In 2021, chief financial officers (CFOs) are expected to spend a record amount on information technology, driven largely by predictions that vaccines will curb the COVID-19 pandemic and fuel a strong economic recovery.

According to Gartner's forecast, global IT spending will surge 6.2% this year to $3.92 trillion, as CFOs accelerate pre-pandemic digital transformation plans by at least five years.

"Because of pent-up demand and the return on investment that people can and need to get now, you're going to see a significant increase in spending," said Omar Choucair, CFO of Trintech, a financial software company.

Jim Tyson, CFO Dive / Gartner data

CFOs need to ensure they don't waste too much of this record spending. Flexera noted in a survey that at least 30% of a typical IT budget is wasted, and the survey ranked digital transformation as the top item in this year's technology budget.

Limiting waste is one of several challenges CFOs face as they seek to emerge from the pandemic with a competitive edge in digital technology, according to CFOs and business technology experts. CFOs also need to align technology spending with business strategy, trim the number of vendors hired since the COVID-19 outbreak, and improve how they measure the costs of digital tools—to name just a few key developments.

Digital transformation can touch every corner of a business. Companies can move operations from on-premises computers to external cloud servers to increase flexibility, speed up software upgrades, and reduce costs.

Companies can also use analytics and artificial intelligence (AI) to boost customer satisfaction or mine near-real-time insights from vast amounts of data. Alternatively, they can streamline accounting and finance processes with robotic process automation (RPA) software, improving efficiency, reducing spending, and freeing employees for higher-value tasks.

Demand has surged since the final months of 2020 for a range of technologies, including analytics, cloud computing, supply chain management, and enterprise resource planning (ERP) software, according to Anthony Coletta, CFO of SAP North America.

High performance and digital applications go hand in hand. According to McKinsey data, the top 10% of digitally performing companies can earn 80% of the digital revenue in their industry.

However, failure is also common. McKinsey's survey of more than 1,700 C-suite executives found that a typical digital transformation has a 45% probability of falling short of profit expectations, while the probability of exceeding profit expectations is only one in ten.

CFOs and business technology experts say finance executives can improve the success rate of digital transformations by avoiding some common missteps:

1. Underestimating digital transformation

While CFOs should not shy away from their responsibility to scrutinize budget requests, they need to be prepared to support bold, innovative initiatives with adequate capital.

"You need to take an aggressive stance," Coletta said, noting that early in the pandemic, some brick-and-mortar retailers benefited by investing heavily in e-commerce, delivery, and curbside pickup operations to adapt to social distancing rules.

"If cost savings become the primary factor, you might lose your competitive edge and lose the first-mover advantage," he said.

2. Letting vendor contracts proliferate

Choucair said many companies adopting a software-as-a-service (SaaS) strategy have hired redundant or non-value-adding vendors.

"If you don't look at this holistically, you could end up with 30, 40, or 50 vendors," he said. CFOs should then ask: "'Wait, are they all working together? Do we need all of them? Do we need only 15 instead of 25?'"

CFOs often discover vendor overabundance months after decentralizing technology spending authority to lower levels and reclassifying spending from capital expenditures to operating expenses.

For example, they may have shifted from on-premises computing with hardware purchases every few years (capital expenditure) to cloud computing purchased on demand from vendors like Amazon or Microsoft (operating expense).

By giving frontline employees more spending freedom, the new budgeting approach often sparks innovation. Internal software developers gain the flexibility to deploy new ideas to the cloud or test new vendor products.

However, spending can exceed limits, and remote work during the pandemic has further hindered oversight of spending, said James Denena, CFO of Snow Software.

"With more employees working remotely, it's especially difficult to monitor SaaS applications and cloud services that are often procured by business units without IT involvement," Denena said in an email response to CFO Dive. "This can lead to expensive annual contracts lacking governance."

3. Failing at change management

Top-down technology overhauls can affect all company stakeholders—from employees and customers to investors and board members. Finance executives need a plan to inform and unite each group, according to CFOs and business technology experts.

"Soft skills, communication, engagement are not in the CFO's DNA, but they are extremely important," said Christine Laurens, CFO of Kearney. "I've seen it time and time again—underestimating change management is one of the biggest mistakes CFOs can make when leading digital transformation."

Before moving forward, CFOs should consider mapping out the different needs and potential concerns of all stakeholder groups and identifying those who may support or resist the digital transformation, she said. Change management "has its own workstream, and I think without a plan, it's a big risk."

Employees need training in new skills and roles and an understanding of how digital technology advances the company's long-term goals. C-suite executives and boards need regular updates on benchmarks, KPIs, and budgets. Vendors need detailed information about technology changes, such as new coding and shifts in company expectations.

"CFOs underinvest in change management and adoption communication—these are critical factors in preparing the organization for a technology leap," said Chip Cohron, national leader of BDO's digital transformation services.

Best practices

Finance executives are more likely to succeed in technology adoption by following some best practices, such as ensuring spending aligns with the company's long-term business strategy, according to CFOs and business technology experts.

"You need to define a clear roadmap," Coletta said, with the company's strategic goals as the destination.

When considering whether to replace legacy computing with digital technology, finance executives need to choose metrics that reflect the different cost structures of old and new technologies, CFOs and business technology experts said.

"What I really want to do internally—and we encourage clients to do this too—is think about total cost of ownership (TCO)," Laurens said, measuring the direct and indirect costs over the technology's lifecycle.

A TCO analysis measures various costs, including support, maintenance, training, security, insurance, and tangible expenses such as required floor space.

The calculation should be comprehensive. For example, when determining cloud computing costs, finance executives should include the expense of synchronizing upgrades of on-premises and vendor software with software in the cloud.

CFOs considering moving computing from internal systems to the cloud can gain useful comparative insights from a TCO analysis. This comparison is especially complex because moving to the cloud may require reclassifying capital expenditures as operating expenses, leading to different accounting and tax outcomes.

CFOs should also consider focusing digital transformation efforts on their own operations first, CFOs and business technology experts said. This might mean building a full suite of ERP tools, or on a smaller scale, installing digital accounting or quote-to-cash systems and expanding from there.

CFOs are well-positioned to lead digital transformation. In the face of COVID-19, companies rely on CFOs to cut costs, tightly manage cash and investments, and provide forecasts that underpin business strategy.

"The entire enterprise is looking to the CFO to navigate the pandemic with agility," Choucair said.

Many finance executives are already leading digital transformation. Since the COVID-19 outbreak, CFOs have become "catalysts for digital strategy" and the company's "digital stewards," according to Accenture. A survey by Accenture found that 72% of CFOs now have final say over technology strategy.

Some CFOs are steering companies in new directions, according to Peter Ulrich, leader of digital strategy and transactions at EY-Parthenon.

Ulrich said the CFO of a producer of steel, aluminum, and other metals pushed the company to embrace sustainability and cut costs by using blockchain to track the use of recycled metal.

Through blockchain, the company aims to use more recycled metal and shrink its carbon footprint, he said. The CFO took the lead in "boldly defining the company's next digital agenda."