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Financial World of Information Technology Conferences August 23-27, 2010 Harrisburg, PA. IT Finance Concepts. IT Finance and ITIL. “Finance management for IT services is concerned with helping the business to assess whether its IT services are doing the best it can with the money it has.”

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it finance and itil
IT Finance and ITIL
  • “Finance management for IT services is concerned with helping the business to assess whether its IT services are doing the best it can with the money it has.”

Source: ITSMF UK, Financial Management

it finance and itil1
IT Finance and ITIL
  • ITIL places Finance under the Service Delivery section of Service Management along with Service Level Management, Capacity Management, Continuity Management and Availability Management
  • Functions include: budgeting, tracking, cost benefit analysis, unit costing, cost recovery, and operating like a business unit
  • Focus on processes, controls, communication, education
  • Self-assessment available at www.itsmf.com/bestpractice
it finance vs corporate finance what s different
IT Finance vs. Corporate Finance – What’s different?
  • Few true differences, but IT seems to have one of everything!
  • Technology carries its own level of mystery and client distrust -Language is key to solving the mystery
  • Additional dimensions by adding projects, capitalization of software, cost/benefit analysis, portfolios, governance, chargeback
  • Many Corporate Accounting systems do not support the tracking requirements of IT
it finance organization
IT Finance Organization
  • Driven by each company
  • Centralized vs. Decentralized
  • Relationship with Corporate Finance
  • Size of IT organization
  • Functions within IT
  • May include HR and measurements
it finance responsibilities
IT Finance Responsibilities
  • Business Planning
  • Executive Reporting
  • Ensure services delivered are within budget
  • Ensure accuracy of all financial data
  • Monthly monitoring of use of funds
  • Prepare/analyze variance reports
  • Process invoices
  • Determine accounting codes
  • Review/negotiate vendor contracts
  • Recurring Payments
  • Resolve payment disputes
  • Resource management including hiring policies and salary administration
  • Coordinate materials with legal
  • Approve training requests
  • Provide guidance and analysis for procurement requests
  • Asset Management and/or capital tracking and contract files
  • Cost accounting and chargeback
  • Project tracking
  • Balanced Scorecard input
  • CIO expense management
  • Financial systems oversight
it budgeting concepts
IT Budgeting Concepts
  • Focus on the largest categories first – usually salaries and hardware/software
  • Utilize tools available for managing resources to aid the forecast process
    • Time tracking, project management , asset management
  • Bottoms up/tops down
  • Client consumption
the it chart of accounts
The IT Chart of Accounts
  • One of the most important parts of cost management for IT
  • Develop to enhance decision making
  • Key structure for ABC and ABM
  • What are the most important areas of IT to manage?
  • Cost types, cost elements, cost units
accounting terms
Accounting Terms
  • Cash
  • Statutory Accounting
  • Depreciation
  • Amortization
  • Capitalized Lease
  • SOP
  • ITIL
  • ISP
  • Run Rate
  • LRIC Long Run incremental Cost
  • Portfolio
  • Project
  • Governance
  • Regulatory Accounting
  • Intellectual Property
  • Tangible Asset
  • Useful Life
  • Net Book Value
  • Baseline
  • Write Down
  • Scrap
  • Prepaid Expense
  • Sarbanes Oxley
  • ABC/ABM
  • Unit Costing
  • Transfer Pricing
  • Profit CenterBusiness Center
  • Cost Center
  • Chargeback
  • Memo Billing
  • Blue Dollars/Green Dollars
  • Clearing Account
  • Standard Costs/Standard Rates
  • Cost/Price/Volume Variance
  • Fixed & Variable Costs
  • Business Value Assessment/Cost Benefit Analysis
managing finance forecasting
Managing Finance – Forecasting
  • Run rates, trend lines and magic eight balls
  • Understand what your real cost drivers are
  • Sort out the clutter and deal with the facts
  • Make the right friends - use the tools available to operations managers
  • Clients and project managers will never hit the target as closely as a good trend line
it budget cycle
IT Budget Cycle
  • April – begin Planning for future year(s)
    • Corporate guidelines (high-level) issued
  • May IT begins planning by Project
    • Interface with Client
  • June/July Project Lists 85% complete for major work efforts
  • August Projects reviewed by Portfolio Management or Governance Board
  • August/September Corporate Assumptions delivered
it budget cycle1
IT Budget Cycle
  • October Governance Boards rule on Project Lists
    • Corporate headcount targets handed down
    • Capital budgets due
    • Chargeback rates due
    • Forecasts for volumes due
    • Revise project lists
  • November Strategic Planning Documents delivered at executive levels, detail budgets submitted to Corporate Finance for roll up.
  • December Budgets reduced at high levels – returned to IT for rework - Revise Project lists
  • January spending begins, project budgets not yet in balance
  • February/March project budgets near authorized levels
financial planning
Financial Planning
  • Budgeting and Controlling
  • Types of budgeting…
    • Imposed
    • Participative
financial planning1
Financial Planning
  • Pros and cons…
    • Imposed.

