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5.1.1 Why introduce formal Financial
Management for IT Services?
5.1.2 Basic concepts of Financial
Management for IT Services
5.1.3 Scope of IT Financial Management
5.1.4 Goal for Financial Management
for IT Services
5.1.5 Relationship with other IT Service
Management processes
5.1.6 Impact on the organisation
5.1.7 Benefits of Financial Management
for IT Services
5.1.8 Costs
5.1.9 Possible problems
5.1.10 Accountancy
IT Services are usually viewed as critical to the business or organisation. The increases in User numbers, demands for new technologies and complexities of client-server systems has frequently caused IT Services costs to grow faster than other costs. As a result, organisations are often unable or unwilling to justify expenditure to improve services, or develop new ones, and IT Services may become viewed as high-Cost or inflexible.
Due to the complex nature of Accounting for IT usage, it is rare that the actual running costs of the IT Services are properly identified and this often leads to dissatisfaction with the perceived 'value for money' of the services.
| 'Why can't the IT organisation provide a better level of Service?' 'Why does the IT organisation budget have to be so large?' 'How much will it cost to implement and run this new System?' 'Why do we spend so much time performing redundant tasks, like reprinting large reports that are not read?' |
The above are examples of the questions asked inside and outside an IT organisation, often in emotive situations, such as project over-runs or during periods of loss of critical service. The answer is often:
'We're doing the best that we can with the money that we have'; but ... is that true?
To understand whether an IT organisation is doing the best that it can and to demonstrate this to its Customers, it has to both understand the true cost of providing a service and manage those costs professionally. To do this, it is usual to implement IT Accounting and Budgeting processes and often to implement Charging processes as well.
Financial Management is the sound stewardship of the monetary Resources of the organisation. It supports the organisation in planning and executing its business objectives and requires consistent application throughout the organisation to achieve maximum efficiency and minimum conflict.
Within an IT organisation it is visible in three main processes:
The aim of Budgeting is that the actual costs match the budget (predicted costs). This budget is usually set by negotiations with the Customers who are providing the funds (although this sometimes happens at a very gross level i.e. the business leaders agree proportions of their revenue which is to be used to fund IT, based upon what IT have told them their costs are). Good Budgeting is essential to ensure that the money does not run out before the period end. Where shortfalls are likely to occur the organisation needs early warning and accurate information to enable good decisions to best manage the situation.
Organisations which need to account and charge to a very high level of accuracy, e.g. commercial IT Service providers, need to invest much more effort in developing IT Accounting and Charging systems than those who seek only a fair, simple apportionment of costs back to Business units. IT Accounting can be used to determine the exact costs of resource usage down to CPU, filestore and bandwidth but it is rarely advisable to use this as the basis for charging as the costs of so doing may outweigh the benefits. It is in the interest of all parties to keep the overall cost of service low and the bureaucracy to a minimum, even at the expense of total precision.
Current leading practice is to use IT Accounting to aid investment and renewal decisions and to identify inefficiencies or poor value but to charge a fixed amount for an agreed Capacity (determined by the level of service agreed in the Service Level Agreements or SLAs). In this case, IT Finance Management works with Service Level Management (they may even be the same person) to ensure that the overall costs of running the agreed services should not exceed the predicted costs. Charging is then often a matter of billing for agreed periods at an agreed rate, for example
A commercial organisation, such as a supplier of outsourced services, is likely to have to develop more precise methods of charging and display a greater flexibility in linking charges to costs incurred, than an in-house organisation, in order that the requirements of commercial marketing and profit-making can be supported.
This Chapter looks at methods for an IT organisation to predict and calculate the costs of service and discusses ways of estimating the proportion of costs that can be attributed to each Customer where an IT Service is shared. The simple diagram at Figure 5.1 is used as a basis for the whole Chapter.
Figure 5.1 - IT Accounting, Charging and Budgeting cycle
In summary:
Budgeting enables an organisation to:
IT Accounting enables an organisation to:
Charging enables an organisation to:
The scope of IT Financial Management includes Budgeting, IT Accounting and Charging, although the responsibility for the processes and tasks may lie with the Finance department. In many organisations the budget rules are set for all parts of the organisation and the monitoring and reporting of budgets is performed by staff who report to the Finance department rather than to the IT organisation.
For the purpose of this Chapter, it is assumed that Budgeting, IT Accounting and Charging for IT Services is the responsibility of IT Services Management. In some organisations the design and implementation may be the responsibility of a Finance department or shared with them. Even if the IT Services Management assume total responsibility for the process, it is advisable to work closely with the Finance department and with qualified accountants.
For an in-house organisation, the goal should be:
In a commercial Environment, there may be a goal statement that reflects the profit-making and marketing aims of the organisation.
The aims for any IT Services organisation should include:
Financial Management for IT Services interacts with most IT Service processes and has particular dependencies upon and responsibilities to:
Changes to Budgeting and IT Accounting or the introduction of Charging for IT Services are strategic business decisions. They may impact service levels, perceptions of value and usage of services. They also require an investment in planning and maintaining the processes. Business leaders throughout the organisation should be fully aware of the Changes likely from the implementation of Changes to any or all of the above.
