What is "cool" does not provide "value". What provides "value" may not be cool. What is "cool" may have "value" that needs to be communicated. So where do the poor techies go - "coolness" is their mojo. Not with the intention to trivialize the value of "techies", it seems that more and more software vendors are targeting their products at the "early adopters" and are failing at the "mass adoption" stage. This is clearly a problem which leads to the understanding of why "good" technologies do not catch-up.
Doing some thinking around this for a while now. I came to the conclusion that "techies" do need to be taught corporate finance 101. That should not be a stretch since Black Scholes was driven by laws of thermodynamics. It is imperative for "serious technologists" to understand the concept of "Enterprise Value" as defined in corporate finance. It is more important for software vendors to prove the contribution of their technology to their consumers. This can only be achieved if technologists understand the concept of "value" the way the "market" sees it.
Projects or investments add to the "Total Enterprise Value" if the the returns from the project, usually denoted and loosely defined by ROI (Return on Investment), is greater than the company's cost of capital. In other words the returns from the investment in technology need to offset the cost of the interest paid by the company on its debt and equity components.
Technologists need to understand the nature of their company. If they belong to the supply-side (software product and services vendors), it depends on how the company is funded. If the company is highly leveraged, the cost of capital is biased towards the cost of debt. If the company is a public company, then the cost of capital is a mix of the cost of debt and equity. Technologists on the supply-side are mainly driven by market demand of their products. However, a knowledge of corporate finance to just this extent allows them to better prioritize and rationalize the product road map.
On the demand-side (corporate users of technology) perform a charade of a so called "business case" which essentially ends up in the form of a Discounted Cash Flow (DCF) showing the Net Present Value of any IT project to be a very high number (mostly in millions). This is good corporate citizenship. However, the goal of the business case is not to create "value" in the organization. It is usually to work an angle off the CIO's Capital Expenditure (Capex) budget. The real kicker is when the project gets initiated, no one really controls or even looks at the "assumptions" made during constructing the DCF. This is usually due to two reasons. First, the cost of the project has created a hole in the CFO's pocket and we don't want to boil the ocean. Second, the assumptions made (especially those around the cost components) are no longer valid and let inertia prevail. Job security, quest for building the resume with "cool" technologies, hoping to get a job at Google...probably are the more prominent vested interests than actually creating "value". The poor CIO who has a life span of 18-24 months is looking at "quick wins" or "low hanging fruits" - whatever those mean.
The real problem arises from the so called technology proponents from the demand-side - namely the "Architecture Groups" start imposing their "standards" and "SOA evangelism" into the CIO's agenda. Not denying that these groups do bring some kind of an "unknown, non-quantifiable cosmic" value to the IT organization, but has anyone questioned or correlated their "value generating" abilities to the stock price or even the Return on the Invested Capital (ROIC)?
I am petrified and appalled at the fact that we continue to talk about "Enterprise Architecture", "Technology Evangelism", "Standards" etc. etc. - but we don't bother to spend any quality time trying to quantify and capture the IT "value" in corporate finance terms to convey and communicate all the good work around sound investments in technologies with a high NPV. The "Enterprise Technology Strategy" must be guided by "value" to business. Period!
So as the CIO do I not have the corporate responsibility to help improve my stock price?
I would also argue that many business executives need to be taught "inclusion 101" and "strategy 101". While at least part of the blame can be laid at the feet of the CIO/CTO, I have often found that the resistance comes from the "demand side" - a "you can't advise me on how to do my job" kind of attitude. However, I completely agree with you that high-performing organizations are more likely to see the positive appreciation that comes from having the CIO/CTO be a core participant in the business strategy and revenue generation.
Posted by: David | March 10, 2008 at 09:36 AM