Do your new, and exciting, moves into Digital Business make money? Well of course they do, or you wouldn’t be doing them, but is it really that simple? Many first steps don’t seem to be making as much money as expected, and do you really feel in full financial control of this new business activity with all its new technology based components? At the heart of this is a simple fact; I have yet to meet, or even hear of, a CFO from a traditional Enterprise who could put together a really accurate spreadsheet for a Digital Business unit.
That’s quite a challenge, and I would like to hear that I am wrong, but why would an experienced CFO, be able to do this? It is an accepted fact that Digital Business is a giant game changer so why would the majority of the factors in the new Digital Business model spreadsheet be the same as the old business model? Sure, at a head line level there are all the common factors for any business, but lets dig down below starting with the question are you using the same basic spreadsheet as for the rest of the business as a starting point?
Probably, after all it has been built up over the years in increasing detail and accuracy to reflect your enterprise and its Business. However simple aspects like the apportionment of the overheads are quite likely to be wrong, does the new Digital Business really make use of the same elements as the older traditional business? Has the Finance Department carried out a realistic reappraisal, or is it a case of more revenue spreads the load and helps the whole business? These are all understandable issues and as the Digital Business grows the CFO and Finance department will get round to investigating them in line with normal management of costs.
Dig deeper and two key differences emerge; the first is that Digital Business models are usually based on Operational Expenditure, or OPEX, and the traditional business model is based on Capital Expenditure, or CAPEX; the second is that OPEX means buying in ‘Services’ to support a variable trading model, an entirely new business activity and set of costs.
The Board is full of enthusiasm for the shift from CAPEX to OPEX, in the IT department the shift in ownership of expensive IT assets is looking good, may be even the overheads are getting adjusted too. But the Sales and Marketing departments pressing ahead into Digital Business are into using OPEX based services in a far deeper and wider manner than the IT Department simply because this is what Digital Business is built upon. New Technologies used in a new and innovative manner to create a Business dependent on external suppliers of OPEX services. There is not too much of the old IT operating model here, nor of the old business model, and yet where is the corresponding change in the Financial management?
So back to my opening paragraph; Its very difficult for a CFO to itemize exactly what these new, usually technology based services are, together with correct benchmarks for budgeting. Now add the further complication of how you link the purchased services to the revenue producing activities to ensure accurate financial reporting with the ability to have genuine financial management. This is new, complex territory that requires the newly constructed Digital Business plan to be matched by an in depth technology review of functionality provisioning and linkages.
An Enterprise Board will have built a sophisticated set of Financial Controls for its existing business, but in its Digital Business most of the major operational factors are technology based, in a completely new and different set of costs!
The Technology Industry is already experiencing this, with two visible results, the obvious moves to introduce new products, no, not so much products, but ‘services’, and the headline grabbing rearrangement of their own businesses. The latter often makes more sense if viewed against this point of two different business models leading to two different financial, management and even shareholder returns. Thinking in this way can make it more interesting and instructive to look more closely at these changes.
But it’s the first point about changing what they are selling, and how they are delivering it, that really needs careful examination in the context of your own enterprise as these ‘services’ will be entering your business. The question is visibly and managed, or, invisibly and building up hidden distortions in financial management.
My colleagues at Constellation Research have done a great job of analyzing Oracle, Salesforce.com, et al as the ‘customer events’ season reaches a climax, and I suggest reading their reports on the technology suppliers your enterprise is using with the points of this blog in mind. In my own case I reported on Cisco InterCloud service being a potential game changer in how Business and Financial Management could be brought to use of external cloud services.