The CFO's desired financial metrics
Now that you have embarked on creating the compelling case for your technology solution, making sure your approach is grounded in professionalism, practicality, proof and perspective, you need to present the right financial metrics that the CFO needs to see to believe. The top-line metrics you need to present are benefits, return on investment (ROI), payback period, total cost of ownership (TCO) and net present value (NPV).
Senior IT Management and CFOs need to show fiscal contribution now more than ever, and clearly articulating the fiscal benefits to be derived from a technology initiative are tantamount to having a project funded. There are different ways to frame these benefits, so let's begin with looking at hard (tangible) and soft (intangible and strategic benefits). Tangible benefits can be directly quantifiable, and undisputable in nature. They are the discreet cash flow producing benefits, showing either revenue enhancements or cost-reductions. These types of benefits are easily quantifiable, such as savings derived from lowering the amount of printer toner used or lowering the amount of storage required. Intangible benefits are often present, but more challenging to quantify such as improving customer satisfaction or improving employee satisfaction. Strategic benefits have strategic organizational impact, such as improving the quality of customer experience through more complete information resources.
Benefit risk is very important to portray to CFOs, and they should be given the full spectrum of benefit possibility before making their decision. Vendors that can accurately portray the range of benefit possibility, including more liberal and conservative scenarios will gain more credibility while offering a more complete picture for decision making purposes.
Return on Investment (ROI) is the cumulative net benefits (benefits minus direct costs of benefits such as applying a profit margin to total revenue influenced) derived from a technology initiative, divided by cumulative costs of the enabling technology investment and associated deployment and on-going costs. ROI is the number one way CFOs are making technology purchase decisions in these tight times. They are using this metric to control technology purchases and to make smarter tech-buying decisions. It allows them to quickly cut through the technology hype to determine the true economic worth to the firm.
Payback period (breakeven)
The payback period is the point in time (sometimes referred to as breakeven point) where the organization recoups its costs outlaid for a particular technology solution. It's where the net benefits equal the costs associated with the technology initiative. The payback period is a good measure of risk, letting the investor know how long it is going to take to recoup an investment outlay.
Total Cost of Ownership (TCO) is where most companies begin to scrutinize the costs of a potential technology solution. TCO seeks to measure all of the expenses, both human and technical, behind a given technology initiative. It includes all costs related to the technology lifecycle, including procurement, deployment, maintenance and support. A TCO analysis can be very good for budgeting purposes, or choosing between alternative courses for technology initiatives. It is not often wise to evaluate potential technology initiatives based on TCO alone. Key cost areas to be considered in the TCO analysis include software (including maintenance and upgrades), hardware and other infrastructure-related costs), personnel, consulting, training (admin and end users) and other areas particular to a given project.
In its simplest form, net present value (NPV) is the value today of cash received at a future date given a discount rate (cost of capital). CFOs want to see all of the future net cash flows associated with the technology initiative, discounted by an appropriate interest rate so they can determine present value of the future cash flows, and compare this with other potential investments.
Many CFOs like to see the Internal Rate of Return (IRR), even though it is not often the best measurement of investment potential. IRR is the effective yield on the project; that is, the discount rate that causes the net present value to be equal to zero. Its disadvantage is that it might give an incorrect decision when deciding among mutually exclusive projects.