IT Services are usually viewed as critical to the business or organisation. The increases in user numbers, demands for new technologies and complexities of client-server systems have frequently caused IT Services costs to grow faster than other costs.
As a result, organisations are often unable or unwilling to justify the expenditure to improve services or develop new ones, and IT Services may become viewed as high-cost or inflexible.
Due to the complex nature of accounting for IT usage, it is rare that the actual running cost of the IT Services is properly identified and this often leads to dissatisfaction with the perceived ‘value for money’ of the services.
The ab0ve are examples of the questions asked inside and outside an IT organisation, often in emotive situations, such as project over-runs or during periods of loss of critical service. The answer is often: We’re doing the best that we can with the money that we have, but …is that true?
To understand whether an IT organisation is doing the best that it can and to demonstrate this to its Customers, it has to both understand the true cost of providing a service and manage those cost professionally. To do this, it is usual to implement IT Accounting and Budgeting processes and often to implement Charging processes as well.
Basic concepts of Financial Management for IT Services
Financial Management is the sound stewardship of the monetary resources of the organisation. It supports the organization in planning and executing its business objectives and requires consistent application throughout the organisation to achieve maximum efficiency and minimum conflict.
Within an IT organisation, it is visible in three main processes:
Budgeting is the process of predicting and controlling the spending of money within the organisation and consist of a periodic negotiation cycle to set budgets (Usually Annual) and the day-to-day monitoring of the current budgets.
IT Accounting is the set of processes that enable the IT organisation to account fully for the way its money is spent (particularly the ability to identify cost by Customer, by service, by activity). It usually involves ledgers and should be overseen by someone trained in accountancy.
Charging is the set of processes required to bill customers for the services supplied to them. To achieve this requires sound IT Accounting, to a level of detail determined by the requirements of the analysis, billing and reporting processes.
The aim of Budgeting is that the actual cost matches the budget (predicted costs). This budgeting is usually set by negotiations with the customers who are providing the funds. Good budgeting is essential to ensure that the money does not run out before the period end. Where shortfalls are likely to occur the organisations needs early warning and accurate information to enable good decisions to best manage the situation.
Organisations which need to account and charge to a very high level of accuracy, e.g commercial IT service providers, need to invest much more effort in developing IT Accounting and Charging systems than those who seek only a fair, simple appointment of costs back to business units. IT bandwidth but is rarely advisable to use this as the basis for charging as the costs of so doing may outweigh the benefits. It is in the interest of all parties to keep the overall cost of service low and the bureaucracy to a minimum, even at the expense of total precision.
Current leading practice is to use IT accounting to aid investment and renewal decision and to identify inefficiencies or poor value but to charge a fixed amount for an agreed Capacity (determined by the level of service agreed in the Service Level Agreements or SLAs). In this case, IT Finance Management works with Service Level Management (they may even be the same person) to ensure that the overall costs of running the agreed periods at an agreed rate, for example, 1/12 of each Customers IT budget each calendar month. Additional charges are made for work above the agreed Service levels(e.g. office moves, major roll-out, unplanned hardware upgrade).
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