Why CIOs Should Start Thinking Like CFOs

Over the last two years, inflation has created headwinds particularly in the Cost of Goods Sold line item of the P&L Statement. To offset inflation, companies have raised prices. But with corporate pricing power fading in 2024, a cost-cutting trend has begun, and companies are looking inward to bolster the bottom line.

In this environment, the CIO is in a unique position to deliver savings to the CFO to improve margins. However, getting there requires a shift in mindset from a ‘caretaker’ of systems to a ‘cultivator’ of value.

Imagine if a CIO saw his or her systems portfolio in the same way a property management company views its assets. Each property offers a range of cash flows and asset appreciation that the company wants to maximize. You then invest in these properties accordingly.

A CIO can adopt the same perspective and actively seek to increase the value of each system under management. The true value of a software solution or system is not just what it can do today, but also what it can do over its useful life. This reflects the financial concept of valuing assets based on the net present value of their future cash flows.

So, let’s examine how a CIO can practically increase the value of a portfolio. There are three main approaches that vary in the level of effort and return:

• Focus on FinOps. Optimize spend for immediate savings and reduce the expense growth rate
• Refactor systems. Optimize systems to consume less resources and reduce management efforts
• Embed a cost aware culture within IT. Make cost a nonfunctional requirement in the design, build and operate phases

Focus on FinOps

Over the last 10 years, there has been a significant migration to the public cloud and increasing adoption of the private cloud. The prevailing wisdom has favored “lift and shift” migrations since there were immediate benefits to be found in the cloud in terms of speed and new capabilities. However, many organizations were surprised to find that costs increased after their migration, and there has been some repatriation of workloads as a result. If these workloads had been optimized or modernized, their cost would have been reduced.

Unfortunately, companies regularly suffer from the “cobbler’s children have no shoes” syndrome. Amid a surge of new requests, they can't allocate time to look backwards. A CIO who adopts a CFO mindset, however, can see unrealized value in the inefficiencies of the initial lift-and-shift approach, and can deploy resources to capture that value.

The adoption of FinOps — an ongoing process of continuous analysis, reporting and optimization that can drive increased savings over time — can help enhance a system’s value. For instance, it is common to discover that migrated workloads were not tagged appropriately to allow for a true cost analysis. Tagging is the first step in FinOps to accurately show back or charge back the cost of systems to the business. This enables an informed discussion about approaches to minimize cost and improve value. Companies typically see a 25-30% improvement from these efforts alone.

It is also possible that migrations did not consider dependencies, resulting in unintended latencies between systems. These are typically addressed through over-provisioning, thereby artificially increasing the cost basis of running them in the cloud. This, along with other issues, often leads to the second approach; refactoring to use fewer resources and reduce overall management effort.

Refactor systems

It is always easier to change the structure of a system than its function. Refactoring systems demands more upfront effort, but it can deliver immense dividends as enhancements accumulate. By transitioning from merely maintaining the status quo to proactively improving your systems, you get off the stationary and repetitive hamster wheel and gain the momentum of a flywheel where your efforts drive accelerating value.

With foundational FinOps now in place, you will realize quick wins. But further optimization exists in the systems architecture itself. As mentioned above, your initial migration may not have considered dependencies between systems, resulting in latency that was masked by increasing allocated resources. Investigating these areas can lead to quick code changes that enable additional efficiency gains.

Visibility is important here. You need a mature observability function to analyze the consumption patterns of your systems and identify excess resource usage when compared to systems of similar breadth and scope. Then, consider establishing a tiger team to hunt and eradicate technical debt that contributes to the inefficiency of particular workloads.

These efforts can help you avoid the time-consuming and costly repatriation of systems that you would otherwise undertake to reduce costs. It is important to note that as you refactor, you improve the manageability of a system, and it pays dividends from an operational perspective. Everything discussed so far affects the efficiency of existing systems, but the final approach embeds this philosophy into the organization and future efforts.

Embed cost culture

Werner Vogels, CTO of Amazon Web Services (AWS), established the concept of Frugal Architecture and its seven tenets. The first of those is to make cost a non-functional requirement that is as important as security, reliability, and scalability. He notes that, in the early move to the cloud, speed was paramount. Cost took a back seat.

Well, it is time to bring cost back to the forefront. This does not simply mean that you calculate the project run-rate costs in advance, but rather that your architecture — and even your choice of software language — take resource consumption into account.

Werner also believes you should build in switches and dials to allow a cost-aware architecture to adjust resource consumption. Then, he says, put it in the hands of the business.

With newfound visibility and the ability to adjust, IT can now sit with business stakeholders and make collaborative, cost-optimization decisions while considering the pros and cons of any adjustment to the switches and controls. If you increased the latency on your e-commerce site by 3%, would customers even notice? You can test it and find out!

The cost of building a software application is dwarfed by its lifetime operational costs. You can flatten the cost curve by prioritizing smart consumption. This is comparable to our personal adoption of LED lights in our homes and other steps we take to lower energy usage. Since cloud resource consumption is a good indicator of your environmental sustainability, your efforts here deliver benefits in this area as well.

Sustain value creation

In closing, it is critical to understand that frugality is not about being cheap; it is about maximizing value. As businesses enter a new era of cost cutting, those who focus solely on static cost reduction will lose ground to those who viewed it from the perspective of driving greater value.

A CIO who adopts the mindset of a CFO can transform systems from cost centers into strategic assets that drive shareholder value. It is a mindset shift that can inspire growth and spark innovation.

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