This article was originally published by Forbes.
Innovation has become a toxic addiction for companies. Gartner reports 80% of CEOs are increasing technology investments while CIOs and CPOs still struggle to deliver dividends, meet expectations, and reduce technical debt. But to break the cycle of failed digital transformations, executives must approach innovation like a CFO approaches their balance sheet.
Strategic portfolio management is key to correcting 70% of failed digital investments, and financially managing innovation is becoming easier thanks in part to the introduction of the FinOps strategy. FinOps is gaining popularity because it offers a framework to control runaway cloud costs – issues only increasing in frequency today. It’s also gaining recognition as a methodology can make broader innovation financially sustainable long term.
But amid the excitement, leaders are glossing over FinOps’ finer instruments.
Inside its framework one capability is single-handedly detoxifying technologies to cure and prevent failures in digital transformation: cost allocation. This seemingly simple financial toolset takes tech expenses and charges them back to the business, and it’s the secret behind lean portfolio management and measuring tech ROI.
That’s because it helps innovation leaders break two of their worst habits…
Bad Habit #1: Failing to Communicate the Business Value of Technology
Executives aren’t always good at discussing technology in relation to corporate priorities and desired business outcomes. When success metrics are focused on bug fixes, systems performance, and rapid ticket resolution, innovation leaders and their departments can be viewed solely as a supporter of business continuity. But while they are matching resources to business demands, they also need to be matching technologies to financial returns. Gartner predicts that executives who can successfully communicate the business value of IT will maintain 30% higher funding levels.
The Solution: Tying Dividends to Digital Investments
The first step in communicating tech business value is to connect expenses to resulting impacts – revenue, productivity gains, cost savings, and risk remediation. This way the Board can see where they’re getting maximum value from their tech spend.
This is easier said than done, which is why so many organizations fail at it.
Cost allocation kickstarts this process triggering critical mapping activities. Leaders are forced to establish the missing links between technologies, projects, and payouts. Assigning costs helps measure the financial performance of innovation and the IT budget overall. Through effective chargeback processes and data visualizations, they can better:
- Articulate tech returns and ROI.
- See where new investments may be outpacing returns or the growth of the business.
- Identify threats to financial sustainability, where investments consume an increasing amount of the budget.
When technology ROI measurement feels elusive, start with cost allocation.
Cost allocations serve as the breadcrumbs behind much-needed feedback loops. With a clearer view into assets versus liabilities and tech ROI, cost intelligence leads to strategic portfolio management.
Bad Habit #2: Letting IT and Product Eat the Cost Overruns
When most of their budgets go to normal business operations, innovation leaders become company financiers. They’re used to taking on large fiscal responsibilities as simply the “cost of doing business,” and they do this even when budget overruns hit, and cloud costs spin out of control.
It’s easy to see why passive acceptance has become a natural habit.
Sprawling technologies and visibility challenges make tracing the source of overage fees a chore — not to mention a distraction from priorities like security and automation. Plus, vendor dashboards aren’t built to triangulate data in ways that pinpoint anomalies with a clear root cause. Additionally, a lack of billing and pricing standards can make investigations complicated.
The Solution: Passing the Buck to Sharpen Profitability Calculations
Cost allocation toolsets, including those found in FinOps solutions, can simplify cost visibility and empower CIOs and CPOs to “pass the buck.” This is the moment when many turn the tables on digital transformation failures. Cost assignments spread tech expenses more fairly across departments, lines of business, and innovation projects. Most importantly, they help calculate profitability with higher accuracy, understanding the all-in cost as well as who benefits from them.
For example, the cost of Generative AI is miscalculated when totals omit cloud infrastructure. Cloud infrastructure is the supporting foundation for GenAI platforms, making it easy to overlook these costs. By uncovering hidden expenses, taxes and other fees, cost allocations can expose how and where innovation may drive unrecognized technical debt.
When attribution is done right, executives can define tipping points between a go versus no-go decision, reeling in any hype by using data to do a look-back against the original business case. With true costs and large offloads, some can even open their budgets to make more aggressive investments in GenAI. After all, you can’t find funding if you don’t restructure your cost base.
Using FinOps to Overcome Challenges in Cost Allocations
Aligning tech investments and costs to business outcomes isn’t inherently easy, and FinOps helps solve that problem. It involves overcoming challenges in data observability, unifying a sea of siloed cost information, and correlation exercises all aimed at helping stakeholders know when their tech investments will appear as income. These tips can help:
- Integration and AI automation are essential in reducing the administrative work of data collection, compilation, and chargebacks.
- Corporate financial rules should guide tech cost allocation activities; CIOs, CPOs, and CFOs should work closely to drive one fluid motion across their organizations, giving IT visibility into the financial implications of cloud deployments.
- Reporting systems that generate custom data cuts, as well as General Ledger and Accounts Payable files streamline allocations, ensuring compliance with fiscal management practices.
- FinOps and IT expense management platforms offer built-in tools and financial analyst services, easing the burdens of do-it-yourself approaches.
Spearheading Successful Digital Innovation
In the end, FinOps has delivered a sound strategy for cloud services management and governing costs. But those who understand how to use its finer instruments can apply its principles more broadly to dodge digital innovation disasters. In leveraging FinOps cost allocation tools, executives can measure financial returns on all their technologies and manage their portfolios strategically – the same way CFOs manage their book of business. Moreover, they can connect the dots between GenAI investments and dividends to more accurately calculate the profitability of innovation and better communicate the business value of IT. When spearheading successful digital transformations, nothing matters more.