Basic Financial management for IT services

The goal of Financial Management for IT Services (ITFM) is to optimize the cost of IT Services while taking into account quality and risk factors. The role of Financial Management varies depending upon the view of IT within the company. ITFM is a discipline based on standard financial and accounting principles, but addresses specific principles that are applicable to IT services, such as fixed asset management, capital management, audit, and depreciation.

Financial management for IT services consists of financial models and practices which enable us to calculate the value of the services. It includes the core concepts such as funding, accounting, and budgeting. Funding refers to the sourcing and allocation of money for specific purposes such as design, transition, operation, and improvement of IT services.

Funding can be of 2 types; external and internal. External funding comes from the revenue received from selling IT services to external customers, and Internal funding comes from selling IT services to business units within the IT service provider’s organization.

 Some companies view IT as an expense center, some as a profit center, and some as a cost-recovery center. However, in all cases, Financial Management supports the “business” of IT.

Financial Management activities include:

-Providing oversight of all IT expenditures

-Ensuring funds are available for planned events

-Providing detailed financial information for proposed initiatives

-Influencing the use of IT assets to maximize the return on IT investments through chargeback systems

-Tracking current expenditures against the budget

The overall financial management policies and practices of an organization are applied in a tightly aligned manner across all their departments. This usually creates another level of financial management process which is specific to the department’s governance requirements.

Financial management consists of three main process:

•    Budgeting – The purpose of budgeting is basically to provide a model of how the IT organization might perform which includes the process of predicting and controlling the income and expenditure. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. There are majorly four types of Budgeting, namely Sales & Marketing budget, Production Budget, Administrative Budget, and Cost of Investment Budget. provide more informed budgeting and forecasting by having more insights to true costs and demand.IT investments in support of an entire digital transformation

•    Accounting – Accounting is one of the key functions for almost any IT organisation. IT accounting is concerned with the amount of money spent in providing IT services. It enables the IT organisation to account fully for the way its money is spent.

The IT organization to track & account for every single way the organization’s fund is utilized or spent. It usually involves accounting systems like ledgers, charts of accounts, journals etc

Accounting takes account of all kind of costs like Capital Cost, Operational Cost, Direct Cost, Indirect Cost etc and should be overseen by someone trained in accountancy.

•    Charging – Process required to bill the customers for the services supplied to them.  Charging requires that accounting procedures and systems exist and are set up. It makes a difference whether the organization is an internal service provider, or if it serves external customer as its main business. In the case where an IT organization is an internal service provider (according to ITIL, these are Type I and Type II organizations), it is not necessary to bill for services. Sometimes such IT organizations only allocate costs. If an IT organization sells its services to external customers (Type III organization) they will, certainly, issue bills for their services and generate income which funds that organization.

Transparency in charging is an essential requirement for gaining customer confidence. Thus encourages users to do a cost-benefit analysis to avoid expensive activities by choosing a far cheaper alternative, even if that alternative is slightly inconvenient. Charging need not necessarily mean money changing hands (full charging). It may take the form of information passed to management on the cost of provision of IT services (no charging), or may detail what would be charged if full charging were in place without transactions actually being applied to the financial ledgers (notional charging). Notional charging may also be used as a way of piloting full charging

 IT organizations are able to provide transparency around costs incurred back to the business through basic integrations with financial and operational systems, as well as the company’s ERP solution.  Serviced based costing and service models are the basis for this maturity level.

Major Activities of Financial Management for IT Services

Here are the major activities performed under Financial Management for IT Services:

•    Service Valuation – To understand if the service is worth investing / continuing.

•    Demand Modeling – To shift or influence demands.

•    Service Portfolio Management – Right services and their cost / price are captured in the portfolio and catalog.

•    Service Provisioning Optimization – Improving time to market and provisioning of service by ensuring right funding is available.

•    Planning Confidence – With the effective Service Valuation, help in planning and increase the confidence.

•   Service Investment Analysis – Cost / Benefit Analysis and recommendations to make decisions.

•    Budgeting, Accounting & Charging

•    Compliance – Ensure compliance in financial issues.

•    Variable Cost Dynamics – Analyze and Recommend Fixed Cost or Variable Cost Models.

Rigorously applied, financial management generates meaningful critical performance information used to answer important questions for an organization like:

•    Is our differentiation strategy resulting in higher profits or revenues, lower costs or greater service adoption?

•    Which services cost us the most, and why?

Many organizations fail to account for IT costs when doing business, and find their profit margins shrinking uncontrollably when IT costs are allocated at the end of each financial period. Better matching of IT services to business outcomes results in more appropriate and controllable spending models, and more predictable profitability. The ability to make sound business decisions regarding the use of and investment in IT.

The aim of ITIL Financial Management for IT Services process is to provide accurate and cost-effective governance of IT assets and resources used in providing IT Services. This process is also responsible for planning, controlling and recovering costs of providing IT Services.

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