Lease-Accounting Compliance Calls For Increased Visibility Into Assets And Contracts

Judy Cubiss

Businesses run on cash and borrowed money. The better the cash flow, the greater the flexibility to take advantage of a business opportunity or a shift in market conditions. By embracing this universal truth, CFOs have realized the value of leasing to keep cash on hand for investments that would likely yield profits that are higher than their interest cost. The concept may sound simple, but the administration and accounting of these contract and financial obligations just became more involved.

Last year, the Financial Accounting Standards Board (FASB) issued new guidance for lease accounting, with new reporting requirements starting on December 15, 2018, for ASC 842 and January 1, 2019, for IFRS 16. As the mandatory effective dates loom, approximately 60% of CFOs are keenly aware of the changes, according to David Furgason, managing director at Deloitte Consulting LLP, during the Webcast “Leases on the Balance Sheet: Compliance with the New Standard,” hosted by Institute of Management Accountants (IMA). However, Furgason also noted some inconsistency among finance leaders: “Over 80% have yet to assess whether their financial technology and underlying architecture are up to the task of complying with the standards. And this same percentage of CFOs do not have the budget available to address any gaps.”

Furgason was joined by Imran Mia, head of the Center of Excellence for Finance at Nakisa, and Pete Graham, director of Finance Solutions at SAP, to examine the implications and timing of IFRS 16 and ASC 842 and strategies for adopting them.

Lease accounting standards call for simplification and optimization

Considering that less than two years are left until businesses must establish compliance, CFOs have a heavy load to lift in a short time. “IFRS 16 and ASC 842 will undoubtedly involve new processes, staff training, technology upgrades, more detailed reporting capabilities, and technical accounting assessment,” warned Mia.

In short, lessees will be required to recognize operational and capital leases on their balance sheet, a significant change from current accounting practices that account only for capital leases. The standards align underlying principles of the new lessor model with those in FASB’s latest changes in recognizing revenue and eliminate the bright-line tests mandated by U.S. GAAP for determining lease classification.

The key to preparing for this transition is clear visibility into assets and contracts. Graham advised, “The first step is to get a better understanding of the lease portfolio and which major category each investment falls under – beyond operations and capital finance.”

All long-term leases must be individually accounted for and evaluated to determine their impact on the balance sheet, paying particular attention to details such as the asset’s fair value, estimated useful life, and incremental borrowing rate. Agreements may contain multiple renewal options, escalation terms, and termination clauses that may be hidden in the fine print. Also, underlying lease and non-lease components may be embedded in service contracts and tangible real estate and property.

Gathering lease information will get 80% of this work done, which can be complex and cost-intensive because data formats may vary. The remaining 20% command an assessment of the current financial landscape and implementation of a seamlessly integrated lease-accounting solution that stores data and enables accurate calculations of risk and exposure.

“Ultimately, the finance department is responsible for communicating business policies for compliance and the identification of all leases,” suggested Furgason. “All relevant business process owners should be brought together to define a global model for the end-to-end lease accounting solution. Then IT can locate all lease source systems, financial systems of record, and integration points for the chosen technology. While the lease-accounting technology implementation may be six months in duration, from planning through implementation, such an exercise can take upwards of 12 months to complete.”

While capturing and consolidating lease agreements into a central system creates the foundation, full compliance with IFRS 16 and ASC 842 demands attention to specific aspects of finance operations and business processes, including:

  • Integrated business processes: Consideration must be given to the end-to-end process including the general ledger, asset accounting, procurement, accounts payable, vendor management, and, in some cases, equipment maintenance.
  • Application of judgment and estimation: Since nearly every lease will be recognized on the balance sheet, it is important to distinguish between leases and services and your customers’ right to direct the use of a particular asset.
  • Income and property taxes: Potential federal and state income tax can be situationally applied to finance and operating leases, requiring the involvement of the business’ tax department.
  • Covenants: Careful examination of the lease liabilities outside of traditional debt may be necessary – depending on how various debt agreements are defined, limited, and governed by GAAP covenants.
  • Internal controls and business process environment: Because leasing will become more relevant to financial statements, auditors and regulators may apply additional scrutiny in the design and effectiveness of associated controls under Sarbanes-Oxley. Businesses should examine internal controls for capturing, calculating, and accounting for leases and issue organizational communication, conduct employee training, and establish change management as needed.
  • Disclosure reporting requirements: Existing reporting functions must include quantitative attributes such as lease costs, cash flows, maturity, lease terms and commitments, and discount rates, as well as qualitative considerations including general descriptions, terms, and conditions of the lease.

