It Finance

The Importance of IT Financial Management

in Successfully Running IT

David Baker

Chief Architect

Diamond Management & Technology Consultants

[email protected]

November 11, 2008

A significant portion of business users concur that IT is a strategic

investment

87% of business leaders concur

that IT plays a major role in the

strategic success of their

business1

77% of CFOs say they regard IT

as a strategic function instead of

as a utility2

1. 2007 Digital IQ study, Diamond Management & Technology Consultants

2. CFO magazine , December 2005

Yet there is growing concern about increasing costs, lack of

IT/Finance alignment, and poor return on IT investments

Increased demand for new

technologies and complexities has

frequently caused IT costs to grow

faster than other costs

CIOs in 250 firms across Europe

found that nearly three-quarters of

decisions about innovation

investments are made without full

consideration of the impact on IT1

60% of CFOs indicated that IT did not

meet their performance expectations2

45% of CFOs identify the challenge of

obtaining metrics to identify true IT

value and cost31. Computer Associates

2. CFO magazine , December 2005

3. Strengthening IT-Finance Collaboration to Drive ROI, Corporate Executive Board, 2007

Proper financial management has become integral to ensuring IT

achieves the business objectives

IT Financial Management

. . . is the sound management of

monetary IT resources in support of

organizational goals

. . . provides the expense, or cost, side

of the equation for making business

decisions regarding changes in the IT

infrastructure, systems, staffing, or

processes

. . . provides answers for how IT can

help deliver organizational goals and

what IT contributes to shareholder value

Our research and experience indicate IT organizations are

transforming to value-oriented service providers

Business strategy and business

priorities determine IT work

prioritization

Emphasis on ROI and focus on

realizing business benefits

Implementation plans driven by a

commitment to deliverables

Spending concentrated on work

that produces business value

regardless of duration and ease

Willingness to accept and

aggressively manage reasonable

amounts of risk

Existing IT capacity, skills and

cultural appetite determine work

selection and prioritization

Budget and cost oriented with a

focus on variances explanation

Implementation plans are typically

effort driven e.g. resource and time

Spending concentrated on work

that is relatively short and perhaps

easier to implement

Cultural aversion to risk and

change

1 Based on Diamond’s primary research and experience with large IT organizations across multiple industries

Common Attributes of a

Cost-Focused IT Organization1

Common Attributes of a

Value-Oriented Service Provider1

We’ve identified five barriers restricting companies from making

that transition

PortfolioManagement

Continuous

Optimizing your IT financial management process avoids these

barriers and aids your transition to a value-oriented provider

PlanningAnnual

BudgetingQuarterly

AccountingDaily/Monthly

ChargingMonthly

AnalyzingAd hoc

Note: cycle is not necessarily completed in a

continual loop since timing can be different

for each component

IT Planning is the annualized activity to determine the IT initiatives,

to support both the business strategies and the IT strategies

The very first step in planning for IT

spend should be the business

strategy

Then, IT strategy should be derived

from the business strategy and add

other critical elements that are not

on the business radar

Demand management is the filter

that considers both strategies and

criticalities to form the desired

portfolio of IT spend for the next 12

months.

Top 10 most important planning pitfalls to avoid

Management’s assumption that the planning function can be delegated to the planner

Top management becomes so engrossed in current problems that it spends insufficient time

on long-range planning

Failure to develop goals suitable as a basis for formulating long-range plans

Failure to assure necessary involvement in the planning process of key line personnel

Failure to use plans as standards for measuring managerial performance

Failure to create a company climate that is congenial and not resistant to planning

Assuming comprehensive planning is separate from the entire management process

Injecting so much formality into the system that it restrains creativity

Failure of top management to review with department heads the long-range plans they

developed

Top management’s consistently rejecting the formal planning mechanism by making intuitive

decisions which conflict with the formal plans

Source: Pitfalls in Comprehensive Long-Range Planning, G. A. Steiner

Budgeting ensures that correct funding is available for delivery of

IT Services and that those funds are not over-spent

Limits on capital expenditure

Limits on operational expenditure

Limits on variance at any point in

time, between actual and predicted

spend

Guidelines on how the budget must

be used

An agreed workload and set of

services to be delivered

Limits on expenditure outside the

organization or group of

organizations

Agreements on how to cope with

exceptions.

