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The Dollar Dialogues

The Dollar Dialogues

What a fictitious CIO would say to his hypothetical financial counterpart.

On Continuous Upgrades

CIO Harold Peeples: Let me ask you, Ben - and I hope I'm not sounding snippy - but can a CFO really appreciate something when its value can't be expressed in dollars and cents?

CFO Ben Courtanes: Sure we can. For example, intellectual property. Biotech companies spend years and billions of dollars before they even have a product. How do you measure the value of that R&D? It's pretty much priceless. And morale. I don't know how to measure its value, but I know we have to invest in it.

CIO: Let me ask you this then: Is it possible that there's value in the continuous upgrade of our IT? Can you see the value in making sure our technology is as good as our competitors'?

CFO: No, I can't. And I'll tell you why. Low morale leads to lower productivity. Running low on our store of intellectual property can jeopardize future revenue. How much? Not sure. But I'm sure it'll happen. On the other hand, I can't see any cost from extending the life cycle of our IT systems. If anything, it probably increases ROI by reducing capital expenditures without really hurting operations.

CIO: You're wrong, Ben. There are returns from continuously upgrading IT systems - some we can measure, some we can't, both real. Let me tell you about the US Coast Guard.

CFO: Go on.

CIO: The US Coast Guard exemplifies what happens when you try to extend technology life cycles. Many of its boats are 30, 40, even 60 years old. In the late 90s, it finally was forced to start an upgrade process called project Deepwater. Replacing boats and aircraft, it turned out, would cost $US20 billion and take 30 years.

CFO: I'm impressed. In a horrified way.

CIO: Obviously, they didn't have $US20 billion.

CFO: Pity.

CIO: At least they couldn't get it all at once. So while they've started to upgrade some boats, they need to maintain a lot of others until there's money available to replace them. Now, you'll love this part. I'm going to use numbers.

CFO: Go for it.

CIO: A 30-year-old, 41-foot (12.5 metres) Coast Guard patrol boat costs $US2162 per hour of operation. The new boat the Coast Guard wants would cost about $US600 per hour. They could save on the order of 75 percent, $US1500 per hour of operation, if they had newer boats.

CFO: So if one boat works a 40-hour week, that's about $US3 million a year savings per boat.

CIO: Pretty quick, Ben. Not to mention a new boat could handle new missions, like homeland security, that the old boats weren't designed for. Just like the wireless project: leapfrog technology and save money at the same time.

CFO: I hope they don't have to tear down walls and patch security holes too.

CIO: I'll ignore that. Point being, the money the Coast Guard saved by spending almost nothing on capital investment over the years is being lost to maintenance on old boats it can't afford to replace.

CFO: You're saying that if you commit more capital year-over-year to maintain a smooth level of investment, you get a portfolio of better equipment that's less expensive to maintain. And you end up spending less than what you would ostensibly save by avoiding investment. I get that. But boats fall apart, Harold. And we're talking about stuff that's 10, 30, 40 years old. Servers, switches, that stuff doesn't rust or sink, and it seems like you guys want to upgrade it every half-hour or so.

CIO: In one sense, you're right. IT equipment doesn't deteriorate the way boats do. But IT systems are social; they live in a community of systems that interact.

CFO: I don't normally think of them like that, Harold, but I won't argue. What's your point?

CIO: This: If those other systems in the community improve and get upgraded - and ours don't - our systems become less capable of interacting with them. And if those other systems in the community are getting upgraded every half-hour or so, like you said, then, yes, we have to keep up.

CFO: Why?

CIO: Because IT systems deteriorate socially. So the company trying to save money by extending life cycles to the max ends up having difficulty with business transactions because the systems don't interact well with the newer, better, different systems all around them. Maybe the older systems don't support the right document format. Or maybe that old network gets a reputation for being less secure. Customers and investors lose confidence. The stock starts to sink like a, like a leaky Coast Guard boat.

CFO: OK, Harold, I get it. But why aren't those document formats standard? Why aren't there regulations demanding people-secure systems to a certain baseline? In every other part of the business we've decided there's no competitive advantage to being on the kind of hamster wheel IT keeps us on. Nicholas Carr in that book, Does IT Matter? says the competitive advantage of IT innovation is gone; it's a myth. If he's right - and I think he is - we should stop chasing something that isn't really there.

CIO: You know I disagree with Carr, Ben. Maybe CIOs haven't done a good enough job demonstrating IT's competitive value, but if you want to test Carr's hypothesis, it's easy enough.

CFO: How?

CIO: If IT is just a commodity, then we can buy it like we buy paper clips. Lowest cost. And when our competitors start to beat us with new systems that our own systems can't even interact with, and we lose market share, and the stock falls, you can tell the board how much we saved by not upgrading.

CFO: That's a little overstated, don't you think?

CIO: Maybe a little, but the point is, you don't want to risk it, do you? You know the value of making sure our IT is competitive even if you can't express it as a number. So, Ben? Want to try buying lowest cost IT?

CFO: Maybe not right now.

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