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Monday, 5 March 2012

ITIL Financial Management


Financial Management for IT is one of five components in the ITIL Service Delivery area and part of Service Strategy process.
 It determines the costs of services and provides financial accounting support to ensure expenditures fall within approved plans and that funds are well-spent.
The role of Financial Management varies depending upon the view of IT within the company. Some companies view IT as an expense center, some as a profit center, and some as a cost-recovery center. However, in all cases, Financial Management supports the "business" of IT.



Financial Management activities include:
•         Providing oversight of all IT expenditures
•         Ensuring funds are available for planned events
•         Providing detailed financial information for proposed initiatives
•         Influencing the use of IT assets to maximize the return on IT investments through chargeback systems
•         Tracking current expenditures against the budget

Why should I implement Financial Management?
Financial Management processes allow you to:
•         Plan and predict IT expenditures required to maintain or improve services
•         Ensure expenditures fall within approved plan guidelines and that money is well-spent
•         Assist senior management in understanding the ongoing total cost of a proposed IT initiative
•         Promote a better understanding of the costs associated with providing specific services
•         Foster an environment of control to ensure IT services are effectively and efficiently used


Follow these steps for implementing ITIL Financial Management for IT:
1.     Gather the data. Identify a finance manager with substantial IT knowledge to ensure proper oversight of IT expenditures and assign additional staff as required. The team must perform several duties:
•         Perform a current-state assessment
•         Perform a gap analysis to reveal areas that require process improvements, training or software.
2.     Build the plan. The implementation plan should:
•         Establish the three major components of Financial Management - people, processes and tools.
•         Outline the costs necessary to sustain the new organization and build a preliminary budget.
•         Describe workflow, including data inputs, information outputs, and work processes.
•         Plan the resources and train them
Once the project plan and budget are complete, they should be submitted for approval.
3.     Execute the plan. You will want to execute the project plan in a series of steps:
•         Assign the staff.
•         Document and publish the processes.
•         Build the accounting and budgeting framework.
•         Identify, define and implement chargeback systems.
•         Define metrics to measure success.
4.     Implement reporting and exception processes and procedures.
5.     Initiate the ongoing work of Financial Management.
6.      Perform post-implementation review. Document lessons learned and identify any changes that should be made to the process to facilitate future process migrations. Perform a post-implementation audit 6-12 months after completion to determine if the new processes are being adhered to and if you're getting expected results.


Financial management for IT services contains 3 sub-processes:

  • Budgeting
  • IT Accounting
  • Charging

Budgeting
Budgeting enables an organization to plan future IT expenditure, thus reducing the risk of over-spending and ensuring the revenues are available to cover the predicted spend. Additionally it allows an organization to compare actual costs with previously predicted costs in order to improve the reliability of budgeting predictions.


IT accounting
IT accounting is concerned with the amount of money spent in providing IT services. It allows an organization to perform various financial analyses to gauge the efficiency of the IT service provision and determine areas where cost savings can be made. It will also provide financial transparency to aid management in the decision making process.
Several cost elements can be used to control your accounting:
Capital costs: Any type of purchases which would have a residual value as hardware and building infrastructure
Operational costs: Day to day recurring expenses cost like rental fees, monthly electrical invoices and salaries.
Direct costs: Any cost expenses which are directly attributed to one single or specific service or customer. A typical example would be the purchase of a dedicated server which cannot be shared and is needed to host a new application for a specific service or customer.
Indirect costs: One specific service provision which cost needs to be distributed in between several customers in a fair breakdown. A fair example is the cost associated to overall Local Area Network on which every customer are connected to. Breakdown could be done using total amount of users per customer or total amount of bandwidth usage per customer to accurately distribute the cost of providing this service.
Fixed costs: Any expenses established for long periods of time like annual maintenance contracts or a lease contracts. These expenses do not vary in the short-term.
Variable Costs: Any expenses that vary in the short-term based on the level of services provided, resources consumed, or other factors. For example, energy costs are variable based on the amount consumed.


Charging
Charging provides the ability to assign costs of an IT Service proportionally and fairly to the users of that service. It may be used as a first step towards an IT organization operating as an autonomous business. It may also be used to encourage users to move in a strategically important direction - for example by subsidising newer systems and imposing additional charges for the use of legacy systems. Transparency of charging will encourage users to avoid expensive activities where slightly more inconvenient but far cheaper alternatives are available. For example, a user might browse a dump on screen rather than printing it off.
Charging is arguably the most complex of the three sub-processes, requiring a large investment of resources and a high degree of care to avoid anomalies, where an individual department may benefit from behavior which is detrimental to the company as a whole. Charging policy needs to be simultaneously simple, fair and realistic.
Charging need not necessarily mean money changing hands (full charging). It may take the form of information passed to management on the cost of provision of IT services (no charging), or may detail what would be charged if full charging were in place without transactions actually being applied to the financial ledgers (notional charging). Notional charging may also be used as a way of piloting full charging.


The Critical Success Factors (CSFs) are:
•         Effective stewardship over IT finances


The key activities for this process are:
•          Perform budgeting for IT services and activities.
•          Perform IT accounting activities.
•         Perform IT charging and billing activities.
•         Provide management information about Financial Management quality and operations.


Key Process Performance Indicators (KPIs) for this process are:
Examples of KPIs are shown in the list below. Each one is mapped to a CSF.
•         Overall cost of delivery per customer
•         Percentage of IT costs not accounted for
•         Dollar value of budget variances/adjustments
•         Percentage of IT financial objectives met
•         IT Service Headcount


Role of Financial Manager are:
The Financial Manager is responsible for managing an IT service provider's budgeting, accounting and charging requirements.

2 comments:

  1. If you plan on a long term career as a project manager, then yes, even with your level of experience, I would suggest getting your PMP. You can prepare yourself for the exam in one of the PMP trainingproviders like http://www.pmstudy.com/. You can do minimal prep-work to get 40 PMI® Contact Hours and apply to PMI for PMP Exam before the class begins.

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  2. Very nicely shown about finance management. Its very useful. Thanks for sharing.

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