Budgets may be fine for managing capital in a slow-moving,

hierarchical company, but they have critical flaws in today’s economy

Checklist to

Improve the ProcessBudgeting Flaws

Little help for today’s performance

drivers (innovation rates, service

levels, quality, and knowledge

sharing don’t lend themselves to

budget quantification)

Same treatment of all employees

– as costs

(talent and involvement are not in

direct relationship with salary)

Compartmentalization of

companies into small units

(No incentive to look outside of

one’s unit)

1.Begin with objectives rather than

numbers

2.Ensure your unit’s objectives align

with the company’s

3.Link the budget to performance

drivers

4.Budget by walking around

5.Keep it out of the file cabinet

6.Explain the payoffs

Cost Accounting is an inward-looking activity that examines the

actual costs of performing IT activities

Cost Accounting breaks down

costs associated with particular

activities and assigns them to

projects, customers, or services

Cost Accounting can also be used

to measure the efficiency of the IT

Department over time in

management of trends and

benchmarks

Overview of Cost Accounting Elements

Asset Management Employee Time Keeping Project Accounting

• Tracks all Computer-

Related Expenses by

specific cost elements,

according to cost

management guided

capitalization guidelines

• Hardware, software, and

data communications

often contribute a large

chunk of this cost

• Tracking time across all

IT employees assists with

utilization and allocation

of employee expense

• Contractor and

Outsourcer expenses

must be tracked and

attributed to work efforts

• Projects must track the

actual expenses, by all

types of expense, and

compare it to original Cost

/ Benefit Analysis

established within plan

• Project Accounting is

critical to track variances

to planning estimates

Chargebacks allocate the costs of IT services back to the business

units and are optionally based on activity based costing

Influence business unit behavior

Rein in spiraling costs

Enhance transparency

Some business units consume more

IT resources than others

IT can demonstrate good

management and effective

accounting of IT resources

IT chargeback data can provide

valuable insight for budgeting, cost-

benefit analysis, product-costing and

profitability reporting

There are several keys to successfully deploying chargebacks

• Analyze cost drivers

• Find ways to convert fixed cost to variable costs (on some timeframe, all costs are variable)

• Benchmark key processes

• Look for ways to cut costs

Understand IT Costs

• Business Unit managers accountable for IT costs must understand of IT

• IT managers need to understand the business direction

“Renaissance” people to cross the

Business / IT boundary

• Business pushes IT to keep service quality high and costs low

• Business pushes IT to match costs with value to free funds for business priorities

• IT pushes business to question the importance of their IT requests

• IT pushes business to keep focus on changes in demand

• IT pushes business to recognize need to leverage IT across Business Units

Promote healthy tension between

business units and IT

• IT needs to deliver cost reductions for variable costs when the Business makes decisions to reduce service levels or usage

• The Business will need to make service level changes or sunset services to allow IT to reduce costs

Need to deliver on decisions

IT Spend Analysis looks inward to examine where IT dollars are

spent and identifies opportunities for future savings

IT Spend Analysis typically gathers

data from the general ledger and

many other data sources for

analysis purposes

The spend data is compared to

benchmarks and analyzed for

trends that can result in savings

opportunities

Here are three typical spending gaps with opportunities to reduce

each

This gap is addressed through

utilization and capacity analysis

related to current requirements and

expected growth. This analysis will

identify any overcapacity in the

infrastructure.

