April 23, 2020
How IT Can Talk to the Finance Team
Communication between different departments is critical to success. This is particularly true when it comes to the relationship between IT and finance. A failure to communicate can result in project approval delays or even failing to get approval at all. We spoke to the OST finance team to gain some insights into how IT can more meaningfully connect with the finance team.
The conversation started with a look at the differences between capital expenditures (CAPEX) and operating expenditures (OPEX) to understand why there can be friction between finance and IT when it comes to budgets, projects and more.
How can IT talk to the finance team about CAPEX, OPEX and how they can best utilize them to benefit the business?
First, we need to understand the difference between CAPEX and OPEX and how they impact the finance team. OPEX includes expenses that occur every single year on the income statement. At a high level, the biggest difference between OPEX and CAPEX is that they come out of two different funding sources.
OPEX is part of that day to day income statement and expense. You get an invoice; you have to pay it. That is typically one budget, and it is usually managed by the IT director. The IT director, manager or department has their own budget for the year’s expenses.
The capital budget, including capital expenditures, typically comes out of a completely different budget, and that is usually managed by the finance team. So while IT tends to have more discretion with OPEX, the finance team solicits information from across all of the different teams to ask what major purchases are anticipated, and they’ll combine them into the CAPEX budget.
What are some of the ways that IT typically deals with OPEX and CAPEX budget issues?
Typically, OPEX includes items such as salaries, vendor contracts, supplies, utilities, travel, advertising and XaaS. CAPEX are large expenditures that are happening, such as data center investments and refreshes. Capital expenditures can also include items such as computer equipment, office equipment, furniture and fixtures and intangible assets.
Which is better for a business when it comes to IT: Funding focused on a CAPEX or OPEX model?
Typically, CAPEX and OPEX considerations with IT are related to infrastructure and the data center. All the hardware for data storage, networking, computing and other crucial business functions is expensive and falls into the category of capital expenditures. Many enterprises have their own, extensive data centers that they have built and maintained for decades.
With the rise of cloud computing (and its simultaneous decreasing cost), organizations can essentially set up all their infrastructure in the cloud and just pay for a subscription based on what they need. Infrastructure as a service (IaaS) and other “anything as a service” (XaaS) options allow enterprises to pull their spending out of CAPEX and into OPEX.
Today, most IT departments understand the value of moving some, or all, of their infrastructure to the cloud and utilizing XaaS: less overhead, instantaneous scaling (both up and down), predictable costs, better utilization of in-house team members, etc.
But the shift to XaaS and OPEX has other finance-related implications:
• All of that hardware that would have been in that CAPEX budget historically is now moving to the OPEX.
• From a company’s perspective, if nothing else changes, all of a sudden your net income would go down. You are pulling the expense into your income statement.
• The positive is that you no longer have all of these assets sitting on your balance sheet. You then don’t have the debt traditionally associated these assets.
• From a cash flow perspective, you don’t have to do an outlay every few years; you plan for an every single month expense. This shift to XaaS and OPEX has benefits.
How can the IT team get the conversation started about slowly (or quickly) transitioning to XaaS and the implications of that on their budgets?
The conversation should start well in advance of budgeting and can’t be decided short term. It has an impact on both CAPEX and OPEX budgets. Many organizations get tripped up on the timing. IT starts talking about “as a service,” which is an operating expense. Finance tends to like that model, but it’s either too late in their budgeting cycle or they have to wait for the next cycle because the business’ net income would go down—because operating expenses get added into your income statement.
When IT begins talking to the finance team, it’s also important to walk through what other implications a switch to XaaS may have. For example, if an XaaS provider handles tasks that your internal IT staff did previously, you will need to plan for staffing changes. Can you redeploy these individuals to another part of the business? Does this mean restructuring? People often focus on the hardware spend, but the people perspective matters as well.
How can IT involve finance in decision-making in meaningful ways?
Again, starting the conversation early is huge. Having them involved from a financial modeling perspective or providing them with the models is also important. It’s about providing the details of different CAPEX and OPEX scenarios to the finance team. It makes sense for IT to focus on specific criteria relevant to their department. But it also helps to think more broadly and try to connect with finance. For example, finance will be considering effects on staffing and insurance requirements. Is there a way to work through some of those scenarios ahead of time to make working together more efficient?
What are some of the important concepts that finance is weighing when they make the IT budget?
The finance department compiles a draft budget, but don’t typically approve it. It still must go up to the executive team. The best way to move your IT initiatives forward is to help finance tell a compelling story about why shifting spending models are important for the growth of the business.
Ultimately, a budget is a guideline. When the finance team submits it, they need to have enough knowledge to have those conversations at a high level. Most importantly, you need to speak the same language. The work of IT is complex, and they tend to speak in technical language and focus on details. The same is true of finance, so it’s really about bridging that gap and speaking a common language. Focus on how both teams can tell the story about how changes in spending will benefit the company. Then the chances of getting that budget approved will be a lot higher.
What can an IT team do if finance is resistant or there seems to be a lot of friction between the teams?
Making budget model changes can be significant. Typically, funding for CAPEX comes from a different place than OPEX. Even if the shift seems like a great idea at a high level, that fundamental change in how that money moves from one place to the other is rarely easy. And friction tends to increase as the details get sorted out. The IT team specializes in the technical side. They want to make sure that things are safe, secure and functioning optimally. The finance team is thinking about the impact on the bottom line. Trying to understand a little more of each other’s worlds will make moving forward less of a grind.
At the end of the day, IT and finance want the same thing. The more collaborative you can be, the more transparent you can be and the sooner you start having those conversations, the easier it is for the finance team to consider different solutions. Ultimately, both teams can serve each other.
Ready to dive in?
This new era of agile development is an exciting one—balancing IT and developer interests, and taking advantage of containers and open source to make development smarter and more efficient. More collaborative. More powerful. At OST, we can help you navigate through all the questions, and facilitate an honest conversation to determine if and how the cloud makes sense for you, and the future of your business. If you’re curious about how OST can help your organization accelerate growth and achieve your vision, let’s talk.