ITIL V3 Concepts & Processes

Module: Financial Management

Version 1.0

4.4 - Financial Management

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Importance and Coverage

Importance of this training module
Financial Management gives insight into the costs of the IT organization and options to charge the costs - making it possible to run IT as a business.

Coverage
Financial Management concepts and related processes. Financial Management tools.

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4.4 - Financial Management

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Financial Management - Purpose

Financial Management provides the business and IT with the quantification, in financial terms, of the value of IT services, the value of the assets underlying the provisioning of those services, and the qualification of operational forecasting.

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4.4 - Financial Management

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Financial Management - Goals

To produce a value for services that the business perceives as fair, and fulfills the needs of the provider in terms of supporting it as an ongoing concern.

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4.4 - Financial Management

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Financial Management - Objectives

Objectives
To ensure financial visibility and accountability. To budget and account for the cost of service provision. To facilitate accurate budgeting. To account for running IT. To provide basis for business decisions. Balancing cost, capacity and Service Level Requirement. To recover costs where required (Charging). To understand the value of IT services. To establish Financial compliance and control. To enable value capture and creation. To ensure enhanced decision making.

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4.4 - Financial Management

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Financial Management - Scope

Scope:
Budgeting (mandatory) Forecasting, control and monitoring of expenditure IT Accounting (mandatory) Enables IT to account for where money is spent on running the department and providing services Charging (optional) Billing customers for services

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4.4 - Financial Management

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Financial Management Basic Concepts (1)

Service Valuation
Quantifies in financial terms, the funding sought by the Business and IT for services delivered, based on the agreed value of those services
Cost of providing the service Value to the customer receiving the service

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Service Valuation: Service Valuation quantifies, in financial terms, the funding sought by the business and IT for services delivered, based on the agreed value of those services. Financial Management (FM) calculates and assigns a budget to a service or service component so that they may be disseminated across the enterprise once the business customer and IT identify what services are actually desired. The pricing of a service is the cost-to-value translation necessary to achieve clarity and influence the demand and consumption of services. The activity involves identifying the baseline cost for services and then quantifying the perceived value added by a providers service assets in order to conclude a final service value. The primary goal of Service Valuation is to produce a value for services that the business perceives as fair, and fulfils the needs of the provider in terms of supporting it as an ongoing concern. A secondary objective is the improved management of demand and consumption behavior. It is helpful to restate what constitutes service value so that the translation to price can be more easily dissected. Within this definition, the service value elements of warranty and utility require translation of their value to an actual monetary figure. Therefore service valuation focuses primarily on two key valuation concepts: Provisioning value Service value potential Provisioning Value is the actual underlying cost to IT related to provisioning a service, including all fulfillment elements, both tangible and intangible. Service Value Potential is the value-added component, based on the customers perception of value from the service or expected marginal utility and warranty from using the service.

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Financial Management Basic Concepts (1)

Service Investment Analysis
The objective of service investment analysis is to derive a value indication for the total lifecycle of a service based on
Value received Cost incurred during the lifecycle of the service

Understand the total lifecycle value and costs of proposed new services or projects

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FM provides the shared analytical models and knowledge used throughout an enterprise in order to assess the expected value and/or return of a given initiative, solution, programme or project in a standardized fashion. It sets the thresholds that guide the organization in determining what level of analytical sophistication is to be applied to various projects based on size, scope, resources, cost and related parameters. The objective of service investment analysis is to derive a value indication for the total lifecycle of a service based on : 1. The value received. 2. Costs incurred during the lifecycle of the service. On Methods, models, activities and techniques, discusses a number of concepts and methods for exploiting IT investment analysis to improve capital expenditure and IT Operations processes. Assumptions about the service are a key component of analyzing investments. The granularity of assumptions used in investment analysis can have significant impact on the outcome of the analysis. For example, a service obtained via an instantly self-deployable packaged software solution residing on a single desktop and requiring little user support will have a different investment profile than a service obtained through custom development, global customer interaction and other resources that go into creating, deploying and supporting an enterprise solution with multiple language users. In Service Investment Analysis, it is best to lean toward the use of an exhaustive inventory of assumptions rather than a limited set of high-level inputs, in order to generate a more realistic and accurate view of the investment being made.

