Quantimetrics’s Bram Meyerson explains how CFOs can see the value for money when investing in software.
The Covid-19 pandemic has played a key role in accelerating the adoption of new technology solutions in most sectors around the globe. In the latest CFO Community Conversation, executives agreed that the challenge for CFOs as they step back to consider the legacy of application solutions that keep their organisations running, was how to properly assess the value of their IT ecosystems before large sums are invested into the next generation of technology.
“The relationship between the CFO and CIO is often strained, mainly because the CIO doesn’t effectively communicate the return on investment (ROI) of IT projects,” said Quantimetrics CEO Bram Meyerson.
Umgeni Water CFO Nomalungelo Mkhize has found that the finance people and technical people are talking past each other in business. “We are trying to explain issues of ROI, value for money and they want to go ahead and be innovative by bringing in new things,” she said. “We always feel like we are just throwing money at technology and can’t seem to calculate the ROI effectively to be able to report to the board and the committees.”
He explained that, as a result of the fast-changing technology landscape of businesses, CFOs are now expanding their traditional responsibilities by overseeing data-driven analytics and providing insights that support growth, bringing them closer to data and its source.
“CFOs that are aligned with their CIO counterparts are starting to co-develop guidelines for IT investments, where they look at the perceived benefits, the risk mitigation, regulatory issues, and ROI, all of which are underpinned by costs. And the challenge lies in predicting and measuring the cost of software,” Bram said.
Woolworths South Africa CFO Justin Crowhurst shared that he is still struggling to get his head around whether or not businesses are getting real value for money when it comes to the cost of IT operations by moving into the cloud. “Its so complex to evaluate value for money in moving to the cloud especially in leading edge areas of big data analytics and machine learning,” he said.
To help CFOs prepare for when businesses demand measurable value for their IT spend, Quantimetrics CEO Bram Meyerson explained how CFOs can calculate these complex costs, adding that there are six key questions CFOs should be asking:
- Are we right-spending on software and app delivery?
- To what extent are projects adequately prioritised?
- Which projects are draining our budget? And why?
- What proportion of our spend is sunk on maintenance and support?
- Which legacy applications bear the heaviest support overheads?
- Which support activities contribute most significantly to support overheads?
Evaluating software costs
Bram explained that, when evaluating software costs, purchasers should objectively judge whether they are enjoying value for money for software it procured and used. As a minimum, they should look at whether they are acquiring or developing the software at a fair price. “The foundation of these types of judgements require us to understand the concept of size or complexity.”
He referred to Hatch Africa as an example, which supplies engineering, project and construction, business consulting and operational services to the mining, metallurgical, energy and infrastructure industries, saying that “there are capital projects that run into enormous sums, and clients would not approve the budgets of these projects without clear benefits realisation and ROI analysis.”
However, he says that the key to calculating the value for money on these projects is to look at the engineer who is responsible for it, “the expert who actually measures the complexity of the undertaking”, and to use that as the basis of the costing model.
Hatch Africa CFO Craig Sumption agreed, saying that the business has struggled to find something that really works and, as a result, has rolled out a team that is working on developing in-house systems to take their experience and use it to extrapolate what the final capex cost is going to be to effectively bring an added value service to Hatch Africa’s clients.
Bram further explained that the size or amount of software procured and supported is directly related to the cost of the procurement. The more software, the more complex the system, thus the higher the cost. “Sizing software is usually based on business-functional capabilities or utilities of software, such as the types of complexity of the business transactions the software is designed to process, and the richness or complexity of the data that it maintains, as well as the management information it provides,” he said.
To work out how to cost software, you have to size the software, convert the size to hours using equivalent benchmarks, then look at cost rates. “We can benchmark those cost rates and then convert the effort into the cost,” he concluded.
Read more about how CFOs can evaluate the cost of enterprise software solutions here.