SM271g01FinancMgm

IBM Global Services

© 2005 IBM Corporation

ITIL ® is a Registered Trade Mark, and a Registered Community Trade Mark of the office of Government Commerce, and is Registered in the U.S. Patent and Trademark Office

ITIL Service ManagerService Delivery

Financial Management for IT Services

Service Delivery – Financial Management for IT Services

2 © 2005 IBM CorporationITIL Service Manager Course | v1.0

Content

1. Goals, Scope and Definitions

2. Process

3. Controls

4. Implementation Considerations

5. Summary and Exercise



Content


2. Process

3. Controls





Financial Management for IT Services

Source: IPW Model is a trade mark of Quint Wellington and KPN Telecoms



Goals

The goal of Financial Management for IT Services is to ensures that the IT organization is able to account fully for the money spent on IT services, to attribute these costs to the IT services delivered to customers, and to assist management decisions on IT investment by providing detailed business cases for changes to IT services.

Goals of Financial Management for IT Services:For internally oriented (in-house) IT service providers

– Monitoring of the usage of IT components and resources for supplying IT services with regard to cost efficiency.

For externally oriented IT service providers– Recording of costs incurred, and details of how these relate to services performed for the customer.– Support management decisions about IT investment by means of detailed business cases.



Scope

Scope and Contribution of the Financial Management Process:Scope of IT Financial Management for IT Services: – Budgeting

ensures that the correct finance is available for the provision of IT Services and that during the budget period they are not over-spent.

– Accountingtracks actual costs against budget, as well as supports the development of investment strategies which evaluate IT options.provides cost targets for performance and Service Delivery, as well as facilitates prioritization of resource usage.

– Chargingdetermine the most suitable Charging policies for their organization.recovers fairly and accurately, the agreed costs of providing the services.

Importance of Financial Management for IT Services:– Financial Management is necessary for any IT Organisation to act as a “real” IT Service

Provider, especially in combination with Service Level Management. – Financial information is necessary to make valid IT investment decision.– It enables an accurate and fair way of determining the cost as well as

charging for ongoing services.



Definition – Cost types (1/2)

Direct costs can be clearly linked to a single customer, e.g. server or application used exclusively by a single division.

Direct costs

Indirect costs sometimes called overheads, cannot be easily linked to the running of specific customer services, they are distributed across all, or a number customers (e.g. network or technical support costs, etc.).

Indirect costs

Fixed costs do not vary even when resource usage varies, e.g. maintenance contracts.

Fixed costs

Variable costs vary with some factor, such as usage or time, they are used in cost models where costs cannot be easily predicted, e.g. production of additional quarterly reports.

Variable costs



Definition – Cost types, depreciation (2/2)

Operational costs resulting from the day-to-day running of IT Service organization, they can be measured within a short timeframe, usually less than 12month financial year, e.g. staff costs, maintenance of HW/SW, etc.

Operational costs

Depreciation is the measure of the wearing out, consumption or other reduction in the useful economic life of a fixed asset, whether from use, passage of time, or obsolescence through technological or market changes. Depreciation should be allocated so as to charge a fair proportion of cost or valuation of the asset to each IT Accounting period expected to benefit from its use.

Depreciation

Capital costs are costs of the physical assets of organizations, they are the purchase or major enhancement of fixed assets; It’s usual to calculate just the annualized depreciation for the year, e.g. computer equipment, building and plant, etc.

Capital costs



Content


2. ProcessProcess activitiesRoles & ResponsibilitiesInterfaces Essentials

3. Controls





Process Activities

Process Activities Financial Management for IT Services:Budgeting– Budgeting and obtain budgets– Cost administration and control Accounting– Building a cost model– Definition of cost types & elements– Apportion of IT Services costs– Calculating cost of IT Services– Perform cost-benefit or Return-on-Investment analysisCharging– Definition of charging policies– Identification of chargeable items– Perform pricing– Definition of ways to charge– Charging and billing (invoice)



Process Activities in a chart

Source: OGC ITIL Book Service Delivery, Figure 5.1



Roles & Responsibilities

Driving the efficiency and effectiveness of the Financial Management processManage IT Organization budgetDefine Charging policyProducing management informationSupervision of Finance Support StaffMonitoring the effectiveness of Financial Management and making recommendations for improvement

Identification and allocation of IT costsSupporting the Finance Manager in– Building financial reports– Budget planning process– Planning of charging policies– Day-to-day activities

Finance Manager Finance Support Staff



Interfaces – Inputs

Process Trigger: – New financial requirements (changes in regards

to budget, accounting and charging changes)– External audits

Inputs used by process activities:– CI and/or asset information (Configuration

Mgmt.)– Capacity plan & details (Capacity Mgmt.)– Charging policies, customer requirements

(SLM)– Service Level requirements and reports (SLM)– Costs of non-availability (Availability Mgmt.)– Costs for implementing a change (Change

Mgmt.)