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Financial Management Basic Concepts (1)

Accounting
Enable the identification and tracking of service-oriented expenses or capital items.

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Accounting within FM differs from traditional accounting in that additional category and characteristics must be defined that enable the identification and tracking of service-oriented expense or capital items. FM plays a translational role between corporate financial systems and service management. The result of a service-oriented accounting function is that a greater detail and understanding is achieved regarding service provisioning and consumption, and the generation of data that feeds directly into the planning process. The functions and accounting characteristics that come into play are discussed below: Service recording The assignment of a cost entry to the appropriate service. Depending on how services are defined, and the granularity of the definitions, there may be additional sub-service components. Cost Types These are higher level expenses categories such as hardware, software, labor, administration, etc. These attributes assist with reporting and analyzing demand and usage of services and their components in commonly used financial terms. Cost classifications There are also classifications within services that designate the end purpose of the cost. These include classifications such as: Capital/operational This classification addresses different accounting methodologies that are required by the business and regulatory agencies.

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Direct/indirect This designation determines whether a cost will be assigned directly or indirectly to a consumer or service. Direct costs are charged directly to a service since it is the only consumer of the expense. Indirect or shared costs are allocated across multiple services since each service may consume a portion of the expense

Fixed/variable This segregation of costs is based on contractual commitments of time or price. The strategic issue around this classification is that the business should seek to optimize fixed service costs and minimize the variable in order to maximize predictability and stability. Cost Units A Cost Unit is the identified unit of consumption that is accounted for a particular service or service asset.

As accounting processes and practices mature toward a service orientation, more evidence is created that substantiates the existence and performance of the IT organization. The information available by translating cost account data into service account information dramatically changes the dynamics and visibility of service management, enabling a higher level of service strategy development and execution.

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Financial Management Basic Concepts (2)

Financial Management Basic concepts
Business case
A decision support and planning tool that predicts outcomes of a proposed action. Used to justify investments.

Business Impact Analysis

Understanding the financial cost of service changes.

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A business case is a decision support and planning tool that provides the consequences of a business action. The consequences can take on qualitative and quantitative dimensions.

Business Case Structure

A. Introduction : Presents the business objectives addressed by the service B. Methods and Assumptions: Defines the boundaries of the business case, such as time period, whose costs and whose benefits C. Business Impacts: The financial and non-financial business case results D. Risk and contingencies : The probabilities that alternatives results will emerge E. Recommendations: Specific actions recommended Business Impact Analysis (BIA): BIA seeks to identify companys most critical business services through analysis of outage severity translated into a financial value and operational risk. This information can help shape and enhance operational performance by enabling better decision making regarding prioritization of incident handling, problem management focus, change and release management operations, project priority, and so on. It is a beneficial tool to identify the cost of service outage of a company, and the relative worth of a service. These two concepts are not identical. The cost of service outage is a financial value placed on a specific service, and is meant to reflect the value of lost productivity and revenue over a specific period of time. The worth of a service relative to other services in a portfolio may not result exclusively from financial characteristics. Service Value, as discussed earlier, is derived from characteristics that may go beyond Financial Management, and represent aspects such as the ability to complete work or communicate with clients that may not be directly related to revenue generation. Both of these elements can be identified to a very adequate degree by the use of a BIA. While this section will discuss and illustrate the output of, and creation of BIA, one should realize that the examples of BIA format and output represented here are not the only options, and alternative formats are visible throughout industry. 4.4 - Financial Management

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Overview of Budgeting and Accounting

Ensure that business provides sufficient funds to run the IT services it requires

Budgeting
Predict and control IT spend

Provide sound business method of balancing shape and quantity of IT service with needs and resources of the customers

IT Accounting Identify Cost by customer, service, activity

Provide management information on the cost of providing IT services supporting business needs
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Charging Bill customer for services

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Key Activities of Budgeting and Accounting

Perform budgeting for IT services and activities. Perform IT accounting activities. Perform charging and billing activities for IT services. Provide management information about Financial Management quality and operations.

