and fix times, support hours, security standards – together with how performance will be reported and what happens (escalation, service credits) when standards are missed. With an internal IT department the SLA is an internal agreement; with an outsourced or cloud provider it is part of the contract, and by far the most important part to get right before signing.

Finance's roles in the relationship: negotiating and reviewing the contracts and SLAs; verifying the provider's charges; monitoring performance against the agreed KPIs (below); and reassessing periodically whether the service still offers value for money compared with the alternatives.

4.1 Cloud and SaaS: what finance should consider

Chapter 3 explained the cloud model and its general advantages and disadvantages. When the organisation's own systems – above all the accounting/ERP system – move to a cloud subscription (software as a service, SaaS), finance should weigh some specific considerations:

• Cost pattern: subscriptions replace a large up-front purchase with an ongoing operating cost. That eases cash flow and scales with use, but the payments never stop – over many years a subscription can cost more than the system it replaced, so the comparison must be made over the system's whole life.

• Data location and regulation: financial and personal data will sit on the provider's servers, possibly in another country. Data protection law constrains where personal data may be held and transferred; finance must know where its data physically lives.

• Security and assurance: a major provider's security is usually stronger than anything an ordinary organisation could build – but finance should still obtain assurance (independent audit and certification reports) rather than take it on trust, because responsibility for the data remains with the organisation.

• Service continuity: if the provider has an outage, finance stops working. What availability does the SLA promise, what compensation applies, and what is the contingency plan?

• Lock-in and exit: moving accounting systems is painful, and providers know it. Before signing, establish how data would be extracted, in what format, at what cost, if the organisation ever wanted to leave – and what happens to the data if the provider fails.

• Integration: the new service must exchange data cleanly with the organisation's other systems, or the 'one version of the truth' benefit of integration is lost.

5 The costs and benefits of IT systems

IT is a major spend in almost every organisation, and the syllabus requires a structured view of its costs and benefits – not least because finance is the function that must appraise IT proposals and then hold them to their promises.

5.1 Costs

The initial price is often the smaller part: the total cost of ownership over the system's life – purchase plus all the running, support and hidden costs – is the figure an appraisal should use.

5.2 Benefits

• Tangible benefits can be quantified: staff cost savings from automation, fewer errors and less rework, lower inventory from better forecasting, faster invoicing and cash collection, cheaper processing per transaction.

• Intangible benefits are real but hard to value: better and faster decisions from better information, improved customer service, stronger controls and security, staff freed for higher-value work, keeping pace with competitors.

Because the costs are largely up-front and the benefits arrive over years, IT proposals are appraised like any other capital project – estimate the incremental cash flows and apply the investment appraisal techniques introduced in Chapter 2 (such as net present value). The intangible benefits should be described and challenged, not silently ignored: many good IT investments fail a purely tangible-benefits test. Finance's job continues after approval – tracking whether the promised benefits are actually realised, and feeding the lessons into the next business case.

6 Key performance indicators for IT

As with operations, marketing and HR, the finance-IT relationship is managed through KPIs. Good IT KPIs are set jointly, written into the SLA, reported regularly and – the finance angle – linked to what the organisation actually needs from its systems, not just to technical activity:

Alignment matters more than the individual measures: IT's KPIs should support the organisation's objectives and connect to the KPIs of the functions it serves. An IT team measured only on cost per user will resist spending that finance needs (say, better reporting tools); one measured also on availability, project delivery and user satisfaction is pulled in the same direction as its customers. Reviewing the KPI set periodically – jointly – is part of managing the relationship.

7 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s key terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.