This post was inspired by an article I read today in the Enterprise CIO Forum on the topic of IT financial managent http://bit.ly/Nxe7dr. I wanted to leave a comment but I thought it would be much easier if the author of the article simply read an excerpt from my book, “Eliminating ‘Us and Them’ – Making IT and the Business One.” So in the interst of saving me the time of writing a lengthy reply to his article, I decided to post an excerpt from my book and simply leave a link to this post in my comments. Here it is.
IT Financial Management is another great example of an IT governance process that can be found to some degree in every enterprise with an IT organization. Every enterprise has mechanisms for managing their finances. But once again, they seldom recognize and manage them as IT governance mechanisms. And it is the lack of governance context that relegates most IT financial processes to little more than book keeping versus decision-making support mechanisms.
How does your organization view IT financial planning and budgeting process? Is it a fight between the business units wanting to spend less on IT and the IT organization trying to beg, borrow or steal anything it can? Or, does your organization view the IT financial planning and budgeting process as one of the principle means to ensure IT is aligned with the business, delivering value, and managing risk, resources and performance?
Here is the sample list of IT financial management-related processes I use in my IT governance presentation:
- Financial Services for IT
- Financial plans
- Budgets and forecasts
- Cost accounting
- Resource management
As with all of the IT governance processes, the challenge is to convince folks to reflect on how they would approach these common processes if they viewed them as the mechanisms necessary to enable and support reasoned and rational business information technology decision-making. With the exception of the first bullet, I use vanilla financial process characterizations as examples. Everyone is familiar with them and I merely want to illustrate how each of their organizations is already doing most if not all of these processes.
The first bullet is not a vanilla term. Notice how I have it capitalized. That is because “Financial Management of IT Services” was the name of one of the major ITIL processes. I say “was” because this was the name of the process in ITIL Version 2.0. In version 3.0, they have renamed it “Financial Management.” I still use the V2.0 naming convention because it avoids confusion and points directly to ITIL. I also love the idea of services and I use the term every chance I get.
I have the ITIL process on the top of the list because I want to expose as many people as possible to this great method to managing the financial aspects of IT. Other than resource management, each of the bullets is actually a subset of ITIL’s Financial Services for IT. It is the most comprehensive IT financial management approach I have ever seen. I have yet to have one person disagree or show me a better approach. I would be delighted if there was and I invite readers of this book to raise my awareness. I would be ecstatic if someone, anyone could show me they have a handle on IT costs and an acute understanding of the value they are deriving from those costs. I would also be shocked.
When IT was born, it was one of the only business units immune to cost-based-accounting. IT cost what IT cost. Techies were doing magical stuff behind glass walls in air-conditioned rooms. They would conjure one system after another that elevated business users from the depths of their manual processes. One point solution after another would be added to the computing environmnet in response to each new business need. This was how data centers were built, one IT project at a time. New applications and infrastructure was willingly, if not reluctantly, subsidized by the business units driving the change. Other business units would eventually jump on the new infrastructure for free—that is, until IT presented the annual bill for “ongoing operations” (“keeping the lights on”).
How did the enterprise pay to keep the IT lights lit? Via the complex calculation of dividing the overall IT budget by the number of business units.
- Was the human resources department realizing the same value from the data communications network as the sales department? Nobody knew. So what? Pay up!
- Did manufacturing realize the same value from the new email system as the legal department? Nobody knew. So what? Pay up!
- Did IT really need to cost what it cost and was it worth the cost? Nobody knew. So what? Pay up!
If a business unit didn’t like the cost of IT, they had little recourse. They would argue amongst themselves as to who-should-pay-what to little or no avail. IT could do little to resolve the disputes given the lack of financial mechanisms to truly understand the cost of technology and the value it provided. If the business units turned their ire as one on IT, it was just as futile. IT cost what IT cost and there was no alternative—at least for a while.
This situation started to change when some renegade business units started buying and installing their own systems and coding their own applications. They had no idea if it was a better deal but at least they had control. They were no longer at the mercy of the “cost of the collective.”
Fast forward to present day and business units have a plethora of alternatives for their IT needs. The increased commoditization of technology and the advent of external service providers and outsourcing provide business units with many alternatives to internal IT. No longer are these business units forced to pay for IT without knowing if they are getting commensurate value for their investment. The days of “IT costs what IT costs” are behind us. And with the emergence of cloud computing every business unit with a credit card and internet access on a Friday, can have their application up and running on Monday.
IT must account for costs and must be able to measure and determine value and ITIL provides a systematic approach to doing so. ITIL defines Financial Management as “the Function and Processes responsible for managing an IT Service Provider's Budgeting, Accounting and Charging Requirements.” It may not sound too earth shattering, but take a look at these topics you’ll find in ITIL Version 3.0:
- Enterprise value and benefits of Financial Management
- Service Valuation
- Service Portfolio Management
- Service Provisioning Optimization
- Service Investment Analysis
- Variable Cost Dynamics
- Service provisioning models and analysis
- Funding model alternatives
- Business Impact Analysis
- Cost recovery
- Return on investment
- Internal Rate of Return
Mind boggling, isn’t it? And this isn’t even the entire list of topics you will find. Don’t get me wrong, I don’t expect every organization out there to implement Financial Services according to ITIL. I do expect them to consider their level of competency and capability in regard to financial management of IT and determine if they are meeting the needs of the business. ITIL provides a pretty solid gauge.
~ Steve ~