In this space in 2014, I often spoke of the need for information technology owners to expand their role beyond being service providers and into becoming full strategic partners in business and value creation.
In one sense, this is an obvious move. As a former regulator, to me it is clear that regulatory moves such as the Own Risk and Solvency Assessment (ORSA), other suggested enterprise risk management (ERM) enhancements, and required corporate governance enhancements represent a recognition by regulators that immediate, relevant, and actionable intelligence is absolutely necessary for the proper functioning of a financial services company in today’s digital environment.
At its last meeting, the NAIC dug even deeper into the weeds, aligning with federal regulators and leading state regulators such as those in New York by creating an executive task force focused on cyber security. Whether the focus is on a specific concern such as cyber security, or more broadly on managing risk throughout an enterprise, the commonality is that an expanded use of information technology is necessary.
But that was then, this is now. By now, just about every Chief Information Officer (CIO) is already aware of the greatly increased demands dumped on her/his plate, demands unfortunately not always accompanied by the resources required to support meeting them. While others in the C-suite may recognize the necessity of meeting these regulatory requirements, they may not always be convinced of the added value of the information that could now be accessible to the organization.
That is where an alliance with the Chief Financial Officer (CFO) may prove fruitful. My colleagues at the Deloitte CFO Program, working with OpenMatters, recently issued a white paper. This is the first of a four-parter and the latest in a series of CFO Insights, and is called The value shift: Why CFOs should lead the charge in the Digital Age. It may help CIOs appeal to the enlightened self-interest of CFOs, converting the gatekeepers into fellow innovators.
OpenMatters, with input from Deloitte & Touche LLP, examined 40 years of data from the Standard & Poor’s 500 and found that “investors assign higher valuations to organizations that embrace emerging technologies (big data, social media, the Internet of Things, mobile, and so on) to create digital networks.”
They found that companies fit predominantly into one of four types of business models regardless of their industry or function. They were either asset builders, service providers, technology creators, or network creators. As in much of life, they found a digital divide in business, with technology creators and network orchestrators being above the divide, and asset builders and service providers below it.
Technology creators and network orchestrators were the ones that most embraced emerging technologies, and in return received valuations two to four times higher than the other two business models. They also outperform the other two business models on other metrics, including return on capital employed, return on assets, and earnings before interest and taxes margin in both the short- and long-term.
The good news is that no company is trapped in its current business model, but tapping into the value shift required to make a successful transition may require numerous changes, beginning with migrating a company’s mental model. For details, I would suggest downloading the free whitepaper, but there is one point that may be of particular interest to both finance leaders and technology leaders.
My colleagues found that financial data alone is no longer sufficient to convey the value that the new digital business models create. They say a successful transition demands that business performance management be rethought.
Defining “big data” as including “information gathered on everything from customer transactions to inventory levels, often in real time and in quantities previously unimaginable,” they call for it to be “fused with financial data to constantly measure, monitor and report the results from these new and often unmeasured and unreported sources of value (customer engagement on websites, for example).” They suggested CFOs need to find ways to mine the information these new technologies offer.
Smart CFOs, faced with this realization, will turn to the people who they know will know how to do this — CIOs.
Smart CIOs won’t wait for the CFO to ask.
Howard Mills is Director and Chief Advisor for the Insurance Industry Group at Deloitte LLP and a former Superintendent of the NY Insurance Department. He may be reached at HowMills@Deloitte.com.
