Financial Management – the Lost ITIL Process Returns!
by Bob Multhaup, President, IT Business Dimensions and
Ken Turbitt, President & CEO, Service Management Consultancy (SMCG) Ltd
IT Financial Management finally arrived in the third version of ITIL (there was no financial management of IT possible previous to this historic moment), alongside Demand Management and Service Portfolio Management as the key processes in the Service Strategy domain. It arrived with such a bang that it could have been positioned in an even loftier domain called ‘Boring Management Stuff’ that needs to be avoided at all costs so we can get back to defining catalogs, implementing virtual servers, complaining about outsourcing, and listening to vendors say that the ‘cloud’ (their cloud) will be running all of IT in the future.
To the average IT Service manager (very smart, technical wizards, but often financially impaired, otherwise they would have been accountants), Financial management is the last of the ITIL processes that one would ever want to implement due to its nefarious implications such as cost cutting and slowing down the continuous parade of new equipment coming through the door. Down deep they say “Why can’t Finance leave us alone so we can get on with the business of playing with our monster Lego set of servers, networks, SANs and monitoring tools that collect data that no one looks at? And now they want to cut costs again after we actually cut costs last year, and this is after we have finally implemented the perfect incident management system (they hope to do problem management next year or later) and we are now all fully certified in ITIL v3.” Maybe we should define a new strategic ITIL process called ‘Implementing Technology for Technology Sake’, and not to focus so heavily on such peripheral processes as IT Financial Management. But to the contrary, this article will demonstrate a way that the Service Managers can turn the tables around and use Financial Management to their favor and benefit.
Meanwhile in the Boardroom, the Executive Committee is wrestling with the problem of a downturn in the market, and the need to cut costs across the board by 10%. The company has just finished a major ERP renewal project (they also just finished the same project each year of the last three years) with major investments in IT, and many of the Execs have been waiting for their own IT projects to begin after they were put off by the big ERP project. Everyone is a little (a lot) frustrated, especially the CIO who has little information to explain exactly where all the increase in spending has been coming from, and where to cut the additional 10% after introducing the new ERP system and having a dump truck size backlog that would choke NASA. Maybe it’s time to do a little Financial Management.
In a ‘real’ business (not to confuse a real business with how IT is typically run), the business unit leaders are responsible for the strategy and execution of their plans to contribute to the financial expectations of the company and its stakeholders. In other words companies are in business to make money, and so should IT’s sole purpose be to make money for the company. IT can be viewed as a business unit like any other whose job it is to optimize business processes through leveraging technology and to generate financial returns as any other business unit. IT Financial Management is not a secondary process that just tracks budgets, does chargeback, and tracks costs, it is the fundamental objective of IT to create real financial value to the business and to express this contribution in financial terms. This ability to express the value of IT is where IT management fails miserably. So let’s discuss how the IT Management Team can better react to the above scenario by using Financial Management, Portfolio Management and Demand Management processes. In the following paragraphs I will develop a new set of financial management principles that can be used to respond to the above business cost cutting scenario.
Principle 1: IT costs are not IT costs, they are customer costs
“Great, I’ll drink to that, are we done then”, says the IT Service manager. The problem is you must convince your own management of this because they won’t believe you until you perform the financial analysis that is necessary to connect these costs back to the users. And as long as costs are sitting in the IT budget without a full business analysis of actual cost accountability, the IT manager will be the direct target of the blunt edge sword of untargeted cost cutting. All IT costs were initially invested in to serve a customer demand or business need. Projects were executed, systems were put in place, users began using the systems, but the support costs remained in the IT budget. IT didn’t ask for the above ERP project, although they are responsible to accurately estimate the technology requirements of the system. So after this constant absorption of one project after the next, IT is sitting on a massive collection of systems, and a massive collection of costs, none of which are differentiated back to the originating customers in the normal accounting systems. These normal accounting systems will set up IT as a functional overhead unit such as application development, various technical core competencies or shared services, and other cost centers, which have become the general dumping ground of all the costs that customers have invested in IT to fulfill their computing needs. Now granted IT is the ‘caretaker’ of all these costs and their job is to find creative ways to minimize these costs, but they are not the ‘owners’ of these costs because they don’t ‘use’ the systems to optimize their own processes. So now IT looks like the bad guy because it is draining from 2 to 10 percent of every dollar sold. The chargeback systems that attempt to reposition these costs back to the business, often do a great job at repositioning these costs to befuddled customers who have no idea what these charges are for, and absolutely provide no idea of how they are contributing to the business (other than its decline). So the real problem is directly related to Financial Management in that these user costs are positioned in the IT budget as a major overhead cost block, when they should be analyzed and repositioned back to the customers who are actually consuming these assets and resources for their own benefit. IT action in above ERP case is to develop a sub-ledger cost tracking system (simple or not so simple) to track spending and assets on a project/service basis.
