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Improve Value-Added Financial Management Activities

Accurate financial information can be used to improve service and lower cost through more a range of advanced IT financial management activities, including service valuation, service provisioning, cost optimization, investment analysis and demand modeling.

We summarize three of these activities and selected practices below and continue this discussion in Chapter 5 on how to use business cases to implement service investment analysis and service portfolio management approaches to maximize IT investments.

Service Valuation

As an IT organization develops and matures, IT financial management values services contained in the IT service portfolio. This linkage clarifies the service offerings and the rates for internal and external customers. It also provides discipline for the IT pricing. For example, if a customer would like a service beyond those services offered on a service catalog, the organization would establish a process to determine if this exception is truly feasible and cost-effective.

The cost, or provisioning value, of the service is based on actual IT accounting information. Establishing the value over and above the cost, referred to as the service value potential, is more difficult. We recommend that as your service valuation matures, you leverage the below approach to define the tangible and intangible benefits from IT investments.8 As the customers begin to perceive that the IT organization consistently provides a positive return on IT investments, the IT organization will begin to act as a business partner to its customers. More mature pricing allows for more accurate collection of fees for IT products and services through SLAs, and more accurate pricing of IT products and services in the IT service catalog.

Service value from tangible benefits of IT services are directly observable and measurable. They include IT investments that reduce cost, improve quality of service, and expand available system and storage capacity. Tangible benefits specifically tied to financial measures include direct cost savings as a result of a completed and implemented IT project. These costs are often quantified in a business case (summarized in Chapter 5) that might also include future cost avoidance from a variety of sources, such as lower maintenance costs from a newer IT system.

To determine the value of a service, an IT organization might also quantify cost savings as a result of continuous improvement activities, such as improved quality of service through continuous improvement activities related to server outage history, server utilization statistics, business criticality, outage impact, service levels, and processing speed. For example, a tangible benefit of an enterprise resource planning (ERP) solution that replaces a number of existing applications might be consolidation of software and hardware, which might lead to cost savings.

Intangible benefits are much more difficult to measure. Professor Baruch Lev of New York University and others define intangible benefit as a perceived value to an organization of an activity, but this benefit may not be directly observable or measurable. This difficulty of identifying intangible costs is in part related to the current accounting regulations, which do not allow companies to record all intangible assets as an asset for financial reporting purposes. Professor Lev has pointed out a number of examples in his writings. For example, he cites Cisco's Internet-based product installation and maintenance system generated $1.5 billion in savings from 1996 to 1998.9 This system—aside from the actual hardware and software costs—was not allowed to be recognized as an asset for accounting purposes. However, the IT organization should no doubt have included these cost savings in its quantification of benefits in a business case. As an organization that views IT as a positive ROI or a business partner, it begins to develop processes to identify and account for these intangible benefits to determine the service's value. Table 4-10 highlights different examples to measure intangible benefits through a process developed by Baruch Lev and others.

Table 4-10. Sample Ways to Measure Intangible Benefits

Quantitative Example

Standardized Categories

Empirical Evidence

Reduced risk of cyberattack

Reduced risk

Fewer IT costs related to spam and malware

Improved server uptime

Greater reliability

Increased uptime and, as a result, lower opportunity costs

Improved metrics for quality of service

Improved quality

Fewer service desk calls and lower cost of service

Reduced costs for service transactions

Improved speed

Increased cycle time and lower cost of utilizing IT resources

Demand Modeling

As the IT financial management process matures, an IT organization works with its customers to understand and forecast demand. By understanding this demand, an organization can understand future financial needs and evaluate investment options to maximize ROI. For example, an organization can model the demand for a given service at different prices to determine what additional capacity may be needed.

Without this demand modeling an organization may incur unnecessary cost or not be able to meet a customer's requirements. For example, in the case of a reactive IT organization, instead of knowing that a server might soon reach capacity and planning for a new expense, the reactive organization often purchases this server on an ad hoc basis. As a result, the organization might not have the time to collect quotes from alternate vendors to purchase this server at the lowest cost. Because these IT resources are budgeted on a reactive basis, the organization also might not be able to decide whether this server purchase is actually necessary.

If financial management practices had been in place, the organization could have used information from the IT charging and accounting process to model future demand and understand the cost of unpredictable increased capacity. Instead of purchasing this resource on an ad hoc basis, effective demand modeling with accurate financial management information could have enabled the IT department and business work together to develop a detailed business case to maximize their investments by perhaps determining that virtualization of existing servers could in fact provide additional capacity and be a cheaper solution to the problem.

Optimizing Costs through Service Provisioning Optimization

IT organizations must take a systematic approach to optimizing the cost of providing a given service. In Chapter 8, "Success Stories: Improving Service and Lower Costs," we discuss in detail the successful efforts of the Department of the Navy CIO to execute systemic application and infrastructure consolidation to evaluate the cost-effectiveness of the services that they provide.

Improving the cost of providing the service and determining whether this service should be provided by the IT organization is the function of service provisioning optimization. This activity takes a systemic, rigorous look at specific services and determines their financial viability and areas for improvement. There are a number of ways to measure the financial effectiveness of your services:

  • Conduct a financial analysis: Conduct a financial review of the service using standard cash flow techniques to determine the service's viability.
  • Benchmark your service against competitors to find areas for improvement: By benchmarking your service against other financial measures, you can determine which area may need improvement. For example, specific cost types, such as hardware or software, may need to be consolidated to be cost-effective.
  • Develop a business case for your service and alternatives: Subjecting your service to a business case can help determine whether it is viable and meets specific business objectives.

It is unfortunately all too common to find a range of IT services being supported that have only one customer or that generate revenue that is easily exceeded by the commitment of resources to maintain these applications. By rigorously scrutinizing these activities with accurate financial information, services can be provided at a high level of value based on the service and cost.

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