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Describes the key components of IT Finance - budgeting, accounting, chargeback, planning, spend analysis and portfolio management.

Describes the key components of IT Finance - budgeting, accounting, chargeback, planning, spend analysis and portfolio management.

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It Finance It Finance Presentation Transcript

  • The Importance of IT Financial Management in Successfully Running IT David Baker Chief Architect Diamond Management & Technology Consultants david.baker@diamondconsultants.com November 11, 2008
  • A significant portion of business users concur that IT is a strategic investment 87% of business leaders concur that IT plays a major role in the strategic success of their business1 77% of CFOs say they regard IT as a strategic function instead of as a utility2 1. 2007 Digital IQ study, Diamond Management & Technology Consultants 2. CFO magazine , December 2005 Page 1
  • Yet there is growing concern about increasing costs, lack of IT/Finance alignment, and poor return on IT investments  Increased demand for new technologies and complexities has frequently caused IT costs to grow faster than other costs  CIOs in 250 firms across Europe found that nearly three-quarters of decisions about innovation investments are made without full consideration of the impact on IT1  60% of CFOs indicated that IT did not meet their performance expectations2  45% of CFOs identify the challenge of obtaining metrics to identify true IT 1. Computer Associates 2. CFO magazine , December 2005 value and cost3 3. Strengthening IT-Finance Collaboration to Drive ROI, Corporate Executive Board, 2007 Page 2
  • Proper financial management has become integral to ensuring IT achieves the business objectives IT Financial Management  . . . is the sound management of monetary IT resources in support of organizational goals  . . . provides the expense, or cost, side of the equation for making business decisions regarding changes in the IT infrastructure, systems, staffing, or processes  . . . provides answers for how IT can help deliver organizational goals and what IT contributes to shareholder value Page 3
  • Our research and experience indicate IT organizations are transforming to value-oriented service providers Common Attributes of a Common Attributes of a Cost-Focused IT Organization1 Value-Oriented Service Provider1  Existing IT capacity, skills and  Business strategy and business cultural appetite determine work priorities determine IT work selection and prioritization prioritization  Budget and cost oriented with a  Emphasis on ROI and focus on focus on variances explanation realizing business benefits  Implementation plans are typically  Implementation plans driven by a effort driven e.g. resource and time commitment to deliverables  Spending concentrated on work  Spending concentrated on work that is relatively short and perhaps that produces business value easier to implement regardless of duration and ease  Cultural aversion to risk and  Willingness to accept and change aggressively manage reasonable amounts of risk 1 Based on Diamond’s primary research and experience with large IT organizations across multiple industries Page 4
  • We’ve identified five barriers restricting companies from making that transition Page 5
  • Optimizing your IT financial management process avoids these barriers and aids your transition to a value-oriented provider Planning Annual Analyzing Budgeting Ad hoc Portfolio Quarterly Management Continuous Charging Accounting Monthly Daily/Monthly Note: cycle is not necessarily completed in a continual loop since timing can be different for each component Page 6
  • IT Planning is the annualized activity to determine the IT initiatives, to support both the business strategies and the IT strategies  The very first step in planning for IT spend should be the business strategy  Then, IT strategy should be derived from the business strategy and add other critical elements that are not on the business radar  Demand management is the filter that considers both strategies and criticalities to form the desired portfolio of IT spend for the next 12 months. Page 7
  • Top 10 most important planning pitfalls to avoid  Management’s assumption that the planning function can be delegated to the planner  Top management becomes so engrossed in current problems that it spends insufficient time on long-range planning  Failure to develop goals suitable as a basis for formulating long-range plans  Failure to assure necessary involvement in the planning process of key line personnel  Failure to use plans as standards for measuring managerial performance  Failure to create a company climate that is congenial and not resistant to planning  Assuming comprehensive planning is separate from the entire management process  Injecting so much formality into the system that it restrains creativity  Failure of top management to review with department heads the long-range plans they developed  Top management’s consistently rejecting the formal planning mechanism by making intuitive decisions which conflict with the formal plans Source: Pitfalls in Comprehensive Long-Range Planning, G. A. Steiner Page 8
  • Budgeting ensures that correct funding is available for delivery of IT Services and that those funds are not over-spent  Limits on capital expenditure  Limits on operational expenditure  Limits on variance at any point in time, between actual and predicted spend  Guidelines on how the budget must be used  An agreed workload and set of services to be delivered  Limits on expenditure outside the organization or group of organizations  Agreements on how to cope with exceptions. Page 9
  • Budgets may be fine for managing capital in a slow-moving, hierarchical company, but they have critical flaws in today’s economy Checklist to Budgeting Flaws Improve the Process  Little help for today’s performance 1.Begin with objectives rather than drivers (innovation rates, service numbers levels, quality, and knowledge sharing don’t lend themselves to 2.Ensure your unit’s objectives align budget quantification) with the company’s  Same treatment of all employees 3.Link the budget to performance – as costs drivers (talent and involvement are not in 4.Budget by walking around direct relationship with salary) 5.Keep it out of the file cabinet  Compartmentalization of companies into small units 6.Explain the payoffs (No incentive to look outside of one’s unit) Page 10
  • Cost Accounting is an inward-looking activity that examines the actual costs of performing IT activities  Cost Accounting breaks down costs associated with particular activities and assigns them to projects, customers, or services  Cost Accounting can also be used to measure the efficiency of the IT Department over time in management of trends and benchmarks Page 11
