“If only the business understood IT, then the company would get move value out of IT.” This statement is a common belief among IT professionals. Understanding begins with the basics, framed in a language that is acceptable to the audience rather than the teacher.
Talking about IT using the language of organization, its role, what it does, position, etc provides a starting point for teaching the business about IT. Using this staring point here are a twelve things that every business leader needs to know about IT.
#1 IT is horizontal
#2 IT is a hybrid organization
#3 IT is part of a capability
#4 IT applies information to replace cash, capital and operations (this post)
#5 IT is complex because the business is complex (next post)
4. IT applies information to replace cash, capital, and operations
Think about your operations. Think about the manufacturing lines, the offices and cubicles, the fleet of service vehicles that people operate but information coordinates. Companies have to invest cash, capital and operations not only to deliver value to customers, but also to handle inefficiencies in communications, coordination and management.
Inventory is an example of this. Companies build inventory in anticipation of future sales. Production scheduling and economic order amounts also cause inventory to build up and consume cash. Improving information flows across customers, production planning, manufacturing and logistics can reduce the inventory required to support customers and free up cash.
You can identify opportunities where information can replace cash, capital and operations by looking at internal versus external growth rates. Wherever working capital requirements, equipment or operational personnel are growing at a rate faster than revenues – then there is the opportunity to use information to replace those assets.
The answer seems obvious as companies are looking to increase free cash flow and preserve capital in the midst of the financial collapse and tight credit markets. Traditionally changes in cash and capital were thought to be the domain of the Chief Financial Officer (CFO) who would raise cash and keep capital by administering draconian spending and investment policies. Those policies work when the economic challenges are short term in nature – generally 6 to 18 months. They work because the keep cash inside the company for a relatively short period of time without significantly damaging company capabilities or performance.
However, in an extended economic downturn, CFO policies for hording cash and capital begin to break down as time amplifies the stress of ‘doing more with less’ on your people, processes, facilities and assets. This is where IT comes in as part of a sustainable solution. See earlier entry in this blog on this subject.
CFOs and CEOs need to change the cash and capital structure of the company in order to sustain performance in a new economic reality. Running a cash efficient and capital lean operation requires using information in new ways – ways that replace cash and capital.
This is new ground for CIOs as well. Most IT business cases talk about the impact to the Income Statement or P&L. They talk about cost reduction, operational efficiency, etc. Rarely do CIOs engage in projects that change the structure of the balance sheet, requirements for working capital or the capital required for investment and operations.
However as economic times continue, there is increased pressure on balance sheet and cash flow statement improvements. This should lead executives to take advantage of IT’s ability to use information to transform the structure of operations from a cash, capital and other resource perspective.