The time to enforce overdue changes in lease management is now

Pervasive loss of efficiency, capital funding, and transparency in lease management are emerging as a warning shot for the immediate need for change. Mia observed, “Businesses are paying a significant amount in evergreen fees for past-term leases and lost assets. Leases are traditionally managed across a single business unit with spreadsheets, disparate applications, or a file residing on someone’s laptop. Meanwhile, the combination of disconnected processes and field-triggered leases are adding stress to the ability to conform to accounting standards.” This environment results in not only unnecessary monetary loss, but also suboptimal leases, poor buy decisions, and accumulated small-ticket-item costs.

Although the accounting itself may not be a difficult task thanks to the technology that’s available, IFRS 16 and ASC 842 place a bright spotlight on how lease data is managed. “With known and unknown agreements spread across regions, business and operating units, and subsidiaries, it can take a herculean effort to capture and aggregate every item and become adept at deriving insight on exposure. It doesn’t matter if the business is a large conglomerate or a small startup; everyone is impacted the same way,” said Graham. “Additionally, experience has shown that it is critical for customers to ensure that they are using the latest technology solutions, running any available diagnostics and related analysis, and implementing all suggested product updates in a timely manner.”

Watch the on-demand replay of the Webinar “Leases on the Balance Sheet: Compliance with the New Standard,” co-presented by Nakisa, Deloitte, and SAP to learn how to gain visibility into your lease exposure. (Registration required.)

Follow SAP Finance online: @SAPFinance (Twitter)  | LinkedIn | FacebookYouTube

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Judy Cubiss

About Judy Cubiss

Judy is director of content marketing for Finance at SAP. She has worked in the software industry for over 20 years in a variety of roles, including consulting, product management, solution management, and content marketing in both Europe and the United States.

Ready or Not, Here It (Rev Rec Standard) Comes

David McCann

The first financial statements required to present revenue calculated under the new revenue recognition standard will begin appearing in April.

That doesn’t mean, though, that all companies are “ready” to do so. That’s according to someone who is decidedly in the know: Christoph Hütten, chief accounting officer for the mammoth, Germany-based business software firm SAP.

Hütten played a key role in the development of the new international revenue recognition standard, IFRS 15 (which is nearly identical to the new ASC 606 under U.S. GAAP).

He served from 2009 to 2014 on the IFRS Advisory Council for the International Accounting Standards Board. During that time period, IASB issued two exposure drafts of the new standard and published the final rule. For the past four years, Hütten has been part of the Joint Transition Resource Group for Revenue Recognition, formed by the U.S. and international standard setters after the standard’s 2014 publication to answer questions and clarify uncertainties around its application.

Asked to characterize companies’ overall readiness to effectively deal with the standard, Hütten laughs. “I’ve had this conversation a few times before,” he says.

Answering the question is a matter of how one defines readiness, he notes. “Is a company ready to produce a revenue number, through manual processes and using thousands of Excel spreadsheets, that is materially correct for one fiscal quarter? Or is the company ready only when it can say it has a stable, sustainable process with much less manual effort?” [Editor’s note: SAP sells software that includes functionality for automating revenue-recognition processes.]

Most companies, Hütten adds, are ready to produce a revenue number for the first quarter. But a majority of those are using what he describes as “interim processes.”

Lots of companies have gone for a two-step approach, he says, setting new accounting policies first and then later applying automation to improve and stabilize processes.

Misjudging the complexity?

In the software industry, a majority of vendors, including SAP, today derive most or all of their revenue from customer contracts. Such contracts are what the new revenue recognition standards apply to. However, even in the software field, readiness for the new standard is a bit spotty, according to Hütten.

“Most [software] companies I’ve talked to are finished analyzing their most typical deal structures,” he says. “But we all know there’s not a high level of deal standardization in the software industry. There are lots of scenarios that don’t happen frequently, and I think companies will take a ‘cross that bridge when we come to it’ approach.”

Still, software firms do tend to be ahead of other companies when it comes to dealing with the revenue recognition standard.