It is essential that the organisation recognises the cost of introducing and maintaining Budgeting, IT Accounting or Charging as well as the benefits. The proposed benefits must be clear to both the IT organisation and to its Customers. Evaluation of these costs and benefits prior to implementing new systems is essential if the systems are to be quickly accepted by the Customers and IT Services staff.
Charges for IT Services must be simple, fair and accurate and this requires accurate, effective IT Accounting. The organisation must also be clear on its overall policies on Charging e.g. whether to break-even, to subsidise or to make profits. It is essential that the organisation is fully aware of the benefits and the pitfalls of the proposed system of Charging.
It is unlikely that IT Accounting can be introduced solely for IT Services - the whole organisation must be prepared to account in the same way for monies spent. If Charging is introduced in an organisation where no other form of inter-departmental charges are levied, anomalies may have to be addressed when, for instance, IT 'charges' Personnel for running the Personnel database but Personnel cannot charge the IT organisation for their services.
The term 'Customer' is used to refer to the organisation, department or division 'buying' the service. The 'User' is the person who makes day-to-day use of the service, e.g. a salesperson or Customer Service representative. Most of the benefits discussed are benefits to the organisation as a whole, or to the Customers of the IT organisation. The benefits to Users are realised through improved service, arising from efficient use of IT spend. Figure 5.2 shows how Financial Management can be seen as the brace that 'locks' IT to the business, preventing the IT organisation from drifting away from the needs of the business and preventing businesses from pursuing private deals outside the organisation.
Figure 5.2 - Locking IT to the business
The benefits of Budgeting, IT Accounting and Charging for IT Services are discussed fully in the Sections on each topic. In summary they are:
The benefits of Budgeting should be self-evident, but in summary are:
The fundamental benefit of Accounting for IT Services (IT Accounting) is that it provides management information on the costs of providing IT Services that support the organisation's business needs. This information is needed to enable IT and business managers to make decisions that ensure the IT Services organisation runs in a cost-effective manner. Cost effectiveness is defined here as ensuring that there is a proper balance between the quality of service on the one hand and expenditure on the other. Any investment that increases the costs of providing IT Services should always result in enhancement to service quality or quantity.
IT Accounting helps the business to:
Put simply, there is no prospect of IT Service providers maximising value for money if the costs of providing the services are not accurately known. A key justification for investing in more IT resources is to support new or better Business processes. IT Accounting provides the cost basis for cost-benefit analyses.
The fundamental benefit to the organisation of charging Customers is that it provides a sound business method of balancing the shape and quantity of IT Services with the needs and resources of the Customers. Customers are charged for the services they receive and because they are paying, they have a right to influence decisions on its provision. If they do not think the services represent good value for money, they may stop using them or make formal complaints but professional IT organisations invest time in discussing the balance of charges and service levels with their Customers.
Services can be improved by spending more, if there is a business justification for it. The introduction of formal Charging often provides more evidence to support this and hence more organisations choose to invest in IT. Conversely, if Customers believe that they can save themselves money (directly or indirectly, by reducing overall organisation expenditure) by changing the way in which they use the IT Services, they are able to discuss this more openly with the IT organisation.
Charging enables the IT Services Management to:
Notional Charging, where bills are produced but no money changes hands, is sometimes introduced to ensure that Customers are aware of the costs they incur. The effectiveness of introducing Notional Charging depends on the supporting management processes: if Customers ignore the information and management takes no action, there is little point in providing the information.
The introduction of Real Charging (i.e. actual money changing hands), as opposed to Notional Charging, is not always necessary. Customers and organisations that see the calculated costs may improve service provision and decision making without transferring money within the organisation. Further, the cost of introducing Charging should be justified by better value for money for Customers but overheads and system constraints may mean that the expected savings cannot be realised. For instance, it may not be possible to provide a higher quality of service to an individual Customer even if that Customer is prepared to pay a premium for it, nor to provide less service to a Customer who expects a discount.
Real Charging is therefore desirable in principle but its introduction must actually improve effectiveness of IT spend and value for money and do so to an extent that savings outweigh the administrative costs. The level of detail available in Charging depends upon the level of detail of the IT Accounting and usage information and may require a redesign of the IT Accounting systems if detailed Charging is required.
The costs associated with Budgeting, IT Accounting and Charging fall into 3 broad categories:
1) the administration and organisation costs for the planning, implementation, ongoing operations and management of the process (both staff directly working in these areas and Operations or other staff involved in the data collection)
2) the extra computing resources needed to automate and facilitate IT Accounting and Charging
3) the purchase and support of tools required in carrying out the processes (some of these tools are also required for other Service Management processes).
Once costs are visible, and particularly when Real Charging is in place, the demand for some services may fall. This results in reduced revenue but is not really a cost of implementation, as it is in the organisation's interest to identify and reduce inefficient use of IT resource.
There are a number of possible problems in implementing IT Accounting and Charging:
The guidance contained in this Chapter is intended to enable IT Finance Management to manage better the risks associated with these problems.
This Chapter assumes an IT organisation serving a single organisation or related organisations in the same country. It does not cover taxation or Accounting legislation. Guidance on IT Accounting practice should be sought from other publications or from qualified accountants.
This Chapter specifically refers to Budgeting, IT Accounting and Charging in an IT organisation. However, the principles and advice apply to all service provision (e.g. software development, in-house consultancy, procurement, direct works departments and so on) and to the supply of services in a commercial environment i.e. Outsourcing and shared service centres.
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