Process Trigger: – New financial requirements (changes in regards

to budget, accounting and charging changes)– External audits

Inputs used by process activities:– CI and/or asset information (Configuration

Mgmt.)– Capacity plan & details (Capacity Mgmt.)– Charging policies, customer requirements

(SLM)– Service Level requirements and reports (SLM)– Costs of non-availability (Availability Mgmt.)– Costs for implementing a change (Change

Mgmt.)

Financial Management



Interfaces – Outputs

Process Outcome: – IT budgets– Cost models– Charging policies– Billing, invoices

Output Information used by other processes:– Financial data (all relevant ITIL processes)– Price information (SLM)– Cost of desired Capacity/Availability (Capacity

Mgmt.)– Cost of availability upgrades (Availability Mgmt.)– Influence of changes on costs (Change Mgmt.)

Process Outcome: – IT budgets– Cost models– Charging policies– Billing, invoices

Output Information used by other processes:– Financial data (all relevant ITIL processes)– Price information (SLM)– Cost of desired Capacity/Availability (Capacity

Mgmt.)– Cost of availability upgrades (Availability Mgmt.)– Influence of changes on costs (Change Mgmt.)

Financial Management



Essentials – Planning Cycle

Planning

of the services, amount of services

and cost

Plan for a year

Budgeting

Ongoing measu-rings/controls

Price fittings

Actual state/target state comparison, failure analysis,

correction measuresService price

The periodicity of the process is defined in coordination with the client. Yearly cycles assure continuity and planning safety within stable service profiles



Essentials – Example budget calculation (1/2)

Source: OGC ITIL Book Service Delivery, Table 5.1 (Part 1)



Essentials – Example budget calculation (2/2)

Source: OGC ITIL Book Service Delivery, Table 5.1 (Part 2)



IT Services

IT Services

IT Services

Database

Host

Server

Staff

Network

Customer

Customer

Customer

IT-Services

IT-Services

IT-Services

IT-Services

ITServices

Essentials – Interface between IT Accounting and Charging

IT Accounting Charging

IT Com-ponents



Essentials – Cost Types

For producing a cost model, the suggested cost types are:Hardware costs (CPU, disk storage, LANs, peripherals….)Software costs (OS, applications, database, systems management….)People costs (payroll costs, company cars, relocation costs, expenses, overtime, consultancy)Accommodation costs (offices, storage, secure areas, utilities)External service costs (security, outsourced services,…)Transfer costs (goods and services that are sold from one part of an organization to another)

All costs for services can be grouped into the cost types listed.Other types are possible; this is not a fixed rule.



Essentials – Cost Types Example Printing a report

Printing out a report:

Fixed direct costs– Depreciation of the printer

Fixed indirect costs– IT Management team, support team

Variable direct costs– Paper consumed for printing

Variable indirect costs– Printing another report on the same printer– Ink cartridge



Essentials: Example of Cost Model of Costs-by-Customer

Source: OGC ITIL Book Service Delivery, Figure 5.3



Essentials – Implementation steps for Charging (Customer Example)

Productive departmentIdentification of the calculated organization units

Cost-planDefinition of costs

Cost developmentAssignment of costs to cost units and center

Cost center planDevelopment of cost center and cost units

Costs per unitDetection of costs per cost unit (service)

Quantity structureDetection of the service amounts

Price cataloguePricing of service

Service shareClassification of the benefits to services

Define services

Define measurement categories for usage measurings

Service catalogue Definition of the mea-surement categories for the invoice

Invoice units

IT internal Interfaces to clients

1 2 4

5 10

1186

7 9

3

Understanding of theframe conditions

0

Organization of the services charge processes

12



Essentials – Example of different Charging Models

Fixed price

Invoice according to usage

Share of actual costs

Service A

Service B

Service C

Is equivalent to individual buyable resources, not according to usage

"Operation service" with defined invoice units

No strategicserviceLow share of turnoverOnly one buyer



Essentials – Pricing decisions

The pricing of any service makes it necessary to answers to following questions first:What is the pricing objective ?What is the true demand for the service ?What is the accurate allocation of Direct and Indirect Costs ?Do we have competition – are services available externally for the customer ? Is the Pricing decision based on:

– Recovering just costs?– Gaining profits ?– Providing market prices ?

Do we know the actual costs of providing the service ?

Examples of pricing methods include:Cost Cost-plus Going rate market price Fixed price



Content


2. Process

3. ControlsReports & KPI’sCosts





Reports & Key Performance Indicator‘s (KPI‘s)

Key Performance Indicators (KPI’s):Success of the Accounting and Charging system:– Cost recovery profiles and expenditure profiles are correct– Charges, where applied, are seen to be fair– IT organization is provided with the expected income/level of profits– IT Customers and users behavior and perceptions changeEffective stewardship of the IT financeOverall effectiveness of the processCustomers satisfied with cost of service provisionPlans, budgets and specific reports are produced on timeAll costs are accountedNumber of changes made to the charging algorithm (where appropriate)



Costs

Costs of not implementing Financial Management:

No adequate basis for IT investment decisions (negative or low ROI)Lack of transparency of IT department performanceUnexpected financial difficulties due to wrong budget planning (cost constrains, etc.)