“I see a lot of [non-software] companies underestimating it,” says Hütten. “They don’t see a big issue for revenue on the face of their income statement. But at some point, somebody will be looking at the very detailed disclosures that are required and realize they’re not prepared to make them.”

For that reason, Hütten advises companies not to judge the new standard’s importance by its impact on the revenue line in the income statement.

Also, he counsels, even companies that take the two-step approach described above should not delay implementing automation longer than necessary. Complying with the standard requires complex accounting with regard to, for example, the allocation of fees among the various deliverables stipulated in customer contracts, he notes.

“I fully understand climbing the accounting hurdle first,” Hütten says. “But I can only tell those companies not to think, ‘oh, we did OK manually for the first  quarter, so that will be sufficient for further quarters.’ That’s risky, especially if you have complicated customer contracts.”

Errors in financial statements could, of course, lead to companies having to file restated financials, which normally don’t sit well with investors. In the United States, if errors are egregious enough a company could be forced to admit a material weakness in controls over its revenue processes, under Section 404 of the Sarbanes-Oxley Act.

This article originally appeared on CFO.com and is republished by permission.

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David McCann

About David McCann

David McCann is deputy editor at CFO magazine and CFO.com.

Why Tech-Savvy CFOs Are Teaming Up With CIOs To Propel Efficiency

Richard McLean

Part 3 in the 4-part Finance and IT Collaboration series

Automation is already reshaping the future of work in the finance function, and the opportunity to boost performance is fueling the trend. A report from McKinsey & Company states that currently available technologies can fully automate 42% of finance activities and mostly automate another 19% using software robotics and advanced cognitive-automation technologies, like machine-learning algorithms and natural-language tools.

Tech-savvy CFOs who are considering automation to propel a new wave of efficiency and performance will be well-positioned to thrive. The finance organization at SAP has been undergoing a transformation for the past several years, enabled by the guidance of our IT team and SAP technology. We often use our own organizational processes as an example to others of how a best-run business can thrive in the digital era. Here are some of the top ways we’re using technology to get ahead.

Automation at SAP

Automated workflow is a big part of what we do in finance. We have a lot of processes that are governed by delegations of authority, which means that different people review and approve tasks in certain orders. When I first joined SAP, we all sat behind our computers working a GAF system for commercial deal reviews that was neither flexible nor mobile-enabled. Now we have applications that work on our phones and tablets, notification emails when we own a task, and transparency well in advance into what approvals are coming our way. The whole process is so much more efficient and transparent and gives us the agility to plan ahead and work on the move. It has made a huge difference for our team’s productivity.

Centralized analytics

To a large extent, we have centralized our analytical capabilities in an Enterprise Analytics Group. We now have access to standard reports based on SAP analytics technology and the SAP Cloud Platform that bring together key metrics and data and help ensure consistency in the way we steer the business. This allows our people to make decisions faster across the company. Rather than ask IT for support or do it ourselves, the reports are readily available so we can immediately use the information to better manage the business. That’s another big productivity gain for us.

Machine learning in the shared-services organization

We are looking at ways to use machine learning to further streamline our processes. For example, IT is currently running cash-matching trials that we’ll build into our shared services environment. That’s going to be the next horizon of automation becoming mainstream in the coming years.

We’re looking at how to match our bank receipts to customer invoices. This typically requires an intensive manual effort simply because of the unstructured nature of the data involved in the process. It becomes more complicated when there are partial payments, multiple invoices are issued simultaneously, different currencies are involved, and so on.

We’ve taken a process that was very manual, applied machine intelligence to it, and now have over 65% success rate on the matches. This automation alleviates a good deal of the workload for simpler tasks, enabling the people in finance to better use their time.

Travel and expense management

Everyone knows the traditional way to process travel and entertainment expenses. People make copies of receipts, scan them, package them up, and submit them for reimbursement. The whole process is time-consuming and manual and, quite frankly, pretty tedious for everyone involved. To automate travel and expense management, we implemented solutions from SAP Concur and coupled them with some policy changes in the finance organization. By automating each phase of travel – such as preapprovals, booking travel, reimbursement, analysis, and expense reporting – the whole process is much more streamlined and efficient.

For example, Concur Expense automatically facilitates compliance by linking to our preferred hotels and airlines, including online travel booking sites. The solution populates expense claims using electronic receipts from those suppliers without requiring employees to capture an image of a receipt or enter expenses manually.

