Benefiting from the IT Financial Management ProcessThe IT Financial Management Process has been considered a 'back office' procedure. Now, with a focus on the bottom line, we need to learn how to capture our costs and implement Internal Billing or Charging.
In this post-dot.bomb age, common sense - with a focus on the bottom line - is returning to some boardrooms, and the "bean counters" are no longer banned from the offices of IT directors. More than ever, attention is being paid to the Financial Management process in the IT organization.
Drivers of this focus are the abundance of "red ink" caused by macro-economic circumstances and the improvement opportunities obtainable through implementation of the ITIL framework.
ITIL or the Information Technology Infrastructure Library (www.itil.co.uk) is a consistent and comprehensive documentation of best practices for IT Service Management. ITIL has been adopted by a host of large and small global companies, mostly in the UK, Canada, and the Netherlands.
According to ITIL, the Financial Management process in an IT organization consists of three main parts: Budgeting, Accounting, and Billing (or recognized as Charging or Internal Billing). All three aspects are nowadays becoming respectable (again), because of the benefits they bring in managing the IT organization.
As an IT management tool, budgeting is ignored or under-used. Budgeting provides a starting point for cost cutting, as it forces one to think about how to provide the same service with less money.
Budgeting in an IT environment is notoriously difficult, because while logic demands an IT budget follow the business budget, reality mandates a simultaneous budgeting process. An IT budget should be made after the goals for the business are set, after the budgets for all other supporting departments are set, and after it is known what the actual business needs are.
Based on the needs and goals of the business, the IT budget can be fairly straightforward. But due to lack of communication between the IT department and the business group, the IT budgeting process often gets hopelessly stranded with a few perfunctory directions.
Another reason IT budgeting can be difficult is when the Capacity Management process is incomplete or does not function properly. IT groups typically are organized in highly politicized functional silos, and planning for the needed capacity often is pure guesswork or - even worse - a result of carefully crafted political compromises.
Accounting practices in many IT organizations can be chaotic and misunderstood. Changes in the IT department and lack of control over these changes provide headaches to most IT accounting people as most uncontrolled change creates chaos. In many cases, the corporate controller is happy to get any figure out of the IT department.
Reporting, in conjunction with Service Level Management, is non-existent in most companies and "fire fighting" considerations determine where the dollars go. IT people are notoriously good at coming up with highly technical excuses why they exceed their budgets.
In most organizations, IT personnel are "accounting-challenged." For example, most of them are unaware of (or don't care about) the differences between regular and capitalized expenses, or between leasing and buying equipment.
In a case involving a major ERP investment, I was surprised to encounter a few blank stares when I mentioned "sunk costs" (a past outlay or loss that cannot be altered by current or future actions); and "opportunity costs" (the difference between the return on one investment and the return on an alternative). Basic financial knowledge in the IT community is lacking.