Sourcing Alternatives: Start with the CFO's View

When Alsbridge analyzes a client's Information Technology sourcing options, one of the items we ask for are their total IT expenditures. What we typically get in return from the CIO is their "IT budget" which is just the elements for which the CIO is responsible (e.g., labor, network, hardware, software, maintenance). What are quite often missing are corporate overhead, asset depreciation, asset amortization, capital investments (hardware, software, labor for projects), PC hardware and software, etc.

When you investigate your IT sourcing strategy, you should recruit the CFO to be an executive sponsor of your initiative and determine the CFO's view of your Information Technology expenditures. These hidden costs are usually buried in the corporate budget and allocated to departments based on headcount, revenue or some other form of distribution method.

CFO's look at the world through a different set of lenses. They are like economists, in that they view people as corporate assets and resources that consume (especially in IT and back office functions), rather than add to corporate revenue. At the end of each month, quarter, and fiscal year, CFO's are the ones sweeping the corners for all revenue possible, as well as tightening up on each and every expenditure and investment that does not positively impact the bottom line and increase shareholder value for that time period. It may sound mercenary, but it is their responsibility.

So why is the CFO's view so important? Before we answer that question, let's first put this into context around three typical sourcing alternatives:

Outsource - Third Party Service Provider. is responsible for delivering the services mapped to your requirements; they decide where to locate, processes to use, and focused on delivering on business outcomes and Service Level Agreements (SLAs). The day to day responsibility of running the IT department has shifted to the service provider but the overall responsibility for IT performance still remains with the CIO.

Shared Services - Captive. your company does it all. location selection, lease negotiations, build out of the space, technology infrastructure and tools, recruiting, hiring employees, knowledge transfer, training, etc.

Shared Services - Build, Operate & Transfer (BOT). similar to a captive, but where an outside firm acts as your surrogate (for which a start-up fee and ongoing fees are paid) and assists your company with setting up your entity, locating the building, recruiting, hiring personnel, training, etc. The firm has the responsibility to stand up the new location, staff it and make it fully operational; you have the option to run the operation yourself after a designated period of time.

Every transaction is different, and regardless of how it is structured, there is downstream impact to your company. In two of the three options noted above, a third party assumes the responsibility for delivering IT services against business outcomes, "the work," to your company. As such, for each position that is outsourced or offshored, the value of the appropriate corporate allocations that were levied for those positions should no longer be charged by your company to IT.

Let's say you outsource your IT to a large service provider, eliminating 500 IT positions within your company. When those employees leave, what impact does it have on who and what remains with your company? For example, does your Human Resources department need one less staff member? How many financial analysts do you need to advise the CIO now running an "IT light" model? If you have less staff to manage, shouldn't your overhead allocations be reduced? What about capital project investments?

Your capital project investments may now be moved to the service provider, whereby they purchase the applicable hardware for which you contracted in your service agreement. They then charge you back based on resource units or in some type of utility pricing fashion for the services rendered.

The bottom line for your company is that now you have less staff, therefore the corporate allotments for overhead, rent, utilities, etc. should no longer be allocated to the IT department. In the case of outsourcing, your service provider now has that corporate burden. They now have more personnel to manage and may need additional HR staff.

From the CFO's view, a shift has occurred. Obviously allotments for rent and utilities don't just disappear immediately. Further, there are leases still in effect, but the space the IT employees occupied can now be allocated to another department that may be growing or the expense can be held at the corporate level. Eventually the space may be sublet or allowed to expire over time. Each company handles these types of allocation issues differently. This is just one example of the downstream financial impact.

Taking a holistic financial approach to your sourcing alternatives clarifies all your costs and investments from the CFO's point of view. After all, in most cases you need the CFO in your corner to back up your business case when you move forward (thus the recommendation earlier for making the CFO one of your executive sponsors). Examine all IT expenditures to ensure that all the costs are captured. How the CFO proceeds based on accounting treatment is another topic, but taking this approach will give the CFO a level of confidence that no cost item has been missed in your sourcing alternatives analysis.