Benefiting from the IT Financial Management Process

Monday Feb 28th 2005 by Jan Vromant
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The IT Financial Management Process has been considered a 'back office' procedure. Now, with a focus on the bottom line, we need to learn how to capture our costs and implement Internal Billing or Charging.

In this post-dot.bomb age, common sense - with a focus on the bottom line - is returning to some boardrooms, and the "bean counters" are no longer banned from the offices of IT directors. More than ever, attention is being paid to the Financial Management process in the IT organization.

Drivers of this focus are the abundance of "red ink" caused by macro-economic circumstances and the improvement opportunities obtainable through implementation of the ITIL framework.

ITIL or the Information Technology Infrastructure Library (www.itil.co.uk) is a consistent and comprehensive documentation of best practices for IT Service Management. ITIL has been adopted by a host of large and small global companies, mostly in the UK, Canada, and the Netherlands.

According to ITIL, the Financial Management process in an IT organization consists of three main parts: Budgeting, Accounting, and Billing (or recognized as Charging or Internal Billing). All three aspects are nowadays becoming respectable (again), because of the benefits they bring in managing the IT organization.

Budgeting
As an IT management tool, budgeting is ignored or under-used. Budgeting provides a starting point for cost cutting, as it forces one to think about how to provide the same service with less money.

Budgeting in an IT environment is notoriously difficult, because while logic demands an IT budget follow the business budget, reality mandates a simultaneous budgeting process. An IT budget should be made after the goals for the business are set, after the budgets for all other supporting departments are set, and after it is known what the actual business needs are.

Based on the needs and goals of the business, the IT budget can be fairly straightforward. But due to lack of communication between the IT department and the business group, the IT budgeting process often gets hopelessly stranded with a few perfunctory directions.

Another reason IT budgeting can be difficult is when the Capacity Management process is incomplete or does not function properly. IT groups typically are organized in highly politicized functional silos, and planning for the needed capacity often is pure guesswork or - even worse - a result of carefully crafted political compromises.

Accounting
Accounting practices in many IT organizations can be chaotic and misunderstood. Changes in the IT department and lack of control over these changes provide headaches to most IT accounting people as most uncontrolled change creates chaos. In many cases, the corporate controller is happy to get any figure out of the IT department.

Reporting, in conjunction with Service Level Management, is non-existent in most companies and "fire fighting" considerations determine where the dollars go. IT people are notoriously good at coming up with highly technical excuses why they exceed their budgets.

In most organizations, IT personnel are "accounting-challenged." For example, most of them are unaware of (or don't care about) the differences between regular and capitalized expenses, or between leasing and buying equipment.

In a case involving a major ERP investment, I was surprised to encounter a few blank stares when I mentioned "sunk costs" (a past outlay or loss that cannot be altered by current or future actions); and "opportunity costs" (the difference between the return on one investment and the return on an alternative). Basic financial knowledge in the IT community is lacking.

Accounting
Accounting practices in many IT organizations can be chaotic and misunderstood. Changes in the IT department and lack of control over these changes provide headaches to most IT accounting people as most uncontrolled change creates chaos. In many cases, the corporate controller is happy to get any figure out of the IT department.

Reporting, in conjunction with Service Level Management, is non-existent in most companies and "fire fighting" considerations determine where the dollars go. IT people are notoriously good at coming up with highly technical excuses why they exceed their budgets.

In most organizations, IT personnel are "accounting-challenged." For example, most of them are unaware of (or don't care about) the differences between regular and capitalized expenses, or between leasing and buying equipment.

In a case involving a major ERP investment, I was surprised to encounter a few blank stares when I mentioned "sunk costs" (a past outlay or loss that cannot be altered by current or future actions); and "opportunity costs" (the difference between the return on one investment and the return on an alternative). Basic financial knowledge in the IT community is lacking.

Charging or Billing
Internal billing practices often are considered "funny money" and a burdensome bureaucratic control. As a result, the potential benefit of billing and thus influencing end-users' behavior often is ignored or unknown. Even in companies where sophisticated service level monitoring is being practiced, it is normal for the end-user to face a lack of transparency around charging practices. The end-user seldom has a clue what the service is actually costing or what his or her department is being charged for the use of any IT service.