With rigorous T&E processes that are easy to use, our employees are more likely to plan ahead and comply with policy – and in so doing, realize the macro- and micro-level benefits that can have a positive impact on business performance.

Dedication to ongoing improvement

These projects are not the end goal for us. They’re just a starting point to explore what new technology can do for us across the company. Every routine task that we can automate gives us the ability to scale our operations and keep pace with the growing demands of our business – and that has a significant impact on performance.

Read the next post in this series on April 30 to see how finance is pairing up with IT to set an example of how to be a purpose-led organization.

Read why finance leaders are pioneers in using technology in the infographic “Next-Gen Finance Solutions.”

And read 3 Reasons CFOs & Finance Professionals Should Attend SAPPHIRE NOW to learn about what’s happening at this year’s SAPPHIRE NOW and ASUG Conference – panels, keynotes, discussions, presentations, and endless ways to connect to people and gain new ideas for streamlining processes. Join SAP’s finance team and partners June 5–7, in Orlando, Florida.

Follow SAP Finance online: @SAPFinance (Twitter) | LinkedIn | Facebook | YouTube

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Richard McLean

About Richard McLean

Richard McLean, regional CFO for SAP Asia Pacific Japan, oversees all key finance and administrative functions for field and regional headquarters, supporting more than 16,000 employees. He has more than 20 years of experience in senior finance roles with leading global companies across a range of industries, including financial services, investment banking, automotive, and IT. He joined SAP in 2008.

Hack the CIO

By Thomas Saueressig, Timo Elliott, Sam Yen, and Bennett Voyles

For nerds, the weeks right before finals are a Cinderella moment. Suddenly they’re stars. Pocket protectors are fashionable; people find their jokes a whole lot funnier; Dungeons & Dragons sounds cool.

Many CIOs are enjoying this kind of moment now, as companies everywhere face the business equivalent of a final exam for a vital class they have managed to mostly avoid so far: digital transformation.

But as always, there is a limit to nerdy magic. No matter how helpful CIOs try to be, their classmates still won’t pass if they don’t learn the material. With IT increasingly central to every business—from the customer experience to the offering to the business model itself—we all need to start thinking like CIOs.

Pass the digital transformation exam, and you probably have a bright future ahead. A recent SAP-Oxford Economics study of 3,100 organizations in a variety of industries across 17 countries found that the companies that have taken the lead in digital transformation earn higher profits and revenues and have more competitive differentiation than their peers. They also expect 23% more revenue growth from their digital initiatives over the next two years—an estimate 2.5 to 4 times larger than the average company’s.

But the market is grading on a steep curve: this same SAP-Oxford study found that only 3% have completed some degree of digital transformation across their organization. Other surveys also suggest that most companies won’t be graduating anytime soon: in one recent survey of 450 heads of digital transformation for enterprises in the United States, United Kingdom, France, and Germany by technology company Couchbase, 90% agreed that most digital projects fail to meet expectations and deliver only incremental improvements. Worse: over half (54%) believe that organizations that don’t succeed with their transformation project will fail or be absorbed by a savvier competitor within four years.

Companies that are making the grade understand that unlike earlier technical advances, digital transformation doesn’t just support the business, it’s the future of the business. That’s why 60% of digital leading companies have entrusted the leadership of their transformation to their CIO, and that’s why experts say businesspeople must do more than have a vague understanding of the technology. They must also master a way of thinking and looking at business challenges that is unfamiliar to most people outside the IT department.

In other words, if you don’t think like a CIO yet, now is a very good time to learn.

However, given that you probably don’t have a spare 15 years to learn what your CIO knows, we asked the experts what makes CIO thinking distinctive. Here are the top eight mind hacks.

1. Think in Systems

A lot of businesspeople are used to seeing their organization as a series of loosely joined silos. But in the world of digital business, everything is part of a larger system.

CIOs have known for a long time that smart processes win. Whether they were installing enterprise resource planning systems or working with the business to imagine the customer’s journey, they always had to think in holistic ways that crossed traditional departmental, functional, and operational boundaries.

Unlike other business leaders, CIOs spend their careers looking across systems. Why did our supply chain go down? How can we support this new business initiative beyond a single department or function? Now supported by end-to-end process methodologies such as design thinking, good CIOs have developed a way of looking at the company that can lead to radical simplifications that can reduce cost and improve performance at the same time.

