What is IT Financial Management (ITFM)?
IT Financial Management (ITFM) determines the costs of services and provides accounting support to ensure expenditures fall within approved plans. Another key responsibility is to make sure that the funds are well-spent and costs are justified.
The role of Financial Management varies among organizations depending on their background, operational maturity and business priorities. It’s not a rigid framework, but rather a set of best practices and recommendations that are applied based on your situation and objectives.
Some of the key aspects of IT Financial Management are:
- Provide oversight of all IT expenditures
- Reduce and minimize waste
- Forecast cost for ongoing operations
- Estimate, budget and track the cost of new IT initiatives
- Allocate cost based on activity
- Encourage desired behaviors through financial levers
Benefits of IT Financial Management
You’ve probably heard it many times before: IT costs too much. I have no idea what I’m paying for. I can’t accurately budget for IT costs. I can do better getting IT services myself.
Complaints like those are what makes IT Financial Management important. A single bill without any details about what makes up the cost will not get their trust. A lack of cost control year over year without proper justification will cause frustration. Tracking, analyzing and making information about cost visible to all stakeholders increases your chances of getting their buy-in.
The primary objectives of IT Financial Management can be summarized in four key activities:
Reduce unnecessary cost
Evaluate and prioritize new initiatives properly
Make consumers more considerate about how they request resources
Improve your planning and budgeting
ITFM Implementation Steps
Implementing IT Financial Management will touch many different parts of your organization and will likely require some cultural changes. In a large organization these things tend to take a while. Under those circumstances, it’s important to get some early positive effects to build some tailwind. The area where you are most likely to find quick wins is cost optimization. Uncovering the potential for savings is non-intrusive, objective and can be automated. That makes it your ideal starting point.
IT Financial Management is not a ‘one size fits all’ process. Scope and timeline of an implementation will vary depending on the characteristics and maturity of your organization. Having said that, there are a set of key initiatives that should always be considered, preferably in the order listed here:
1. Define cost structures and other definitions
For cloud-based services (IaaS, PaaS or SaaS) from a third party, this is a relatively straightforward process where the cost per instance, transaction, user etc. is the foundation of the business agreement and subscription terms. For traditional on-premise infrastructure, hosted in your own datacenter, you normally will have to do a bit more preparations. To calculate the cost of running a whole system or individual resources assigned to it, you need to define the cost of the individual components. Our recommendation is to start with a simple model that can be gradually refined by adding more layers.
2. Get visibility across all your hybrid IT
IT Financial Management also requires visibility of all the different components involved in your service delivery. Service components across the board, whether through public cloud services or hosted in traditional on-prem data centers needs to be visible. Individual business services many times span multiple platforms and service providers. You should look for a tool that offers unified and seamless visibility and analysis of all the complete environment. Being limited by silo makes it difficult and time consuming to gather and analyze the data.
3. Identify and address inefficiencies
The conditions under which your business services are running will change as time goes by.
- Workload intensity will vary due to seasonality in the business
- Changes in business processes impacts the demand for services
- Resources allocated based on forecasts need to be adjusted to outcome
- This means that you need to re-evaluate and then right-size or even decommission over-allocated resources on an ongoing basis. The process of identifying the required and optimal amount of resources can be automated, allowing it to be run continuously.
4. Evaluate and prioritize new initiatives properly
Every time the business asks for IT services in support of new or changing initiatives, you should try to make a fair and objective assessment of the business opportunity. Not just attend to whoever is the loudest. By comparing the cost of standing up the new initiative to the value streams that will be supported, you can calculate net contribution and prioritize different initiatives based on that.
5. Allocate cost based on activity
If there is no cost associated with the usage of IT resources by different business units in an enterprise, there’s a risk that each unit will continue to utilize the resources to maximize its own potential benefit to the detriment of the enterprise as a whole. A simple way to ensure effective use of resources is to charge each business unit in relation to their consumption. A well-designed allocation policy enables business transparency of cost and drives thoughtful business decisions for the whole company, requiring a minimum of allocation overhead and supervision once implemented.
6. Plan and budget for the future
In addition to keeping the ongoing cost in check, IT Financial Management needs to estimate cost implications of future events too. There are several different statistical methods for building capacity models of systems, whether the growth is organic or caused by changing circumstances. The tools will allow you to evaluate what impact different what-if scenarios will have on the resources underpinning your business services. Applying your established cost structure to those predictions will provide an estimate of future spend. Since the forecasts are based on subjective assumptions, you should always apply probabilities to the outcomes and strive to evaluate an array of scenarios.
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