The CIO’s rise and fall: more CEOs are asking their chief information officers to report to the CFO. Can it come back to hurt their companies?

The CIO’s rise and fall: more CEOs are asking their chief information officers to report to the CFO. Can it come back to hurt their companies?

Jeffrey Rothfeder

It was a big deal for Blue Rhino CEO Billy Prim when Wal-Mart named his company’s global sourcing division as the retail chain’s International Supplier of the Year in 2002. Prim had just completed a grueling, multiyear overhaul of Blue Rhino, a maker of outdoor cooking grills and a distributor of propane gas cylinders–“bringing technology to a low-tech business,” as he put it.

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The effort began in 1999, when Prim, working closely with his chief information officer, Bob Travatello, decided to install a just-in-time infrastructure. With this system, delivery drivers, using handheld devices, could key in shipment information at any one of the company’s 28,000 retail outlets, including Home Depot, Lowe’s, Circle K and Wal-Mart. The data would flow to corporate offices where bills could be cut the same day and inventory replenished. The goals? To speed up payments, increase sales by anticipating manufacturing needs and boost earnings.

“I felt I needed to be intimately involved in this concept, so I had the CIO report to me almost every day,” says Prim, a cofounder of Blue Rhino, based in Winston-Salem, N.C. “I knew how I wanted the technology to leverage our business, and I knew that I wanted to take the systems used by great distribution companies, such as FedEx and UPS, and incorporate those ideas into our businesses.”

In part because Blue Rhino had joined the ranks of the techno-savvy, the company’s sales in fiscal 2003 reached nearly $260 million, an increase of 86 percent over two years. Operating income, $24.4 million for the year, shot up more than 500 percent in that period.

Yet with everything going so well, and just as the new system was completed, Prim decided to suddenly drop the CIO from his management orbit and have Travatello report to Chief Financial Officer Marc Castaneda instead. “Now, it’s more about maximizing tech and measuring our return on investment,” says Prim. “That’s not my job. That’s what the CFO is supposed to handle.”

That’s the sentiment being expressed by more and more CEOs. As a result, CIOs are increasingly being bumped down the executive ladder and placed on a direct line to the CFO. Although statistics on the trend are limited, they demonstrate it nonetheless. According to a 2003 survey by CIO Magazine, 22 percent of CIOs call the CFO boss, compared with just 11 percent the year before. Talk to financial managers and the trend is much more pronounced: A 2003 survey of CFOs by the trade group Financial Executives International found that in companies with under $1 billion in revenue, 66 percent of CIOs report to the CFO. When revenue is between $1 billion and $5 billion, that figure drops a bit to 45 percent, with only 35 percent reporting to the CEO, and the remaining 20 percent answering to the COO.

The primary explanation for this shift is not particularly flattering to CEOs. By and large, they’ve done a poor job of managing the CIO and want to rid themselves of a messy situation. Blue Rhino’s experience notwithstanding, the 1990s are rife with major technology project boondoggles overseen by CEOs who were supervising IT chiefs who missed deadlines, whose salaries were too costly and who never fulfilled expectations. Among those were big multimillion-dollar network installations, whether enterprise resource planning (ERP), customer relationship management or other attempts to wire the corporation, and many of them fell flat. (See related story, page 48.)

The problem for many CEOs is that their training in marketing, sales and business strategy failed to prepare them for guiding massive technology efforts–and CIOs are notorious for talking in a confusing geek-speak that makes chief executive eyes glaze over.

Putting Innovation at Risk?

Consequently, many CEOs are giving their CFOs the task of translating strategy into technology while guarding the corporate coffers from negative returns on investment. “Financial and technological concerns are no longer separate entities,” says Nori Goto, CEO of Atlanta-based Lanier Worldwide, which makes document processing systems. “At Lanier, our internal structure reflects this. The CIO reports to the CFO, instead of directly to me. This fosters discussion and discovery for a host of issues where technology and financial performance intersect. We spend less time educating each other and more time collaborating on solutions.”

There is a serious danger in this arrangement, however. Technological innovation–a competitive weapon and a critical component of increased productivity–could be compromised by transferring the IT function from should-be visionary CEOs to fastidious bean counters. When every CIO-promoted project has to go through a rigorous financial exercise to calculate potential ROI and designate specific real short-term cost savings, a breakthrough technology with an uncertain, yet potentially real and lasting, strategic payoff could be overlooked.

“The CFO, because he manages complexity in spreadsheets and ratio analysis, is usually more technically fluent and that can mean he’s also comfortable around computer systems, but he’s not fluent with emerging, razor-edge kinds of IT,” says Francie Dalton, president of Columbia, Md.-based consultants Dalton Alliances, which specializes in leadership development and performance measurement. “CEOs need to become more knowledgeable and confident with technology, because it carries a significant impact on the bottom line. If he dumps the CIO on the CFO, he’s also potentially dumping innovation.”