They are also used to thinking beyond temporal boundaries. “This idea that the power of technology doubles every two years means that as you’re planning ahead you can’t think in terms of a linear process, you have to think in terms of huge jumps,” says Jay Ferro, CIO of TransPerfect, a New York–based global translation firm.

No wonder the SAP-Oxford transformation study found that one of the values transformational leaders shared was a tendency to look beyond silos and view the digital transformation as a company-wide initiative.

This will come in handy because in digital transformation, not only do business processes evolve but the company’s entire value proposition changes, says Jeanne Ross, principal research scientist at the Center for Information Systems Research at the Massachusetts Institute of Technology (MIT). “It either already has or it’s going to, because digital technologies make things possible that weren’t possible before,” she explains.

2. Work in Diverse Teams

When it comes to large projects, CIOs have always needed input from a diverse collection of businesspeople to be successful. The best have developed ways to convince and cajole reluctant participants to come to the table. They seek out technology enthusiasts in the business and those who are respected by their peers to help build passion and commitment among the halfhearted.

Digital transformation amps up the urgency for building diverse teams even further. “A small, focused group simply won’t have the same breadth of perspective as a team that includes a salesperson and a service person and a development person, as well as an IT person,” says Ross.

At Lenovo, the global technology giant, many of these cross-functional teams become so used to working together that it’s hard to tell where each member originally belonged: “You can’t tell who is business or IT; you can’t tell who is product, IT, or design,” says the company’s CIO, Arthur Hu.

One interesting corollary of this trend toward broader teamwork is that talent is a priority among digital leaders: they spend more on training their employees and partners than ordinary companies, as well as on hiring the people they need, according to the SAP-Oxford Economics survey. They’re also already being rewarded for their faith in their teams: 71% of leaders say that their successful digital transformation has made it easier for them to attract and retain talent, and 64% say that their employees are now more engaged than they were before the transformation.

3. Become a Consultant

Good CIOs have long needed to be internal consultants to the business. Ever since technology moved out of the glasshouse and onto employees’ desks, CIOs have not only needed a deep understanding of the goals of a given project but also to make sure that the project didn’t stray from those goals, even after the businesspeople who had ordered the project went back to their day jobs. “Businesspeople didn’t really need to get into the details of what IT was really doing,” recalls Ferro. “They just had a set of demands and said, ‘Hey, IT, go do that.’”

Now software has become so integral to the business that nobody can afford to walk away. Businesspeople must join the ranks of the IT consultants.

But that was then. Now software has become so integral to the business that nobody can afford to walk away. Businesspeople must join the ranks of the IT consultants. “If you’re building a house, you don’t just disappear for six months and come back and go, ‘Oh, it looks pretty good,’” says Ferro. “You’re on that work site constantly and all of a sudden you’re looking at something, going, ‘Well, that looked really good on the blueprint, not sure it makes sense in reality. Let’s move that over six feet.’ Or, ‘I don’t know if I like that anymore.’ It’s really not much different in application development or for IT or technical projects, where on paper it looked really good and three weeks in, in that second sprint, you’re going, ‘Oh, now that I look at it, that’s really stupid.’”

4. Learn Horizontal Leadership

CIOs have always needed the ability to educate and influence other leaders that they don’t directly control. For major IT projects to be successful, they need other leaders to contribute budget, time, and resources from multiple areas of the business.

It’s a kind of horizontal leadership that will become critical for businesspeople to acquire in digital transformation. “The leadership role becomes one much more of coaching others across the organization—encouraging people to be creative, making sure everybody knows how to use data well,” Ross says.

In this team-based environment, having all the answers becomes less important. “It used to be that the best business executives and leaders had the best answers. Today that is no longer the case,” observes Gary Cokins, a technology consultant who focuses on analytics-based performance management. “Increasingly, it’s the executives and leaders who ask the best questions. There is too much volatility and uncertainty for them to rely on their intuition or past experiences.”

Many experts expect this trend to continue as the confluence of automation and data keeps chipping away at the organizational pyramid. “Hierarchical, command-and-control leadership will become obsolete,” says Edward Hess, professor of business administration and Batten executive-in-residence at the Darden School of Business at the University of Virginia. “Flatter, distributive leadership via teams will become the dominant structure.”

