IT Strategy: Account for IT

David Rae

I’d like to start off this month’s column by posing a challenge. First, list
all of your computing equipment, what’s on it, where it is, how much it cost
and, perhaps most importantly, what it’s worth. Now try to do the same for your
organisation’s technology equipment.

Myself, I have a desktop computer somewhere near York (a long story), three
PDA devices in various stages of disrepair (another long story), a prehistoric
laptop, an even more prehistoric Macintosh and two mobile phones. But I have
little idea what these technology assets are worth – and the information
contained on them has now expanded well beyond my control.

As finance directors, being aware of your organisation’s IT equipment, and
what’s on it, is crucial. While it may be the responsibility of the chief
information officer, or IT director, to understand the minutiae of your
organisation’s technology, ensuring you maintain a broad, and accurate, bird’s
eye view is crucial – and for more than one reason.

Lisa Hammond, chief executive officer and founder of Centrix, an IT
consultancy which boasts BMW, Vodafone, PricewaterhouseCoopers and Shell as
clients, illustrates the importance of a company’s IT assets to both the bottom
line and compliance.

Run-of-the-mill technology expenditure on items such as back-end servers
accounts for more than two-thirds of the average IT budget, she says, and with
IT spend often accounting for between 3% and 5% of revenues, this is a
substantial amount of cash. Performing a thorough audit of your company’s
technology can unlock vast amounts of spare computing power, which has hitherto
gone untapped.

Of course, this is little more than a cost issue – recognising that you need
to be aware of the assets your company has before investing in others is not
rocket science. But it seems that, where technology is concerned, traditional
accounting procedures seem to be forgotten.

How, one might ask, can a company accurately account for technology assets on
their balance sheets if they have little idea of what those technology assets
are? Many larger businesses will capitalise their IT and software development
spend, but how many truly know what the value of them are? I’d bet that few know
what they have, let alone what it’s worth. And if this is the case, how can it
possibly be written down with any degree of accuracy? The end result of this is
that on top of the general budget and cost issues, finance directors now have a
compliance issue to boot.

The compliance issue is well illustrated by a conversation I had some time
ago. The story went that a large organisation was asked by the Financial
Services Authority to list how many servers it owned, what was on them and where
they were. The beleaguered company came back with the answer of somewhere
between 20,000 and 40,000 servers.

Quite apart from the fact that this seemingly wild guess would value the
company’s expenditure on a large part of its IT hardware with no greater degree
of accuracy than being somewhere between £30m and £60m; there was a more
important issue at stake. Being the type of organisation it was, the information
on the servers could, potentially, be extremely sensitive. And, somewhat
predictably, the fact that controls over that data had lapsed upset the FSA.
Naturally, the FSA insisted on a thorough technology audit.

I’ve no doubt this company isn’t alone. The sheer volume of computing
equipment, software and data has reached biblical proportions. Keeping track of
what’s where is getting harder by the day. A simple measure of this is
highlighted by Hammond when she says that for every 5,000 full-time employees in
a business, there will be more than £1m worth of unauthorised IT assets.

The maddeningly intangible characteristics of IT and software development
makes them extremely difficult to maintain control over and account for. As a
result, there is always going to be a degree of guesswork when it comes to
booking significant investments in IT.

Under IFRS, development costs for internal software must be capitalised and
amortised over the software’s estimated useful life, while under UK GAAP they
were simply expensed as incurred. In HSBC’s 2005 accounts, for example, the bank
said that the changes amounted to a £25m reduction in expenses for the year to
31 December 2004. This is obviously a step forward and finance directors not
currently operating under the rigours of IFRS would do well to adopt this
practice. But it’s still only a start.

Technology, by its very nature, is a difficult thing to understand. But
getting to the bottom of the value it holds to your organisation is key – to get
there, you must understand what assets you have and where they are.

Hammond refers to it as IT asset management – the realisation that
information is a valuable asset in itself. Looking after that information and
making sure that it’s properly represented on your balance sheet is the real
challenge for companies today.