It is easy.

Lack of buy-in by subordinates.

    • Participative.

Involves everyone.

VERY iterative.

Usually results in a “high” budget.

operating budgets
Operating Budgets
  • What we all seem to do most of the time…all of the time.
  • The first year of the Strategic Plan.
  • The basis for most IT performance metrics.
  • Source of IT praise or criticism.
  • Most deceptive measure.
  • When IT budgets grow at 20% - IT is out of control!
operating budgets1
Operating Budgets
  • IT budgets grow due to:
    • Additional volume for current customer services.
    • Annualized impact of new services added last year.
    • New customer services.
  • Need to change the budget process to “baseline budgeting.”
operating budget
Operating Budget
  • Everything above the baseline requires a “decision package” submitted, prioritized, and approved.
  • The customer and IT work together as partners.
  • The customer provides the revenue and IT indicates the cost.
slide22
The Forecast Period Covered is Typically 3-5 YearsThe Shelf Life of Most IT Budgets is Typically 15 Minutes
it cost accounting concepts
IT Cost Accounting Concepts
  • Services – services– services – It’s all about the services
    • You can’t usage bill what you can’t count,
    • You can’t say you are competitive if you can’t identify the costs
  • Corporate accounting systems may not support the IT needs for detail
  • Services and Cost are not organizationally driven
  • Prices and costs are not necessarily the same thing
activity based rates
Activity Based Rates
  • Concept which requires pricing of each service identified in a service delivery chain
  • Outgrowth of ITIL Service Management
  • Heavily tied to “self-service” for clients
activity based rates example
Activity Based Rates Example
  • IT has set up a self-service Web site to all the client to order email service. Client may specify functions desired such as Email account, number of days of back-up, size of email account, date email account will be delivered, whether a calendar is also required, whether email can be accessed remotely, etc.
  • At each point the client makes a decision, a pricing decision is applied.
activity based rates1
Activity Based Rates
  • Complexity level of cost accounting information grows with each new service identified
  • Cost to track costs (time entry, expense coding) grows enormously
  • Accuracy tends to decline as allocations increase
  • Accounting processes tend to collapse under their own weight
design of an activity based costing system
Design of an Activity Based Costing System
  • Process value analysis
  • Identifying activity centers
  • Tracing costs to activity centers
  • Selecting cost drivers
process value analysis analysis of the activities performed
Process Value Analysis(Analysis of the Activities Performed)
  • Flowchart each step of the process.
  • Analyze activities to determine if it is value-added or non-value-added.
  • Reduce or eliminate non-value-added activities.
  • Through continuous use of this tool, ABC gives way to activity-based management.
benefits of activity based costing
Benefits of Activity-based Costing
  • More accurate product costs.
  • Increased number of cost pools.
  • Changes the basis of assigning costs.
  • Improves management perception of overhead by tracing the costs to products.
limitations of activity based costing
Limitations of Activity-based Costing
  • The necessity of making arbitrary allocations based on volumes.
  • High management costs associated with multiple activity centers and cost drivers.
activity based costing service industries
Activity-based Costing& Service Industries
  • A larger proportion of costs in service industries tend to be facility-level costs that cannot be traced to a particular service.
  • It is more difficult to capture activity data in service companies since the activities are human tasks that cannot be easily recorded.
activity based costing abc for it
Activity-based Costing(ABC) for IT
  • With this basis we can discuss activity-based costing in the IT environment.
  • Don’t view IT as one big overhead item, separate IT into cost pools.
  • Cost pools group costs that respond to the same cost driver:
    • CPU, disk, tape, print, programming, etc,
the abc application process
The ABC Application Process
  • Identify and classify IT activities.
  • Determine appropriate cost drivers.
  • Estimate costs for each cost driver (divide IT budget into pools).
  • Estimate amounts of cost drivers (utilization).
  • Determine the rate for each cost driver (resource cost).
it asset management itam
IT Asset Management (ITAM)
  • Is a total life-cycle strategy for optimum acquisition, installation, operation, and maintenance.
  • Asset management links availability, capacity, and operating and maintenance costs to business objectives.
it asset management is
IT Asset Management is:
  • The discipline of managing:

Finances

Contracts

Usage of IT Assets

what it means
What it means –
  • Throughout the asset’s lifecycle
  • Maintain an optimal balance between business service requirements:
  • Total costs
  • Budget predictability
  • Contractual and regulatory compliance
it asset management activities
IT Asset Management Activities
  • The management of:

Asset Inventory

Software licenses

Vendors

Procurement

Leases

Warranties

Cost accounting

Retirement and disposal.