5. Understand Process Design

When business processes were simpler, IT could analyze the process and improve it without input from the business. But today many processes are triggered on the fly by the customer, making a seamless customer experience more difficult to build without the benefit of a larger, multifunctional team. In a highly digitalized organization like Amazon, which releases thousands of new software programs each year, IT can no longer do it all.

While businesspeople aren’t expected to start coding, their involvement in process design is crucial. One of the techniques that many organizations have adopted to help IT and businesspeople visualize business processes together is design thinking (for more on design thinking techniques, see “A Cult of Creation“).

Customers aren’t the only ones who benefit from better processes. Among the 100 companies the SAP-Oxford Economics researchers have identified as digital leaders, two-thirds say that they are making their employees’ lives easier by eliminating process roadblocks that interfere with their ability to do their jobs. Ninety percent of leaders surveyed expect to see value from these projects in the next two years alone.

6. Learn to Keep Learning

The ability to learn and keep learning has been a part of IT from the start. Since the first mainframes in the 1950s, technologists have understood that they need to keep reinventing themselves and their skills to adapt to the changes around them.

Now that’s starting to become part of other job descriptions too. Many companies are investing in teaching their employees new digital skills. One South American auto products company, for example, has created a custom-education institute that trained 20,000 employees and partner-employees in 2016. In addition to training current staff, many leading digital companies are also hiring new employees and creating new roles, such as a chief robotics officer, to support their digital transformation efforts.

Nicolas van Zeebroeck, professor of information systems and digital business innovation at the Solvay Brussels School of Economics and Management at the Free University of Brussels, says that he expects the ability to learn quickly will remain crucial. “If I had to think of one critical skill,” he explains, “I would have to say it’s the ability to learn and keep learning—the ability to challenge the status quo and question what you take for granted.”

7. Fail Smarter

Traditionally, CIOs tended to be good at thinking through tests that would allow the company to experiment with new technology without risking the entire network.

This is another unfamiliar skill that smart managers are trying to pick up. “There’s a lot of trial and error in the best companies right now,” notes MIT’s Ross. But there’s a catch, she adds. “Most companies aren’t designed for trial and error—they’re trying to avoid an error,” she says.

To learn how to do it better, take your lead from IT, where many people have already learned to work in small, innovative teams that use agile development principles, advises Ross.

For example, business managers must learn how to think in terms of a minimum viable product: build a simple version of what you have in mind, test it, and if it works start building. You don’t build the whole thing at once anymore.… It’s really important to build things incrementally,” Ross says.

Flexibility and the ability to capitalize on accidental discoveries during experimentation are more important than having a concrete project plan, says Ross. At Spotify, the music service, and CarMax, the used-car retailer, change is driven not from the center but from small teams that have developed something new. “The thing you have to get comfortable with is not having the formalized plan that we would have traditionally relied on, because as soon as you insist on that, you limit your ability to keep learning,” Ross warns.

8. Understand the True Cost—and Speed—of Data

Gut instincts have never had much to do with being a CIO; now they should have less to do with being an ordinary manager as well, as data becomes more important.

As part of that calculation, businesspeople must have the ability to analyze the value of the data that they seek. “You’ll need to apply a pinch of knowledge salt to your data,” advises Solvay’s van Zeebroeck. “What really matters is the ability not just to tap into data but to see what is behind the data. Is it a fair representation? Is it impartial?”

Increasingly, businesspeople will need to do their analysis in real time, just as CIOs have always had to manage live systems and processes. Moving toward real-time reports and away from paper-based decisions increases accuracy and effectiveness—and leaves less time for long meetings and PowerPoint presentations (let us all rejoice).

Not Every CIO Is Ready

Of course, not all CIOs are ready for these changes. Just as high school has a lot of false positives—genius nerds who turn out to be merely nearsighted—so there are many CIOs who aren’t good role models for transformation.

Success as a CIO these days requires more than delivering near-perfect uptime, says Lenovo’s Hu. You need to be able to understand the business as well. Some CIOs simply don’t have all the business skills that are needed to succeed in the transformation. Others lack the internal clout: a 2016 KPMG study found that only 34% of CIOs report directly to the CEO.