This gap is addressed through an

improved infrastructure growth

plan based on expected demand

and tightly linked to the capital

planning process

This gap is addressed through

contract negotiations, right-sizing

of contracts, and termination of

contracts

What is

required

What is

used

What is

planned

What is

paid for

Capacity

C

B

A

Reduction Opportunity

Co

st

Gap caused by system

configuration optimized for

availability & reliability or by

lack of awareness of

available capacity

Gap caused by lack of in-

depth knowledge of

application profiles and

capacity forecasts

Gap may be caused by

ineffective procurement

practices such as multiple

vendor contracts

A

B

C

The IT Finance cycle is unified by the continuous process of IT

Portfolio Management

Unifies the management of the

complex world of business

initiatives, technology upgrades,

and overall IT management.

The combination of practices, tools

and techniques used to measure,

control and increase the return on

individual IT investments as well as

on an aggregate enterprise level

A portfolio can include any and all

direct and indirect IT projects and

assets, including components such

as infrastructure, outsourcing

contracts and software licenses.

Portfolio Management places projects and assets into categories

for planning and analysis

Measure,

assess

1

2

2

4

1

0

5

4

2

3

0

1

2

3

1

1

2

5

3

2

0

3

2

0

0

0

2

1

Fact-based

insight into

asset-

specific

performance

2

5

0

2

2

0

2

3

1

1

4

3

1

2

Diagnose,

recommend

Business

language

Make

decisions

Faster and

better

investment

decisions

Invest

Adjust

Sunset

Distinguish

categories

Different

assets

judged and

managed

differently

Define

criteria

Screens

that

match

strategic

intent

A

B

Implicit

IT

portfolio

“This huge

collection

of projects

and

assets…”

Adopting a portfolio approach brings logic, structure and takes

emotion out of spending decisions

Core Business Enablers

(CBEs)

Focused Business Improvements

(FBIs)

Technology Driven Innovations

(TDIs or OCIs)

Assets that form the

core IT infrastructure

of the organization

Assets and projects

aimed at incremental

operational gains

Option creating

investments with

power to transform5-10%

of average portfolio

20-30%of average portfolio

60-75%of average portfolio

Business unit level

Enterprise level

Note: Averages based on Diamond client experience.

Portfolio of

investments in IT

assets and

projects

There are 3rd party frameworks available to help you optimize you

management of IT Finance

x

Cost Accounting

Budgeting

Project Appraisals

Cost Recovery

x

x

Budgeting

Accounting

Charging

x

x

Value Governance

Portfolio Management

Investment Management

x

Financial

management

Cost

accounting

Cost

recoveryBudgeting

Project

investment

appraisals

Tools are an enabler of many components of the lifecycle;

however, not all components require complex tools

• EA repositories (EA documents, roadmaps and strategy maps)

• The outcomes are inputs to Portfolio Management solutionsPlanning

Annual

• Typically Financial Systems, working documents are usually spreadsheets

• Tracking and reporting tools are commonly spreadsheetsBudgeting

Quarterly

• Commonly in industry best practice ERP and/or Financial systems

• Output tracked and often reported in spreadsheetsAccounting

Daily/Monthly

• Can consist of multiple components: hardware tools to manage “usage”, industry applications to compile information and produce “bill” to business customers

ChargingMonthly

• Multiple tools leveraged based upon timeline and budget: examples include spreadsheet, client database tools, or more sophisticated analysis tools –most are ad-hoc and fed from existing tools

AnalyzingAd hoc

• For IT Financial Management, probably the most mature in PPM (Project Portfolio Management) and EPM (Enterprise Portfolio Management) tools; many vendors offer multi-functional tools

Portfolio MgmtContinuous

Key Takeaways

Financial Management is an important discipline required to transform IT to a

value oriented service provider

Start with solid planning, use enterprise architecture techniques to ensure

you have the right projects identified

Create budget categories and budgets, tie them to your Portfolio

Management efforts

Track your assets, project expenses, and time spent on projects

Consider using chargebacks to increase transparency of IT service costs

Monitor your spending, continually check alignment with budget

Use your planning, budgeting, historical data and monitoring to make

portfolio management decisions (invest, adjust, sunset)

It Finance

Business

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