Benefiting from the IT Financial Management Process: Page 2

Posted February 28, 2005

Jan Vromant

(Page 2 of 3)

Accounting practices in many IT organizations can be chaotic and misunderstood. Changes in the IT department and lack of control over these changes provide headaches to most IT accounting people as most uncontrolled change creates chaos. In many cases, the corporate controller is happy to get any figure out of the IT department.

Reporting, in conjunction with Service Level Management, is non-existent in most companies and "fire fighting" considerations determine where the dollars go. IT people are notoriously good at coming up with highly technical excuses why they exceed their budgets.

In most organizations, IT personnel are "accounting-challenged." For example, most of them are unaware of (or don't care about) the differences between regular and capitalized expenses, or between leasing and buying equipment.

In a case involving a major ERP investment, I was surprised to encounter a few blank stares when I mentioned "sunk costs" (a past outlay or loss that cannot be altered by current or future actions); and "opportunity costs" (the difference between the return on one investment and the return on an alternative). Basic financial knowledge in the IT community is lacking.

Charging or Billing
Internal billing practices often are considered "funny money" and a burdensome bureaucratic control. As a result, the potential benefit of billing and thus influencing end-users' behavior often is ignored or unknown. Even in companies where sophisticated service level monitoring is being practiced, it is normal for the end-user to face a lack of transparency around charging practices. The end-user seldom has a clue what the service is actually costing or what his or her department is being charged for the use of any IT service.

A major oil company could not provide even a rough estimate of how much a particular ERP seat was costing in the "sandbox" environment where ERP specialists were practicing their skills. Any such expenses and other expenses related to Research & Development disappeared under a few major accounts and were flushed into the profit and loss statement.

What can you do to improve the Financial Management Process?
Although there is no such thing as a "one-size-fits-all" formula, some guidelines can be applied to improve all three areas of Financial Management and achieve a reduction in costs without reducing the quality of the IT service. It is important not to focus on any single one of these actions, but on the combination that will achieve the fastest and biggest "bang for the buck."

1. Assess the maturity of the Financial Management process
As with most processes or "how things are done" in an IT environment, the Financial Management process can be measured and assessed in terms of maturity. A simple and free maturity assessment - for all your IT processes - is available on the itSMF web site (www.itsmf.com - click on Best Practice).

Typical maturity assessment tools on the U.S. market provide a single maturity number for the Financial Management process. The better tools provide you with more detail and give multiple indicators relating to several aspects of your financial control (e.g. Asset Management, Project Performance, Bidding and Contracts, Cost Control, etc).

A comprehensive maturity assessment provides a good idea where you are now and the basis of a roadmap where you need to go.

2. Upgrade Configuration and Capacity Management processes
Take a hard look at the benefits of having properly functioning IT processes. Without reasonably functioning Configuration and Capacity Management processes, you might as well use darts or dice to determine an IT budget. Configuration Management deals with the pieces that make up your IT landscape (e.g. applications, network, servers) and how they interact, Capacity Management deals with planning your space. The reports coming from these two areas are crucial in ascertaining what you have (your present IT assets) and your future direction (your investment and operating budget).

3. Think 'Service' instead of 'Function'
Define your budgetary requirements and your accounting system according to the IT service that is being provided (e.g. e-mail, human resources system, remote access services). Historically, budgets are crafted around the needs of the functional groups (e.g. DBAs, Unix SysAdmins, mainframe) and turf wars can cause overlap and unused capacity.

The better you understand the budgets and costs for your IT services (in contrast to the functions), the better you can judge the figures and the desirability of those services. This approach also provides the added benefit of an appropriate comparison basis when outsourcing opportunities are evaluated.

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