This lack of a strategic perspective is holding back digital transformation at many organizations. They approach digital transformation as a cool, one-off project: we’re going to put this new mobile app in place and we’re done. But that’s not a systematic approach; it’s an island of innovation that doesn’t join up with the other islands of innovation. In the longer term, this kind of development creates more problems than it fixes.

Such organizations are not building in the capacity for change; they’re trying to get away with just doing it once rather than thinking about how they’re going to use digitalization as a means to constantly experiment and become a better company over the long term.

As a result, in some companies, the most interesting tech developments are happening despite IT, not because of it. “There’s an alarming digital divide within many companies. Marketers are developing nimble software to give customers an engaging, personalized experience, while IT departments remain focused on the legacy infrastructure. The front and back ends aren’t working together, resulting in appealing web sites and apps that don’t quite deliver,” writes George Colony, founder, chairman, and CEO of Forrester Research, in the MIT Sloan Management Review.

Thanks to cloud computing and easier development tools, many departments are developing on their own, without IT’s support. These days, anybody with a credit card can do it.

Traditionally, IT departments looked askance at these kinds of do-it-yourself shadow IT programs, but that’s changing. Ferro, for one, says that it’s better to look at those teams not as rogue groups but as people who are trying to help. “It’s less about ‘Hey, something’s escaped,’ and more about ‘No, we just actually grew our capacity and grew our ability to innovate,’” he explains.

“I don’t like the term ‘shadow IT,’” agrees Lenovo’s Hu. “I think it’s an artifact of a very traditional CIO team. If you think of it as shadow IT, you’re out of step with reality,” he says.

The reality today is that a company needs both a strong IT department and strong digital capacities outside its IT department. If the relationship is good, the CIO and IT become valuable allies in helping businesspeople add digital capabilities without disrupting or duplicating existing IT infrastructure.

If a company already has strong digital capacities, it should be able to move forward quickly, according to Ross. But many companies are still playing catch-up and aren’t even ready to begin transforming, as the SAP-Oxford Economics survey shows.

For enterprises where business and IT are unable to get their collective act together, Ross predicts that the next few years will be rough. “I think these companies ought to panic,” she says. D!


About the Authors

Thomas Saueressig is Chief Information Officer at SAP.

Timo Elliott is an Innovation Evangelist at SAP.

Sam Yen is Chief Design Officer at SAP and Managing Director of SAP Labs.

Bennett Voyles is a Berlin-based business writer.

Read more thought provoking articles in the latest issue of the Digitalist Magazine, Executive Quarterly.
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Cloud Computing: Separating Myth From Reality

Misa Rawlins and Krishnakant Dave

Across industries, many enterprise leaders believe and understand that cloud computing is here to stay. Globally, public cloud services market revenue is projected to reach US$411 billion by 2020, compared with $260 billion in 2017, according to research firm Gartner, Inc. Cloud technology in all its forms—software, platform, or infrastructure as a service—is rapidly becoming essential to the needs of business today. With cloud computing, organizations can simplify IT, save costs, scale rapidly, drive standardization and user adoption, and start getting ahead of tomorrow’s needs when it comes to customer engagement, the supply chain, the workforce, a simplified finance function, and more.

Despite the short- and long-term advantages, some executives remain uncertain about the next steps or have lingering questions about the benefits of moving to the cloud. For many leaders, separating the cloud myths from the facts can prove daunting. Start here, with these insights that can help you bust big myths about the cloud and start moving confidently toward a cloud-enabled transformation of your organization.

Myth No. 1: Moving to the cloud is too costly. “Costly” is a relative term. The cloud can be costly – but costs should be weighed against benefit and return once requirements and migration plans are in place. Rapidly evolving business demands, for example, can dramatically alter cloud-related requirements. Meanwhile, new technologies are dramatically redefining the art of the possible with the cloud. Because migrating to the cloud is not a true “plug-and-play” proposition, and many enterprise leaders underestimate what a migration or implementation involves, some organizations can be surprised by the costs of a cloud transformation. Without a clear understanding of the potential benefits—without a clear business case for moving to the cloud—the focus on costs can overshadow the return on investment. Knowing the value that cloud solutions can bring—not just the costs—can help manage expectations.