Lanier illustrates the complexity of this issue. In the mid-1990s, when the company’s CIO was still reporting to the chief executive, the decision was made to install an ERP system to replace Lanier’s legacy network, which was felt to be out of date and vulnerable to Y2K snafus. The project got under way, but then lingered after it became more expensive than anticipated. By early 1999, it had become clear that it wouldn’t be completed by the Y2K deadline or anytime soon thereafter. So it was shelved as IT resources were redeployed to tear apart the legacy network and add the two digits to avoid a Y2K meltdown. Soon after, Lanier was acquired by Ricoh and Goto was named CEO. As part of a reorganization, Goto put the CFO in charge of a business services group that included the CIO and the IT department.

The move seemed to reinvigorate Lanier’s approach to technology. After a long period during which the CIO had been operating independently, CFO Steve McBrayer has forced discipline on the IT group by requiring each project to be justified by two criteria: how well it serves customers and its cost benefits to the overall business. This road map has produced, for instance, an initiative that involved arming every Lanier service technician with a laptop for downloading software patches directly into the company’s equipment at customer sites. It’s a relatively small project compared with a massive ERP installation–which Lanier still doesn’t have–but it and similar efforts have earned Lanier key customer satisfaction awards from J.D. Power and Associates.

Even with these gains, Lanier still is in a frugal phase of its existence, discouraging large technology initiatives for budget reasons. In an industry with deep-pocketed competitors like Canon, Xerox and Hewlett-Packard, all of whom are making sizeable investments in technology, a penurious attitude about IT could eventually come back to haunt Lanier. “When you’re in a turnaround situation, your focus is more narrow than wide and the CIO and CFO have to be in lockstep,” says Lanier CIO Ann Franks, who describes reporting to the CFO as a necessary evolution. “Everything you do has to be aligned to the business or focused on ROI, because you have limited capital,” she adds.

Despite concerns about the trend, the CIO/CFO relationship is actually growing stronger, cemented by the spate of new regulations mandating that companies implement controls to safeguard against manipulation, guarantee that quarterly results are accurate, and publicly disclose material information promptly. To comply with these rules, most of them generated by the Sarbanes-Oxley Act, many companies are installing software to monitor financial activities closely and embed safeguards that prevent anyone from changing corporate data without a long line of approvals. In fact, U.S. companies will spend upwards of $1.3 billion on Sarbanes-Oxley related technology in 2004, according to AMR Research.

Creating Better Relationships

Oversight of these Sarbox projects is almost solely being handled by CFOs, who along with the CEO must sign off on financial statements and on the efficacy of internal controls. So even in companies where the CIO still reports to the chief executive, the CFO is leading, often with little direction from the CEO, perhaps the company’s most important technology effort, what some have called a repeat of Y2K, only this time without a final deadline.

This increasingly hands-off stance on the part of CEOs troubles some management experts. “Besides financial controls. Sarbanes-Oxley technology has the potential to deliver significant returns throughout the organization, because by automating financial activities, better data and new ways to share it and analyze it could be produced,” says Phil Johnson, president of Orlando, Fla.-based technology consultants Alinenan. “A CEO shouldn’t neglect his responsibility to make sure that the company gains all possible tangible and intangible benefits from every technology initiative.”

Perhaps the best way for CEOs to patch up their threadbare relationships with CIOs is to give up on turning the CIO into a strategic department head. Instead, CEOs should come up with the broad outlines of what they want to accomplish–say, for instance, improve productivity as measured by hourly output in a specific business unit by a certain percentage within 12 months–and ask the CIO to provide a plan detailing the technology that can help achieve this and what it will cost.

That approach fits well with the CIO’s engineering focus and doesn’t require the technology chief to do anything but meet certain predetermined benchmarks, which the CEO could easily monitor. If the project slips, the CEO could decide whether to increase resources or shut down the effort, based on its importance to the organization and the CEO’s plan for the next few years, says Francie Dalton. And, she adds, once the project is completed, it’s okay to have others temporarily supervise segments of it that fit under their areas of management.

That’s the approach that Billy Prim is using. Although the CFO is managing the CIO now at Blue Rhino, that would likely change if a new critical technology initiative were undertaken. It’s in the job description of the CEO, says Prim. “These are the company’s largest capital expenditures, and I wouldn’t be comfortable if I didn’t understand everything about it or wasn’t making the final decision about whether to spend it.”

COPYRIGHT 2004 Chief Executive Publishing

COPYRIGHT 2004 Gale Group