All organizations are budgeting and accounting for IT. Is this enough to say that they are really doing IT financial management properly? Read the opinion of our subject matter expert, Maxime Sottini.

At a first glance, IT financial management (ITFM) is considered one of the most implemented and mature processes in IT. After all, organizations prepare at least an annual budget for IT and they account for costs periodically. Usually, this is done as part of the overall and more general company wide financial management process. Can these organizations say that they are really doing ITFM properly?

A matter of definition
It probably depends on the meaning we give to ITFM and on what we want to achieve with it. For example, if we consider ITFM in the context of IT service management best practices we can certainly doubt whether we are doing ITFM the way we should do.
Let’s first try to understand the characteristics of good ITFM in the context of IT service management. IT service management is usually well known and identified by ITIL v2, ISO/IEC 20000 and ITIL v3. In ITIL v3, ITFM is a function described in the strategy phase of the IT service lifecycle. Its aim is “to provide the business and IT with the quantification, in financial terms, of the value of IT services, the value of the assets underlying the provision of those services and the qualification of operational forecasting”. In ITIL v2, it is a function described in service delivery. In ISO 20000, ITFM coincides with “Budgeting and Accounting for IT services”. Using ITIL and ISO 20000 we can determine the key characteristics of good ITFM:

1. reliably budgeting and accounting for the cost of each IT service
2. periodically forecasting the cost of each IT service
3. determining the value of each IT service

Budgeting and accounting for individual services
The first objective, budgeting and accounting for the cost of each IT service, is required by ISO 20000. Some organizations may have interpreted the standard as requiring budgeting and accounting for the cost of all the IT services together, but the new version of ISO2000, probably released next year but already available as a draft, will wipe out any doubt. Budgeting and accounting shall be done for each service separately! 

Surprisingly, budgeting and accounting for specific IT services, as opposed to budgeting and accounting for the whole IT, is not a very common practice yet, although it offers many advantages, in particular linking and clarifying the results achieved with the money spent. But it also requires several preconditions:

• a service catalogue
• a configuration management database (in particular a service oriented one which helps to understand the composition of a specific service)
• a meaningful and reliable mechanism to manage indirect costs (those which can‘t be directly associated to a specific IT service and which, therefore, shall be apportioned according to rules)

If the mechanism to manage indirect costs is not reliable and meaningful, determining the cost of IT services will become a mere accounting exercise with results not reflecting their true cost, if not a way to justify a predetermined result. In such a case, all the expected benefits of the additional effort done will most likely vanish. Few organizations determine the costs of each IT service. A significant portion of these organizations is not satisfied with the mechanism they use, changing it significantly (for example the apportioning drivers) from year to year. As a consequence, the number of organizations actually achieving this basic objective is very small. This is also the reason why I plan to discuss this topic in much more detail (how to determine the cost of IT services) in a future column.

Forecasting
If your organization is among the few which are reliably budgeting and accounting for each IT service, here comes the next step: do you periodically forecast the costs of your IT services? Forecasting is a difficult and time consuming exercise. Organizations often simply prefer comparing actual values against the budget. Of course, this is a good starting point: it enables you, depending on the frequency of the analysis, to rapidly identify actual deltas and to act on them. Nevertheless, deltas should reside in the future and be predictable. Careful forecasting can therefore help in anticipating issues and in possibly avoiding them or minimize their impact. Not many organizations forecast the costs of each IT service, therefore this topic deserves to be detailed in a future column as well.

Value of IT services
Is your organization satisfactorily doing forecasting too? If so, it is among the few having good control of the cost side of ITFM. This is very important, because cost optimization or reduction is often a very high priority request of the business or the market, especially nowadays in times of recession. But before the recession, and hopefully also after it, a top ranked topic in the agenda of CIOs is the alignment of IT services with business needs. Business alignment and value of IT services are clearly related concepts: the value of IT services is intuitively higher when these services satisfy business objectives. According to ITIL v3, ITFM should help to determine and explain the value of IT services.

This is not an easy task and it is often ignored (for example, it is not part of ITFM in ITIL v2, nor in ISO 20000). Effectively, for many organizations, determining the value of IT services is considered part of the IT strategic processes, e.g. the service portfolio management process. Independently from theoretical issues, the real question is how to determine the value of an IT service. Once again, this is not an easy task and it also depends on the service considered. For example, for a service which is bought or perceived by the client, a mean to identify its value is to understand the money they are able to spend on it. But this is not the only approach, since not all clients are charged for IT services, and not all IT services are directly perceived by the client (e.g. infrastructural services are often invisible to them). There are other options to tackle this problem and they too will be explored in a future column.

Conclusion
In conclusion, if your organization is reliably and meaningfully budgeting and accounting for the cost of each IT service, if it forecasts for them and is also able to determine their value for the client, then it is doing optimal ITFM. But it is a long way getting there and the majority of organizations are probably still facing the initial steps of the trip. If this is the case for your organization too, you will probably be interested in the next column, in which I examine how to reliably determine the cost of IT services.