Principle 2: IT needs to understand what resources and assets are underpinning each IT customer service, to reposition these costs back to the ‘guilty’ parties
In order to fix the problem in Principle 1 of wrongly accusing the poor IT department of intentionally trying to bring down the already meager profit margin of an entire business due to rampant uncontrolled spending, IT will sit in the defendants box until they can prove that they are innocent of wrongfully hoarding unused software and antique mainframes for their own personal benefit. IT becomes the victim at this point because of their inattention to good Financial Management and they are always on the defensive. So each service manager must get their financial house in order and develop a sort of sub-ledger to the accounting system where the assets and resources that they manage are directly linked to the services that they are providing to their customers. This enables a Total Cost of Ownership calculation to be developed by service and then these costs can be re-positioned back to the customers who are consuming these services. Without this information IT is ‘dead’, and will hang on the gallows of always overspending the company’s hard earned revenue. IT action in ERP case is to be fully involved in the business case and project cost assessments and to track the costs of the project on a detailed basis to not lose the connection between the project and the IT asset base.
Principle 3: Once services are known, they need to be managed in a service portfolio similar to an investment portfolio
This is where Portfolio Management comes in. Now all of these customer services, meaning customer applications such ERP systems, CRM systems, email etc, can be viewed in the light of their real cost impact on the business, and the value side of each service be included in the equation since we now know what these costs are being used for. Portfolio Management really refers to the ability to manage a set of diversified investments so that the total cost and value of the entire portfolio can be maximized based upon the amount of risk that the investor is willing to endure. The same applies to the IT Service Portfolio; the ‘cash cows’ should be the set of basic transactional systems that ‘run the business’ where IT has optimized these business processes to a point where the transactions are processed at highly competitive and commoditized cost structures. The ‘dogs’ show up clearly in the light of the portfolio because the cost, possibly the cost per user seat, doesn’t add up to the perceived value of the service or application, and therefore these services need to be attacked from a business contribution perspective (the IT costs of these applications are now a good target to cut). And new investments and projects can be put into the investment competition for the top spots to grab IT resources and get management approval. The best thing IT can do is to prove that they are constantly reducing the cost of their on-going operations (service portfolio) which then ‘makes room’ for these new investments to flourish without increasing the overall cost of IT. IT action in ERP case, track not only the investments in the project, but establish a baseline for sustaining these investments in the future and track these two activities separately. Combine all their activities, new projects and sustainment into a consolidated service portfolio.
Principle 4: The portfolio baseline should be established to as the primary means to measure IT performance
So now the cost of each service is known in the portfolio, and new projects and investments are laid into the portfolio to be prioritized and resources to be allocated. But how does this help determine if IT is doing a good job, and how can IT prove that it’s doing a good job to the CEO. Again, this is what Financial Management is good at, and where the benefits of thinking in terms of financial contribution kick in. If a baseline is established in the Service Portfolio, in other words one determines the cost of each service from an operational maintenance, lights out, perspective, and distinguishes these costs from the other more discretionary costs such as new projects and a lot of enhancements (a good proportion of which never pay off), this then provides the means to measure if each IT service is operating on a more efficient basis over time. In other words this baseline can be compared to the budget and to the subsequent business cycles, latest estimates and year to year actuals, that demonstrate with a high degree of confidence how well IT is taking care of its business: baseline service costs are going down on a per unit basis, and new investments are creating new value. It’s as simple as that because this is what ‘running IT as a Service business’ is actually about, when the managers of the IT services can take the time to develop these cost models and actually demonstrate to management that they care about making money for the company (once done with this diversionary soft stuff you can go back to the lego set and have some real IT fun). IT action in ERP case is to budget and plan a baseline budget for the IT service, and calculate the costs on a per unit basis such as cost per seat or transaction type. This is clearly their direct responsibility area (where new projects are not), and if measured properly, can demonstrate without a doubt that IT is improving its business contribution by the continuous reduction in the cost per unit of each service that they manage.
Principle 5: IT is a technology service business inside the ‘mother ship’ business, and should be managed as such
So for years IT has been managed as an overhead cost center and this has led to many of the gigantic mistakes and wasted money poured into the great IT black hole. IT has been providing services to the business since day one, and only until ITIL and ITSM came into being, did anyone even recognize this. But it is finally time for IT management to become true business persons and run IT as they would any other business, with services defined and fully costed and priced out, the value of services clearly understood, and the most basic of business drivers in place to constantly reduce your cost of service operations to enable investments in future earnings. IT Financial Management provides the means to run IT as a business, and it’s a lot more fun to show your boss that you are making the company money instead of only spending. So our suggestion is simply to declare yourself CFO of your service business (because no one else will want this job) and implement Financial Management as part of your job. Maybe it will be a whole lot more interesting than you think just managing technology is.
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