IT Financial Management: The Business of IT

This chapter is from the book

Business of IT, The: How to Improve Service and Lower Costs

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This chapter is from the book

This chapter is from the book 

Business of IT, The: How to Improve Service and Lower Costs

Learn More Buy

Develop a Roadmap for Improving IT Financial Management Practices

One of the biggest challenges to improving an organization's IT financial management process is identifying a starting point. Before your organization invests significant resources or time in developing new tools, we have identified a process to identify your current IT financial management maturity level. An IT organization, with support where possible from the operational or business units, should conduct an initial assessment to determine the current maturity level of IT financial management practices and then establish a target and timeline for improvement.

Determining the Maturity of Your IT Financial Management Practices

To improve IT financial management, an organization must first identify the current level of maturity of its IT financial management practices against the IT financial management maturity model. This process, however, is not linear. Your organization may have the budgeting process of a cost center, but the accounting and charging processes of an organization that views IT as a profit center. To help you identify this level, you should assess yourself against three questions, summarized in Table 4-1. After you answer these questions, you should review the common financial management practices, benefits, and evidence relating to each stage.

Table 4-1. List of Three Questions to Determine your Organization's Maturity Model

The Reactive Organization: IT as an Unpredictable Expense

The reactive IT financial management organization has the least sophisticated IT financial management maturity. It suffers significant costs from the lack of these practices and reactively responds to financial decisions.

• Financial management activities: The reactive IT financial management organization has limited, if any, formal IT accounting, charging, and budgeting activities. The organization spends IT resources with limited operational or financial planning. The organization also lacks IT accounting to determine whether the IT budget is spent to achieve intended service levels.
• Impact on Cost and Service: The lack of financial management creates significant costs, such as unpredictable IT expenditures that raise the cost of providing services. The lack of a structured IT budgeting results in unplanned IT expenditures that do not achieve desired service levels. The lack of an effective accounting process might cause resources to be spent on IT projects with lower ROI than targeted by your organization. For example, in purchasing a server, the organization does not consider its wider use and whether the equipment could be used to support other parts of the organization. There are also operational costs, such as wasting time or using it ineffectively to "fight fires" or develop workaround solutions as the organization tries to secure funding for needed equipment, software, or other IT resources. The reactive IT finance organization often incurs cost overruns that make service unpredictable. For example, the development of new applications might seem to always run over budget and are delivered late to the customer. Business units are often at odds with the IT department due to unclear or inaccurate charging for IT services. The annual budget process likely seems rushed and out of sync with the larger organization's budget process.

The Cost Center: IT as an Expense

The cost center views IT as a cost recovery organization. The annual goal of a cost recovery organization is to exactly match operating costs to resources received through budget allocations and fees charged. In government, cost recovery organizations are often working capital funds:

• Financial management practices: The cost center only occasionally works with a central budget office or finance department on IT spending, maximize investments, or forecast demand. The cost center's IT budgeting is based on a break-even goal, with projected budgets for current and future years often based on the budgets of prior years and actual spending. However, a risk with developing current and future budgets based on the prior years' budget is that the organization assumes that the prior year's IT spending is appropriate based on current operational priorities. For example, a provider of email services purchased an expansion of its storage capabilities every other year. This expansion is included into its budget and charging rates. Little thought is given to maximizing this investment and whether virtualization of existing storage resources could save money. The cost center often uses a basic chargeback model that begins to link the IT budget with accounting costs and charges to internal customers, such as business units, or external customers. A chargeback model is a financial model developed to determine how to charge users of IT products and services for these services.
• Impact on Cost and Service: The cost center experiences fewer unpredictable IT expenditures than the reactive organization. As a result, its IT organization is more likely to recover all its costs. However, IT resources are not maximized and targeted to the highest value services. For example, because the chargeback rates are often on a flat fee or IT tax, it does not accurately reflect the utilization of key resources. As a result, underutilized IT assets may be perpetuated and demand cannot be forecasted.

The Profit Center: IT as a Positive ROI

All organizations have limited resources to achieve their objectives. Resources must be utilized in a manner that generates a positive return for their use or investment. As an IT organization matures its financial management practices on the IT financial management maturity model, the IT organization is better able to generate a positive ROI:

• Financial management practices: The IT profit center uses actual accounting data to value its services. It uses this accurate data to develop clear rates in its charging process and uses these rates to model demand. It combines these rates with accurate usage information to help the customer meet its goals for IT services. The profit center also combines its IT budgeting process with its business case, portfolio management, and service investment analysis to generate a positive ROI, as measured by NPV, on its IT investments

• Impact on Cost and Services: The organization provides its customers with a clear value for its services. The value of a given IT service is defined for the customer and recovered through an effective charging process. Effective accounting provides the organization with a clear understanding of the cost of specific IT services. IT budgeting allows the IT department to integrate with the larger organization and ensure that its resources are allocated in the most effective manner.

  In contrast with the cost center that only occasionally works with a budget or finance department, the profit center's financial management practices reflects a basic level of integration between IT operations and the finance teams. Costs might reflect rough total cost of ownership (TCO) estimates, although portions of these costs will be estimates and assumptions. For example, the organization might not be able to attribute power consumption of specific applications and might still provide estimated consumption levels.

