IT Financial Management – A Critical Ingredient for Business Service Management
by Bob Multhaup

As a CIO with an MBA in Finance, I learned I needed to care a lot about the ‘numbers’ of my IT function, but had none of the systems, expert staff, or for that matter the bean counting discipline that the Finance Department next door had at their disposal. In other words I was running a pretty good size IT business without a semblance of a Finance Department, Marketing Department, or any department that had any objectives other than madly building new applications for users whose main personality trait was to complain about the costs of their latest and greatest projects.

So I knew I wanted to apply Business Service Management principles to the job since that is the only salvation of a CIO who wants to align costs to value and measure service performance. And then I recalled in the dim haze of my MBA days, that there was a difference between Financial Accounting and Managerial Accounting. I always pretty much hated Financial Accounting since it required recording every insignificant transaction that an IRS bureaucrat would just love to audit (actually I have only the highest regards for anyone associated with the IRS and their entire extended families), but I had always enjoyed Managerial Accounting, since it involved planning and measuring the actual performance of an organization, and the numbers didn’t have to be perfectly balanced! So my premise in this article is to explore the advantages of developing a Managerial Accounting Model of the IT Business as a means to manage an IT function, as opposed to thinking that buying a new Financial Software package would solve all Financial Management problems.   

To start on the Model, the first question to ask is ‘What is the data that I need to pull together to plan, budget, track, measure, and forecast where the IT Business is going?’.  Most companies have a pretty good set of various scattered files that are keeping track (or not) of important aspects of the IT business, but they are not connected. What’s interesting is that the typical financial data tracks only a small portion of data that is needed (in addition to normally being nearly impossible to interpret what the heck each journal entry was actually for).  However the financial data does represent the only true cost data for IT, and should be used as the Financial Baseline to tie and reconcile all other cost data into. The other key data comes from asset ledgers, the PMO, server lists, contract files, IT planning documents, budgets, etc. And the key is to wrap all this data around the IT Services that they support. So no matter what solution one plans, these data sources are the only data that you have. It’s a sort of forced unhappy Medieval-like marriage, so the trick is to mash this data together into a meaningful model!

Principle One – the data already exists, it just has to be pulled together

There is an assumption in the above two figures that all the disparate data sources can somehow be miraculously integrated into a Unified Management Model and the job is done. But the opposite is actually true, that this is a very difficult task and is unique to each company. So if anyone decides to stop reading at this point, and consider this approach to resemble the  waste products from the male gender of the bovine species, then you are forgiven. But if the reader is willing to go through some pain to get over this wall, then we can review how to develop a Managerial Accounting Model of an IT Business.

Key Model Design Principles:

1. Model must maintain financial integrity
1. If the Managerial Accounting Model can’t be reconciled with the real Financial data, I guarantee the CFO will have a heyday pooh poohing any output of the model. This is a law, probably one of the missing commandments from Moses, so an accurate financial baseline has to be developed. I can also guarantee that if the model actually ties out to the financial data, that the hidden satisfaction on the CFO’s face will be proportional to how close to the penny that the two systems can be reconciled.
2. Model must be based upon the Service Portfolio (or Catalog)
1.  Managerial Accounting is based upon developing the unit based cost structures of a business’ products or services. To measure these costs, the business must be organized around the products or services that are provided to the customers, and then one can calculate the cost per unit to deliver the service, and the unit price to charge the customer for the service. Wow, it almost sounds like a real business! So even if a company is having a major trauma in defining their Services, it must be done, and can be refined later, but the Model must be based upon the IT Services to be meaningful.
3. Model can be started and focused around an immediate major initiative or issue
1. It’s incredible to me how many redundant analyses a company embarks upon that actually involves the same or similar data being collected and processed with great expense, and then thrown away at the end of the exercise. This is true for major ERP implementations, outsourcing studies, cloud analyses, M&A etc. Underneath it’s roughly all the same data, and should be preserved in a Managerial Accounting model. So if there is a major focus area that is a priority to the company, the model can be initiated to solve this immediate problem.
4. Data must be loaded from trusted sources on a repeatable basis
1. This is where the ‘lazy’ side of my character becomes dominant, because the idea of having to manually input or anything other than a fully automated load process of the Model just sounds awful. So once the data sources are identified, a process must be established to rebuild the model from bottom up at each iteration of the model. This requirement is critical because it is the difference between a model that is static, and a model that can dynamically capture data at a point in time and compare trends, changes, and improvements toward targets.
5. The model integration process is difficult, and needs to be done by professionals
1. This is where the masochistic side of my character becomes dominant, because the process of integrating large amounts of raw data from multiple disparate sources is really difficult and is unique to each company. Although the fundamental model underlying data structures may be common across businesses, the specific data from each company is always unique and requires a custom data integration process. But these integration processes can be developed by professionals who can clean and interpret the data, develop the logic to map files together, and load the files into a unified data structure. It is a fairly painful process because I do it all the time and am exhausted afterwards, but the ‘wall’ can finally be overcome once all this data can be integrated into the Managerial Accounting Model.  By the way this same process usually needs to be done anyhow if one was trying to load a Financial package.
6. Once loaded, the model should produce important management metrics from which real IT improvements can be targeted, measured, and achieved
1. The joy of building a good Managerial Accounting Model is that the reports, graphs, charts and metrics that can be produced are very satisfying to the manager who is trying to make real improvements to the organization. Some key metrics may be:
1. Cost of each IT Service
2. Cost of the entire IT Service Portfolio
3. Unit based costs per service
1. For instance TCO cost per virtual server, UNIX server, physical server
2. Storage costs per tier, per service
3. Cost per seat per Business Service
4. True benchmark data, cost to maintain a specific service, excluding new development
5. Service spend by priority and business value characteristics
6. Trends of service maintenance, vs. trends in service development
7. And many more

So a Managerial Accounting Model can be developed, and does not have to be a major investment in a ‘second G/L’ for IT. It can be managed by a small group of managers, and resembles more of a periodic analysis that can be rerun monthly, quarterly or even just twice a year. Of course it takes an effort to develop the model, but it can be built up over time in pieces, customized to the needs of the business, and run on a repeatable basis to enable time over time comparisons. I’m not against the need for a good financial system to manage the IT function, but many of these implementations are disappointing because the software may be great but the focus on integrating the underpinning data as described above is not properly addressed. So in any event this data integration needs to take place for whatever ultimate technical solution is chosen.

In short, the problem of IT Financial Management can be much better stated as the need to build a consolidated model of key management information for decision support (Managerial Accounting), than as the need to build a separate financial ledger from the existing ledgers and databases (redundant Financial Accounting). You probably already have a lot of the data that you need run the IT business; it just needs to be consolidated into a very usable form quickly and without creating a lot of new overhead, that’s what a Managerial Accounting model applying Business Service Management principles will do.

Bob Multhaup is President of IT Business Dimensions and architect of the ITin3D IT modeling tool which provides the information IT Management needs to ‘run IT as a Service Business’. Leveraging over 12 years as a CIO in the Life Sciences industry and 7 years working overseas in Europe, Multhaup has designed this tool to consolidate and integrate a customer’s disparate data sources into a unified multi-dimensional model of IT Service Costs, Value, and Consumption based upon BSM and ITIL principles. Multhaup is partnered with Migration Technologies to provide cost modeling and Financial Management solutions for ITIL implementations. By working closely with his customers to quickly build and customize these service based management models, the results and benefits offer a high degree of customer satisfaction by enabling Service Portfolio Management, Service Budgeting, Strategic Planning, Service Performance Measurement, and IT Financial Management and Controlling. Multhaup has a degree from Brown University and an MBA in Finance along with other ITIL certifications.

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