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Budgeting and Accounting Definitions

Budgeting is the process of predicting and controlling how money is spent, and consists of a periodic negotiation cycle to set budgets (usually annual) and the day-to-day monitoring of current budgets.
Budgeting in IT forms part of the overall budgeting cycle set by the business Limits on capital and operational expenditure Variance between actual and predicted spend to be limited Guidelines on how the budget must be used Agreements on how to cope with exceptions

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Budgeting and Accounting Definitions

IT Accounting A system is a set of interrelated activities, policies and tools, which is used to budget, track and charge for IT services. It helps in tracking actual costs against budget. It support the development of a sound investment strategy. Provide cost targets for performance and service delivery. Prioritize resource usage. Full understanding of the cost implications helps in effective decision making.

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Budgeting and Accounting Definitions

Cost Elements of IT Accounting Major Type
Hardware

Cost Elements
Servers, storage, workstation, laptops, PDAs, printers, networks

Software People

Operating systems, applications software, utilities Recruitment , employment costs, benefits, cars, relocation costs, expenses , training

Accommodation Transfer

Offices, power , lighting, water, storage, secure areas Internal charges from other cost centers within the organization

External Services

Security services, IT Service continuity services, outsourcing services

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Budgeting and Accounting Definitions

Cost Classifications of IT Accounting
Fixed Costs fixed for a reasonable period of time Variable Costs that will vary with usage or time Direct Costs that can be directly allocated Indirect Costs apportioned across a number of Customers Capital Assets that are depreciated over time Operational Day to day running costs
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Total Cost of Ownership (TCO)

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Budgeting and Accounting Definitions

Charging is the set of processes required to bill Customers for the services supplied to them. It requires sound IT Accounting processes, to a level of detail determined by the analysis, billing and reporting processes. It aims toDetermine the most suitable charging policies for an organization Recover fairly and accurately, the agreed costs of providing IT services Shape customer behavior to ensure optimal return on IT investment Demand Management Make formal evaluations of IT services and plan for investment based on cost recovery and business benefits

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4.4 - Financial Management

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Budgeting and Accounting Definitions

Billing is the process of producing an invoice and recovering the funds from the customer. Billing cycles must be aligned to the business financial cycles to ensure that there is no negative impact on cash flow.

Objectives:
Bills must be simple, clear and matched to the ability to pay. o Chargeable Items must be understood by the user. o IT accounting data must be available to back up the bills.

Types of billing:
Information only The total cost of providing a service are calculated and circulated to the customer but no actual charging takes place. Notional charging In addition to the total cost, the bill contains itemized details about how the costs would be charged, but no actual cost recovery takes place based on the bills. Full or hard charging Payment takes place as a result of the bill.

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Budgeting & Accounting Tools

Tool specific
SAP or ERP tool for data analysis.

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CSFs in Budgeting & Accounting

Accurate business forecasts and expectations. Understanding of IT strategy and planning. Availability of accurate data. Effective stewardship over IT finances. Knowledge of current and future technologies. Usage of right tools for monitoring. Effective Interactions and interfaces with other processes/teams. Eliminate hidden cost . Improve operational effectiveness and efficiency.

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4.4 - Financial Management

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Financial Management - Roles & Responsibilities

All Managers have some financial responsibilities. Senior IT Management own budgets and are ultimately responsible for decisions. Many organization appoint a financial controller to oversee day-to-day finances. Accounting department provides governance framework and support. Project Manager / Service Manager / Operations Manager Manage overall cost of delivery. Monitor and take necessary corrective and preventive actions to manage variances. Provide financial information to Sr management.

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4.4 - Financial Management

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Summary
General
Make business like decisions. Accurate information on costs and expense.

Budgeting
Predict, understand, plan and control the budgets and the expenditure.

Accounting
Cost of IT services and apportioning.

Charging
Managing Demand by Influencing customer behavior.

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4.4 - Financial Management

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