Costs of implementing and maintaining the process:

Transfer costs Hardware costsSoftware costs Staff costs Accommodation costs



Content


2. Process

3. Controls

4. Implementation ConsiderationsEssentialsCritical Success FactorsBenefitsRisksPractical Recommendations




Essentials – Timing and Planning Activities

Where do we want to be?

Vision and business objectivesNomination of a Finance ManagerMission statement and scope of the Financial ManagementAwareness Session

Where are we now? AssessmentPeople – Process – Tools – Information according the Incident Management

How do we get where we want to be?How do we know we have arrived?

Process implementation activities and MetricsQualification of activities, resources, funding and quality criteriaIdentification, design and development of support systemsGet AgreementTraining and Education Implementation and establishment of support tools and the new processCut-over the new processes



Essentials – Framework for Implementation

Framework for Implementation of Financial Management for IT Services:Perform preparation activitiesEstablish awareness for Financial ManagementSet up cost centres and cost unitsPilot the Financial Management systemMonitor the Financial Management systemPlan IT Accounting and Charging Continuity



Critical Success Factors (CSF’s)

Critical Success Factors (CSF’s):Ensure benefits of Financial Management are quantifiable and demonstrableMinimize the complexity (simple cost and charging models)Build an appropriate cost modelGet company-wide buy-in for charging (incl. an accepted charging policy) Ensure representative SLAs are in place as basis for FMDefine Chargeable items, which are understandable and accepted by the customersEffective/Efficient underlying Financial Management system



Benefits

Benefits:Improved quality of services– Efficient use of IT resources– Increase professionalism of IT staff– Influence customer behaviourLong term financial benefits – Confidence in budget planning and management– Accurate financial information for investment decisions– Sufficient IT funding by the business– Recovering of IT costs in a fair mannerIncreased productivity of IT and customerBetter control of IT and IT ServicesImproved financial metrics and management informationImproved communication and teamwork (IT/IT and IT/Customer)



Risks

Possible Problem Areas and Risks:Lack of management commitment Resistance to changeLack of integration with other processes Over expectationsLack of tools, training, resourcesCost justification for Financial Management is not valid Lack of financial skills within the IT OrganizationIT organization may not be able to respond to Changes in user demands if costs become an influenceNew discipline, with limited understandingStrategic objectives not clearly set



Practical Recommendations

Practical Recommendations:

Clear differentiation between accounting and chargingA common understanding of the business role of IT Organization (profit or cost center) is criticalConnection with Availability Management, Capacity Management, Configuration Management, and Change ManagementCustomer-specific charging



Content


2. Process

3. Controls





Summary

The goal of Financial Management for IT Services is to ensures that the IT organization is able to account fully on the money spent on IT services, to attribute these costs to IT services delivered to customers, and to assist management decisions on IT investment by providingdetailed business cases for changes to IT services.

Financial Management Activities:Budgeting

Budgeting and obtain budgetsCost administration and control

AccountingBuilding a cost modelDefinition of cost types & elementsApportion of IT Services costsCalculating cost of IT ServicesPerform cost-benefit or Return-on-Investment analysis

ChargingDefinition of charging policiesIdentification of chargeable itemsPerform pricingDefinition of ways to chargeCharging and billing (invoice)

Financial Management Activities:Budgeting

Budgeting and obtain budgetsCost administration and control

AccountingBuilding a cost modelDefinition of cost types & elementsApportion of IT Services costsCalculating cost of IT ServicesPerform cost-benefit or Return-on-Investment analysis

ChargingDefinition of charging policiesIdentification of chargeable itemsPerform pricingDefinition of ways to chargeCharging and billing (invoice)

Process EssentialsPlanning CycleBudget CalculationInterface between IT Accounting and ChargingDefinition of Cost TypesCost ModelsImplementation steps for ChargingCharging Models Pricing decisions

Process EssentialsPlanning CycleBudget CalculationInterface between IT Accounting and ChargingDefinition of Cost TypesCost ModelsImplementation steps for ChargingCharging Models Pricing decisions



Exercise Financial ManagementScenarioYou are assigned as a Lead Consultant. At the moment, the Help Desk Services at Pecunia are allocated as indirect costs within the organization. You and your team have to propose a new charging and pricing policy for the Help Desk services, bringing increased benefits for the clients of the IT department. Task

Develop a cost model for Help Desk ServicesDevelop a price model for Help Desk ServicesSummarize advantages and disadvantages of your preferred approach

Target GroupFinance Manager of your clientCFO/CIO

Results10 Minutes presentation including:– Give a business justification for your approach– Comments about the new cost/price model for Help Desk Services– Summarize advantages/disadvantagesTeamwork: One sheet, what went well, what could have been improved

HintsMake appropriate assumptions, there is not much information in the case study. Think about possible client expectations.Duration

Preparation with your team: 90 minutesPresentation: 10 MinutesDiscussion / Questions: 20 minutes

SM271g01FinancMgm

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