A major oil company could not provide even a rough estimate of how much a particular ERP seat was costing in the "sandbox" environment where ERP specialists were practicing their skills. Any such expenses and other expenses related to Research & Development disappeared under a few major accounts and were flushed into the profit and loss statement.

What can you do to improve the Financial Management Process?
Although there is no such thing as a "one-size-fits-all" formula, some guidelines can be applied to improve all three areas of Financial Management and achieve a reduction in costs without reducing the quality of the IT service. It is important not to focus on any single one of these actions, but on the combination that will achieve the fastest and biggest "bang for the buck."

1. Assess the maturity of the Financial Management process
As with most processes or "how things are done" in an IT environment, the Financial Management process can be measured and assessed in terms of maturity. A simple and free maturity assessment - for all your IT processes - is available on the itSMF web site (www.itsmf.com - click on Best Practice).

Typical maturity assessment tools on the U.S. market provide a single maturity number for the Financial Management process. The better tools provide you with more detail and give multiple indicators relating to several aspects of your financial control (e.g. Asset Management, Project Performance, Bidding and Contracts, Cost Control, etc).

A comprehensive maturity assessment provides a good idea where you are now and the basis of a roadmap where you need to go.

2. Upgrade Configuration and Capacity Management processes
Take a hard look at the benefits of having properly functioning IT processes. Without reasonably functioning Configuration and Capacity Management processes, you might as well use darts or dice to determine an IT budget. Configuration Management deals with the pieces that make up your IT landscape (e.g. applications, network, servers) and how they interact, Capacity Management deals with planning your space. The reports coming from these two areas are crucial in ascertaining what you have (your present IT assets) and your future direction (your investment and operating budget).

3. Think 'Service' instead of 'Function'
Define your budgetary requirements and your accounting system according to the IT service that is being provided (e.g. e-mail, human resources system, remote access services). Historically, budgets are crafted around the needs of the functional groups (e.g. DBAs, Unix SysAdmins, mainframe) and turf wars can cause overlap and unused capacity.

The better you understand the budgets and costs for your IT services (in contrast to the functions), the better you can judge the figures and the desirability of those services. This approach also provides the added benefit of an appropriate comparison basis when outsourcing opportunities are evaluated.

4. Focus on meaningful metrics and practice extensive benchmarking
Typically, IT departments provide reports of a dazzling variety on a monthly or quarterly basis and only the "techies" understand the sometimes-obscure metrics. Take control of these reports and analyze them from the perspective of business management goals.

Throw out reporting requirements meaningful only to the IT department and concentrate on reports that reflect the progress made in a few clearly defined areas toward established goals (e.g. the achievement of predicted returns on project investments).

Look at industry analysts or internal sources to provide benchmarking information across industries, time periods, or subsidiaries to validate the soundness of your financial management. Find out the prices for outsourcing services. This can be a great help in managing your IT department, by comparing the outsourcers' prices to your own costs and budgets.

5. Invest in Activity-Based Management (ABM)
Take an ABM approach. Traditional cost systems allocate costs based on direct labor, material cost, and revenue or other simplistic methods. ABM, measures the cost of the value employees add to customers. ABM focuses on what your employees actually do and includes specific work activities, tools and processes, and levels of responsibilities.

This approach will allow you (a) to identify the real drivers of IT spending, (b) to identify savings opportunities, (c) to make budget changes explainable and controllable, and (d) to enable billing or charging.

The result of ABM is a better understanding of the impact of IT services on the profitability of the business, and hence more accountability and responsibility. Another advantage in certain cases is that ABM nicely fits in Balanced Scorecard or similar initiatives.

6. Acquire financial knowledge in your IT department
It is not easy to break down the traditional barrier between IT and the "bean counters." One reason is it is hard to find people with a dual background in IT and finance or accounting. Creative solutions are called for.

One possibility to enhance the knowledge about Financial Management in your IT department is to educate your IT people. ITIL Foundation classes, particularly focusing on Financial Management, are a good start for such training. Another is to physically move accounting people to the IT floor. The interaction and the mutual learning and appreciation can be beneficial to both sides.

These improvements and the permanent monitoring of the financial results of your IT department will help increase the quality perception and ensure the satisfaction of business end-users - and make the "bean counters" feel welcome again within the IT organization.

Want to discuss this topic and/or controlling costs further? Visit our IT Service Management Forum .

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