  • Overview of Cost Accounting Elements Asset Management Employee Time Keeping Project Accounting • Tracks all Computer- • Tracking time across all • Projects must track the Related Expenses by IT employees assists with actual expenses, by all specific cost elements, utilization and allocation types of expense, and according to cost of employee expense compare it to original Cost management guided / Benefit Analysis capitalization guidelines • Contractor and established within plan Outsourcer expenses • Hardware, software, and must be tracked and • Project Accounting is data communications attributed to work efforts critical to track variances often contribute a large to planning estimates chunk of this cost Page 12
  • Chargebacks allocate the costs of IT services back to the business units and are optionally based on activity based costing  Influence business unit behavior  Rein in spiraling costs  Enhance transparency  Some business units consume more IT resources than others  IT can demonstrate good management and effective accounting of IT resources  IT chargeback data can provide valuable insight for budgeting, cost- benefit analysis, product-costing and profitability reporting Page 13
  • There are several keys to successfully deploying chargebacks • Analyze cost drivers Understand IT • Find ways to convert fixed cost to variable costs (on some timeframe, all costs are variable) Costs • Benchmark key processes • Look for ways to cut costs “Renaissance” people to cross the • Business Unit managers accountable for IT costs must understand of IT Business / IT • IT managers need to understand the business direction boundary Promote healthy • Business pushes IT to keep service quality high and costs low • Business pushes IT to match costs with value to free funds for business priorities tension between • IT pushes business to question the importance of their IT requests business units and • IT pushes business to keep focus on changes in demand IT • IT pushes business to recognize need to leverage IT across Business Units • IT needs to deliver cost reductions for variable costs when the Business makes Need to deliver on decisions to reduce service levels or usage decisions • The Business will need to make service level changes or sunset services to allow IT to reduce costs Page 14
  • IT Spend Analysis looks inward to examine where IT dollars are spent and identifies opportunities for future savings  IT Spend Analysis typically gathers data from the general ledger and many other data sources for analysis purposes  The spend data is compared to benchmarks and analyzed for trends that can result in savings opportunities Page 15
  • Here are three typical spending gaps with opportunities to reduce each A This gap is addressed through  Gap may be caused by ineffective procurement utilization and capacity analysis related to current requirements and practices such as multiple vendor contracts What is paid for expected growth. This analysis will C identify any overcapacity in the What is Gap caused by lack of in- depth knowledge of infrastructure. planned application profiles and B capacity forecasts B This gap is addressed through an  Cost What is improved infrastructure growth used A Gap caused by system plan based on expected demand configuration optimized for availability & reliability or by and tightly linked to the capital What is required lack of awareness of planning process available capacity Reduction Opportunity C This gap is addressed through  Capacity contract negotiations, right-sizing of contracts, and termination of contracts Page 16
  • The IT Finance cycle is unified by the continuous process of IT Portfolio Management  Unifies the management of the complex world of business initiatives, technology upgrades, and overall IT management.  The combination of practices, tools and techniques used to measure, control and increase the return on individual IT investments as well as on an aggregate enterprise level  A portfolio can include any and all direct and indirect IT projects and assets, including components such as infrastructure, outsourcing contracts and software licenses. Page 17
  • Portfolio Management places projects and assets into categories for planning and analysis Implicit Distinguish Define Measure, Diagnose, Make IT categories criteria assess recommend decisions portfolio Invest 1 4 1 3 2 3 2 2 1 2 5 1 A 2 3 2 0 0 1 Adjust 4 0 5 0 2 4 1 1 3 0 2 3 0 2 2 2 0 1 Sunset B 5 3 0 1 2 2 “This huge Different Screens Fact-based Business Faster and collection assets that insight into language better of projects judged and match asset- investment and managed strategic specific decisions assets…” differently intent performance Page 18
  • Adopting a portfolio approach brings logic, structure and takes emotion out of spending decisions Portfolio of Technology Driven Innovations investments in IT assets and (TDIs or OCIs) projects Option creating Business unit level investments with power to transform 5-10% of average portfolio Enterprise level Focused Business Improvements (FBIs) Assets and projects aimed at incremental operational gains 20-30% of average portfolio Core Business Enablers (CBEs) Assets that form the core IT infrastructure 60-75% of the organization of average portfolio Note: Averages based on Diamond client experience. Page 19
  • There are 3rd party frameworks available to help you optimize you management of IT Finance Cost Accounting Financial management Budgeting x x Project Appraisals Cost Budgeting Project investment Cost Cost Recovery accounting recovery appraisals Budgeting x Accounting x Charging Value Governance x Portfolio Management x Investment Management Page 20
  • Tools are an enabler of many components of the lifecycle; however, not all components require complex tools Planning • EA repositories (EA documents, roadmaps and strategy maps) • The outcomes are inputs to Portfolio Management solutions Annual Budgeting • Typically Financial Systems, working documents are usually spreadsheets • Tracking and reporting tools are commonly spreadsheets Quarterly Accounting • Commonly in industry best practice ERP and/or Financial systems • Output tracked and often reported in spreadsheets Daily/Monthly Charging • Can consist of multiple components: hardware tools to manage “usage”, industry applications to compile information and produce “bill” to business Monthly customers Analyzing • Multiple tools leveraged based upon timeline and budget: examples include spreadsheet, client database tools, or more sophisticated analysis tools – Ad hoc most are ad-hoc and fed from existing tools Portfolio Mgmt • For IT Financial Management, probably the most mature in PPM (Project Portfolio Management) and EPM (Enterprise Portfolio Management) tools; Continuous many vendors offer multi-functional tools Page 21
  • Key Takeaways  Financial Management is an important discipline required to transform IT to a value oriented service provider  Start with solid planning, use enterprise architecture techniques to ensure you have the right projects identified  Create budget categories and budgets, tie them to your Portfolio Management efforts  Track your assets, project expenses, and time spent on projects  Consider using chargebacks to increase transparency of IT service costs  Monitor your spending, continually check alignment with budget  Use your planning, budgeting, historical data and monitoring to make portfolio management decisions (invest, adjust, sunset) Page 22
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