The Business Partner: IT Contributes to Overall Strategy

The business partner is the most effective, optimized IT organization and viewed as a trusted business partner. A trusted IT business partner contributes to the organization's overall strategy and mission:

• Financial management: IT resources contribute to overall organizational strategy. Business cases determines the NPV for potential expenditures. Effective investment analysis determines that potential IT investments with either a negative NPV or NPV below a target minimum level established by the organization will be rejected, protecting the financial goals for the organization. The IT accounting reflects a high level of detail to provide the organization with a complete measure of IT costs related to each service. Also in this phase, an organization charges IT costs to its business units. These charges are based on total costs and actual utilization. These cost estimates are transparent, exact, and provided to the business unit on a periodic basis. The ability of an IT organization to provide customers transparent IT costs is a critical success factor in establishing trust with the IT provider.
• Impact on Cost and Service: An organization's IT services see a wide range of benefits from optimized IT financial practices. The managers and staff will spend less time responding to crises and requests from the operational and business units and instead allocate a predictable amount of time to these efforts, translating into more predictable service levels. The organization also achieves a range of financial benefits, including lower costs. For example, the organization is able to achieve a higher ROI on its IT investments, and a greater portion of its IT budget is devoted to high value services, as demonstrated by service investment analysis. The organization also maintains a focus on IT costs by understanding the true cost of provisioning a given service. Organizations with optimized practices carefully plan and measure IT expenditures because operations can accurately forecast needs in capacity and the associated expenses. The organization knows the specific costs for each service because the costs are often linked to the IT service catalog and the service catalog management process outlined in Chapter 2. As a result, the pricing for service level agreements developed in the service level management process is transparent to the internal customers, IT department, and external customers.

Establishing Goals for Improving Your Financial Management Practices

After you assess your current maturity level in IT financial management, you then should determine the desired future state for your IT financial management practice. Determining the future state involves a trade-off of the benefits of a more fully matured state of IT financial management versus the cost of implementing new or improved processes for the organization.

The amount of improvement in an organization's financial management practices depends on the resources applied to the effort, the executive sponsorship, support from the IT organization, and other environmental factors. The following summarizes these key issues:

• Executive sponsorship: Executive sponsorship is critical to successfully improving financial management. Ideally, the chief executive officer (CEO) would be visibly supportive of this type of initiative. This support helps to encourage collaboration between the CFO (and other finance staff) and the CIO (or IT director and staff). Without this support, a change initiative to significantly improve IT financial management is unlikely to be successful or provide benefits to the organization.
• Resources and staff: The IT financial management improvement initiative should consist of motivated staff and resources that draw on a range of part-time staff from key departments such as business units/customers, finance, and other areas.
• Culture and organizational preparedness: Based on your organization's culture and structure, you should consider its overall preparedness for financial management process improvements. You should consider whether these improvements are understandable and relevant to the organization. If not, you should consider how these process improvements can be better framed to address challenges facing the organization.
• Timing: The ideal timing for undertaking an IT finance improvement initiative is a few months before the beginning of the annual budget planning process. This allows time to evaluate which phase of the maturity model applies to an organization and to establish the goals for improvement.
• Information sharing: Information sharing between finance and IT staff is critical to any IT finance improvement initiatives. On one hand, financial staff must distill and provide key information related to infrastructure costs. On the other hand, IT staff must provide accurate information about key IT assets.
• Support from IT division, customers, and internal partners: Communicating key benefits of an IT financial management improvement initiative to the IT division, customers, and internal partners is critical. First, many IT organizations have multiple continual improvement, or change, initiatives ongoing at any point in time. Underscoring these benefits to the IT staff will help them participate more actively in the initiative. Showing IT staff this type of information can help them understand that this IT financial management improvement initiative will provide them with significant benefits. Similarly, if your organization engages internal or external customers, you must demonstrate to them the value of this initiative: that it will improve service and lower cost. Finally, the finance department will be more likely to engage if it knows that it will receive fewer ad hoc requests for financial data and IT charging and budgeting will become more predictable.

Use ITIL's Continual Service Improvement Approach to Avoid Key Mistakes

Improvements should be based on a clearly identified target end state and a roadmap to get there. This process should be based on ITIL's continual service improvement (CSI) approach that will help you to identify key business objectives, evaluate where you are today, establish measurable targets, determine a path to reach your targets, and measure your outcome. We discuss this approach in detail in both Chapter 2 and Chapter 9, "Going Forward." Otherwise, significant time and resources can be wasted developing cost estimates based on inaccurate data or tools that are not supported by a robust IT financial management infrastructure.

Software tools, financial models, and studies are all tactical tools that can be applied to improve IT financial management operations, but should not be the starting point for an improvement effort. Table 4-2 highlights common mistakes IT organizations make when first attempting to develop and mature their IT financial management practices.

Table 4-2. Common Pitfalls on the Road to Improving IT Financial Management Practices

Instead, to improve the maturity of an IT financial management organization, the organization should focus on improving specific practices. For example, if an organization wants to move from a reactionary organization to a cost center, it might decide to improve charging and budgeting. After you have decided to improve a given process, you can identify or develop supporting financial tools such as a basic chargeback model. A standardized business case methodology could become part of an IT financial management improvement plan.

Because relatively few organizations know the true costs and benefits of their IT resources, many organizations have an immediate opportunity to improve the return on their IT investments. Just determining the costs of each service is an effective starting point to make immediate, measurable improvements through the practices outlined in this chapter.