Myth No. 2: The benefits of the cloud aren’t substantial enough. As vendors adopt a “cloud-first” stance for many solutions and product updates, organizations that move to the cloud may have a competitive advantage—no matter the size of the enterprise. Cloud solutions continue to offer abundant and increasing functionality. And with the help of an end-to-end solution provider, you can configure cloud solutions to the specific needs of your industry and your business. For larger organizations, rapidly deployable cloud solutions can help support growth or the unique needs of certain business units, such as new acquisitions or foreign subsidiaries, for example. For smaller organizations, the cloud can help you position your organization to tap new opportunities and tame growth challenges.

Myth No. 3: Cloud is too risky. All digital technologies and all business models come with inherent risk. In a hyperconnected world, no system is immune from cyber attacks, insider threats, data leakage, or related risks. No transformation project is a guaranteed success. Market changes, new competition, regulatory issues, and other factors can require you to change your cloud strategy overnight.

Because the risks are real, take advantage of resources and capabilities that can help reduce risk and ensure that your technology investments align tightly with clear business objectives. The maturity of the software goes a long way toward mitigating risk with cloud projects. You can add an extra layer of capabilities such as managed cloud services to provide active, hands-on oversight of cloud applications and infrastructure—helping you to avoid service interruptions and address issues proactively.

Myth No. 4: Cloud computing is still an immature technology. Like other evolving technologies, cloud is advancing every day. Those who wait for the next generation of cloud offerings may find themselves missing out on tangible benefits as competitors leverage cloud technology to sharpen their edge. Across industries, leading organizations are not waiting. Many view cloud technology as evolving but necessary, and they are leveraging it effectively today. Some, for example, are tightly integrating cloud software solutions to streamline supply chain processes, boost information transparency, and improve decision-making across the board—all the while tapping the cloud benefits of cost savings and scalability. Others are confidently turning to infrastructure solutions delivered and running solutions in a private or hybrid cloud. Still others are turning to cloud platform solutions to extend the power of existing applications, build modern analytics platforms, or support new Internet of Things business models. Turning the cloud to your advantage may depend less on the maturity of the technology and more on the power of your imagination.

Myth No. 5: Moving to the cloud will be easy. Cloud technology can help organizations streamline and simplify their IT landscapes and their business processes, reducing needs around capital expenses and infrastructure while helping to save costs. But migrating to the cloud requires more than simply plugging in technology. It requires an ability to address a host of considerations—data migration, the business-specific capabilities of solutions, change management, governance, systems integration, security, and more.

A cloud transformation is more than a plug-and-play project or a traditional system implementation. It requires progressive thinking and an ability to align technology with your business needs and processes— for today and for the future. Migrating to the cloud is a journey. Moving forward with the cloud will require a vision of your “to be” state—your destination—as well as a strategy for getting you there.

To learn more, and to find out what IDC thinks about the future of the cloud, please read this study that presents a strategic blueprint for enterprises on their digital transformation journey.

For more information on how to simplify innovation with cloud technology, learn more about SAP Cloud Platform.

Ready to reimagine the potential of the cloud? Contact us to get the conversation started.

Contact Krishnakant Dave at kdave@deloitte.com and follow him on Twitter: @kkdave

Contact Misa Rawlins at mrawlins@deloitte.com and follow her on Twitter: @misa_rawlins

www.deloitte.com/SAP

SAP@deloitte.com

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This article originally appeared on Deloitte.com and is republished by permission.

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Misa Rawlins

About Misa Rawlins

As a senior manager and consultant in Deloitte’s SAP practice, Misa Rawlins enjoys helping her clients not only to figure out how to solve their current business problems, but also to envision how a modern cloud platform can transform their organizations moving ahead. Within the practice, she has specifically chosen to take a leadership role around the sales and delivery of SAP S/4HANA Cloud because she considers it the wave of the future. She has made it her mission to deeply understand this technology to better advise clients on what moving to a cloud infrastructure really means.

Krishnakant Dave

About Krishnakant Dave

As a principal in Deloitte’s global SAP practice, KK Dave is a consulting leader for Deloitte’s largest clients; part of the U.S. SAP leadership team where he spearheads Deloitte's cloud offerings; and leader of global go-to-market efforts in the wholesale distribution and manufacturing sector. In these roles, he assists clients in their business transformation journeys using the absolute latest SAP toolset, which presently comprises SAP S/4HANA, SAP Cloud Platform, and SAP S/4HANA Cloud, among other technologies.