ITSM - The A B C’s of Financial Management
At the core of IT Service Management is the ability of the service provider to align capabilities to meet business requirements. Not only is it expected that the service provider does this but today’s market requires that we provision faster than ever before for the least amount of cost. This requires a shift from looking at costing models that focus primarily on components such as HW, SW, or other infrastructure costs to a model that looks at what is it costing us to provision the end-to-end service. When we think of Financial Management most will immediately think of number crunching, bean counters, and all those mathematical formulas that go along with that. It is all of that. We need to be able to create business cases and to justify the cost of new or changed services in our environment. Financial Management for IT services will certainly include calculations for Return on Investment and Internal Rate of Return as well as assistance in assessing the overall Value on Investment.
In addition to understanding portfolio management and creating service catalogs, the ITIL Service Offerings and Agreements class discusses best practices for Financial Management and the three sub-processes that are required for success. These include:
It is through standardized accounting methods, ledgers and procedures that we can track our IT spend. We must account for where did the money go? Accounting activities will also ensure a cost model framework that will allow the service provider to determine costs and also ensure that they are allocated correctly. Cost models are utilized to understand the impact of new or changed services from a financial perspective. ITIL Best Practice states “Knowing where money has been spent does not explain why the money was spent, which services it was used for and whether the customer received value. “ Accounting will ensure a cost framework where direct and indirect charges can be allocated to a service/customer and assist in understanding not only where the money was spent but most importantly why.
Truly Financial Management is all about funding and overall financial stewardship. Budgeting process activities allow the service provider to predict and control the allocation of funds to the organization. Budgeting is a forecast while accounting is actual. You could say that through the periodic negotiation and budget cycles the determination is made for “What money will be made available” and then through accounting activities we track “Where did that money go”.
Charging is the only one of these three sub-processes that is optional. All invoicing for charges must be clear and concise and not ambiguous to the customer being billed. If you are provisioning a service to an internal business unit there may be some notional charging (funny money) but perhaps no real or hard charging is taking place. Charging creates a sense of value and greater appreciation for the IT services delivered to internal customers. Charging for services provides the business with more accurate information and allows business leaders to make informed decisions about the use of their technology.
So there you have it! Financial Management for IT Services is not only comprised of the (one’s, two’s and three’s) or the number crunching, it is really all about the A, B, C’s of Financial management. Accounting, budgeting and charging process activities ensure good overall financial stewardship for service providers.