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Quick Wins for the CFO To Stop It Spending From Spiralling out of Control

19 June 2023
By: Andrew Carr, Managing Director, Camwood

It may come as a surprise for finance leaders to learn that the majority of IT applications are managed by the business – meaning outside the realm of the IT Department. In fact, research shows that 56% of Lines of business are managing more applications than IT. This sprawl is often called Shadow IT, and according to Gartner almost 40% of all IT spend falls into this grey area. It represents not only a chronic threat to the security of the business but has a significant impact on the company’s bottom line. Frightening as this may sound, there are some immediate steps that the finance team can take to bring the situation back under control.

What’s the problem with Shadow IT?

There are many reasons why the costs of IT spread outside of the IT Department. For example, the Sales and Marketing team may use a super-savvy lead tracking tool that’s hosted in the cloud, but often they’ll procure a system without IT knowing and bury the cost within their own department.

This poses a problem for Finance Teams, because when the CEO wants to know how much money is spent on IT, what’s the right answer to give? Is it the budget that IT submitted for their financial year, or is it the actual cost of the multitude of subscriptions and licenses that have accumulated over time in the company, that no one, truthfully, has any control over? How profitable are operations when core costs like IT can’t be separated out and allocated correctly? A Finance Team ought to know how much the company is spending on IT. Technology is one of the inputs to the business, and if the cost is spread between departments, and hidden under layers of other expenses then the total figure remains shrouded in mystery.

And there are some very clear problems when IT responsibilities leak to departmental heads, chief among them is the complexity of licensing. Making sure that the users have the right version of the software, and that it’s what they need is a full-time responsibility. Software vendors do not make choosing the right license easy, and many companies will overpay for licenses that they don’t need. For example, does the business really need those 800 copies of Microsoft Project that you pay monthly for so that everyone can keep track of progress, when the Microsoft Project Viewer is actually free?

Often software applications are mothballed, considered obsolete, yet license fees are still leaving the company’s bank accounts. In the same way, parallel licenses in different parts of the company could also be rationalised to create cost efficiencies. If different departments are engaging with the same supplier, then this is something that can be addressed in order to leverage discounts and preferential terms. When an uncoordinated approach to procuring software is undertaken, the vendor will always have the upper hand.

In a recent rationalisation exercise we undertook for a large enterprise customer, we discovered the business had 114,000 applications. After we validated and ratioanlised what was really being used and why it was being used, we managed to reduce this to 3,900 – with no impact on operational performance. This represents a 96% decrease in applications, and, of course, a considerable cost saving.

Rationalisation is a quick win

More typically, companies looking for a quick win will achieve a 40% reduction in applications and cost savings will amount to 30% by undertaking an application audit. But aside from licensing costs, simplifying the IT estate also brings other benefits, particularly in terms of support. With lots of Shadow IT in the estate, companies are unable to properly manage software maintenance and IT is unable to provide the customer support expected of it. Issues like this, if left unattended, are capable of damaging morale within the IT team and therefore hindering employee retention.

Also, by gaining visibility of what IT the company relies upon, it will be in a much better position to take advantage of new technology. Digital acceleration is now seen as a focus for the CFO as much as it is for the IT Director. Making sure that the business has visibility over the entire IT estate reduces the risk of any potential digital acceleration programme running into expensive roadblocks.

Understanding how Shadow IT is creeping into your organisation isn’t an exercise in blame, and it doesn’t mean shuttering all the applications that are discovered. After all, many of them will be essential to the proper running and management of the business. But by taking control, the CFO can mitigate risk and rationalise the overall IT budget, while gaining a better understanding of the business operations. This is one of those rare cases of a quick win that brings benefits to everyone.