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Journal2010Win-Financial Management for IT Services

ITFMA Journal

Financial Management for IT Services

IBM Global Services

Financial Management ensures that the IT organization is able to account fully on the money spent on IT services, to attribute these costs to IT services delivered to customers, and to assist management decisions on IT investment by providing detailed business cases for changes to IT services.

The goal of IT Financial Management is to provide cost-effective stewardship of the IT assets and resources used in providing IT services. The goal is also:

  • • For internally (in-house) oriented IT service providers
    •    Monitoring of the usage of IT components and resources for supplying IT services with regard to cost efficiency
  • • For externally oriented IT service providers
    •    Recording of costs incurred, and details of how these relate to services performed for the customer
    •    Support management decisions about IT investment by means of detailed business cases.

Why Financial Management for IT Services? Because…

  • • You can provide the best service and nevertheless can go bankrupt
  • • There are minimal legal requirements for financial reporting
  • • Service providers should be business-oriented
  • • There is increasing economic pressure
  • • IT Financial Management...
    •    Supports the development of a solid investment strategy
    •    Enables definitions of performance objectives
    •    Enables the measurement of services performed
    •    Makes it easier to prioritize resource deployment, and with it, optimized resource planning
    •    Ensures solid, financially justified administration of the assets used in the organization
    •    Supports management in their daily decision-making in order to plan risk reduction
    •    Creates organizational prerequisites for performing cost-objective accounting
  • • Cost-objective accounting enables...
    •    Flexible determination of services and is the basis for the business design of IT services
    •    Determination of real IT service costs, enabling transparent, well-measured, content-related pricing
    •    Reporting for planning and controlling
    •    Reporting for financial accounting

IT Financial Management is comprised of these tasks:

  • • Budgeting - Ensures that business provides sufficient funds to run the IT services it requires
  • • Accounting - Provides management information on the cost of providing IT services supporting business needs
  • • Charging - Provides sound business method of balancing shape and quantity of IT services with needs and resources of the customers

To understand whether an IT organization is doing the best that it can and to demonstrate this to its customers, it has to both understand the true cost of providing a service and manage those costs professionally. To do this, it is usual to implement IT accounting and budgeting processes, and often to implement charging processes as well.

Budgeting is the process of predicting and controlling the spending of money within the organization, and consists of a periodic negotiation cycle to set budgets (usually annual) and the day-to-day monitoring of the current budgets. Budgeting enables an organization to:

  • • Predict the money required to run IT services for a given period
  • • Ensure that actual spending can be compared with predicted spending at any point
  • • Reduce the risk of overspending
  • • Ensure that revenues are available to cover predicted spending (where charging is in place)

Accounting is the set of activities that enable the IT organization to account fully for the way its money is spent. IT accounting enables an organization to:

  • • Account for the money spent in providing IT services
  • • Calculate the cost of providing IT services to both internal and external customers
  • • Perform cost-benefit or return-on-Investment analyses
  • • Identify the cost of changes

Charging has motivational aspects, considering the effects upon both the provider and the customer of the service. The objective is to optimize the behavior of both parties in achieving the organization's aims. Charging enables an organization to:

  • • Recover the costs of the IT services from the customers of the service
  • • Operate the IT organization as a business unit if required
  • • Achieve transparency for customers
  • • Influence user and customer behavior
    •    Achieve profit- Use market strength (invisible hand)
    •    Deliver effective services in agreed quality and quantity

For producing a cost model fpr the Accounting task, the suggested cost types are:

  • • Hardware costs (CPU, disk storage, LANs, peripherals…)
  • • Software costs (OS, applications, database, systems management…)
  • • People costs (payroll costs, company cars, relocation costs, expenses, overtime, consultancy)
  • • Accommodation costs (offices, storage, secure areas, utilities)
  • • External service costs (security, outsourced services,…)
  • • Transfer costs (goods and services that are sold from one part of an organization to another)

All costs for services can be grouped into the cost types listed above, however other types are possible; this is not a fixed rule. What is important is that all major cost elements in the current or proposed IT budget are identified and then attributed to the customers who "cause” them.

These are the major cost classifications:

  • Capital Costs are the purchase or major enhancement of fixed assets, for example computer equipment, building, and plant, often also referred to as "one-off” costs.
  • Operational Costs are those resulting from the day-to-day running of the IT Services organization, such as staff costs, hardware maintenance and electricity, and relate to repeating payments whose effects can be measured within a short timeframe, usually less than the 12-month financial year.
  • Direct Costs are those clearly attributable to a single customer, such as manufacturing systems used only by the Manufacturing division.
  • Indirect Costs (sometimes called overheads) are those incurred on behalf of all, or a number of, customers, such as the network or technical support department, which have to be apportioned to all, or a number of, customers in a fair manner.
  • Fixed Costs are those costs that do not vary even when resource usage varies. Examples of this would be a maintenance contract for a server or a corporate software licence (within agreed user limits).
  • Variable Costs are those that vary with some factor, such as usage or time.

Examples of these various costs are found in the cost of printing out a report:

  • • Fixed direct costs - Depreciation of the printer
  • • Fixed indirect costs - IT Management team, support team
  • • Variable direct costs - Paper consumed for printing
  • • Variable indirect costs - Ink cartridge cost and printing another report on the same printer

IT Financial Management has links to other processes, such as:

  • Service Level Management: Cost of meeting customer SLA requirements impacts shape and scope of services that are agreed. IT Finance manager cooperates with Service Level manager about the costs meeting business demands and charging policies influencing customer behavior. The more variations to service levels, the larger the scope of charging, but the larger the overheads of budgeting, IT accounting, and charging.
  • Capacity/Availability Management: Cost information can be used to estimate cost of desired capacity or availability.
  • Configuration Management: Financial management requires asset and cost information which can be provided through the CMDB.
  • Change Management: Influence of changes on cost.

The benefits of IT Financial Management include:

  • • IT accounting supports the IT Service Manager
  • • Statements about profitability of the individual IT services
  • • Essential decisions about IT services and the required investments
  • • Data for justifying IT expenditures
  • • Essential planning and budgeting
  • • Overview of costs, created by service failures, as a basis for expenditure justification in strategy planning
  • • Users can track costs of the services they have used

The risk or potential problem areas of IT Financial Management include:

  • • New discipline, so limited understanding of leading practice in cost modeling and charging mechanisms, leading to overly complex or ineffective systems
  • • IT accounting relies on planning information provided by other functions within and outside IT services management, and is sometimes difficult to obtain
  • • Combination of IT skills and accountancy skills is rare
  • • IS strategy and objectives are not clear, hence prediction of capacity requirement is not accurate
  • • Senior management may not realize benefits of IT accounting and charging
  • • Resentment of administrative overhead and workload
  • • Complex IT accounting and charging makes cost larger than value of information provided
  • • Monitoring tools providing resource usage are inaccurate or not cost-efficient

Among IT Financial Management best practices are:

  • • Clear differentiation between accounting and charging
  • • Connection with Availability Management, Capacity Management, Configuration Management, and Change Management
  • • Customer-specific charging
  • • Financing, benchmarks, and investments are very important


Copyright © 2010 by the IT Financial Management Association.

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