what are it assets
What are IT Assets?
  • Computer Hardware
    • Enterprise Servers (Mainframes)
    • Distributed Servers
    • Storage Devices
    • Printing Resources
    • Desktop / Portable Resources
    • Network attached devices
    • Local devices
what are it assets1
What are IT Assets?
  • Telecommunications Hardware
    • Network
      • Hubs, Routers, Bridges, Switches
    • Voice
      • PBX, VoIP Resources
    • Shared Voice/Data Resources
    • Mobile Devices
      • BlackBerry, Palm, Treo, etc.
what are it assets2
What are IT Assets?
  • Software
    • Operating Systems / Sub-System
    • Application
      • Purchased
      • Developed
    • Database
    • Performance Management
    • Diagnostic
    • Utilities
capital expensed assets
Capital / Expensed Assets
  • Capitalized Assets
  • Purchased Resources
  • Leased Resources
exploring the asset lifecycle
Exploring the Asset Lifecycle
  • Call to the Customer Care Center (Help Desk)
    • Trouble report
    • Service request
    • Request for new service
  • Customers current configuration or service profile
    • Is asset under warranty?
    • What is customers service level (24x7, time & materials)

Change Management / Help Desk

exploring the asset lifecycle1
Procurement Management

Contract Management

Exploring the Asset Lifecycle
  • Repair
    • Dispatch technician
    • Create work order
  • Purchase replacement or new resource
    • Warranty replacement?
    • Disposal or retirement of old resource?
    • Procurement?

Change Management / Help Desk

exploring the asset lifecycle2
Procurement Management

Contract Management

Exploring the Asset Lifecycle
  • Repair
    • Billable time to customer

Change Management / Help Desk

  • Purchase
    • Capital or expense

Cost and Charge Management

ERP System

exploring the asset lifecycle3
Procurement Management

Contract Management

Exploring the Asset Lifecycle
  • Moves, adds, or changes to resources
    • Changes in
      • Configuration
      • Location
      • Ownership

Change Management / Help Desk

Cost and Charge Management

ERP System

additional it finance interactions
Procurement Management

Contract Management

Additional IT Finance Interactions
  • Chargeback
    • Asset based
    • Service based

Change Management / Help Desk

Cost and Charge Management

ERP System

additional it finance interactions1
Procurement Management

Contract Management

Additional IT Finance Interactions
  • Planning & Budgeting
    • Capital budgeting
    • Revenue budgeting
    • Expense budgeting

Change Management / Help Desk

Planning and Budgeting

Cost and Charge Management

ERP System

additional it finance interactions2
Procurement Management

Contract Management

Additional IT Finance Interactions
  • Expense Reporting
    • Depreciation – hardware
    • Amortization – software
    • Hardware & software maintenance

Change Management / Help Desk

Planning and Budgeting

Cost and Charge Management

ERP System

additional it finance interactions3
Procurement Management

Contract Management

Additional IT Finance Interactions
  • Dashboard
    • Management reporting – metrics

Change Management / Help Desk

Dashboard

Planning and Budgeting

Cost and Charge Management

ERP System

additional it finance interactions4
Procurement Management

Contract Management

Additional IT Finance Interactions
  • Project Management
    • IT project resources

Change Management / Help Desk

Dashboard

Planning and Budgeting

Cost and Charge Management

ERP System

Project Management

additional it finance interactions5
Procurement Management

Contract Management

Additional IT Finance Interactions
  • IT Portfolio
    • Strategic planning for IT resources

Change Management / Help Desk

Dashboard

Planning and Budgeting

IT Portfolio Management

Cost and Charge Management

ERP System

Project Management

integrated enterprise architecture framework design concept
Procurement Management

Contract Management

Integrated Enterprise ArchitectureFramework Design Concept

ITAM

Change Management / Help Desk

Asset & License Management

Dashboard

Planning and Budgeting

Central Repository

/ Data Warehouse

Asset/Configuration

Management

Database

IT Portfolio Management

Cost and Charge Management

ERP System

Project Management

what is total technology management
What Is Total Technology Management?
  • Asset Management
  • IT Scorecard / Benchmarking
  • Activity-based Budgeting
  • Activity-based Costing
  • Telecom Cost Control
  • Project Planning
  • Chargeback
  • Investment Evaluation
  • Financial Reporting
  • Strategic Planning
  • These are just some of the topics discussed at ITFMA conferences…

58

elements of total technology management
Elements of Total Technology Management

All of the above items, and more…

  • Strategic Planning
  • Project Planning
  • Resource Planning
  • Project Evaluation
  • Capital Budgeting
  • Procurement and Contract Management
  • Project Tracking
  • Asset Management
  • Operating Budgets
  • Expense Reporting
  • Activity-based Costing
  • Chargeback
  • Product Costing
  • Service Pricing
  • Benchmarking
  • Balanced Scorecard
  • Dashboards
  • Others…
achieving total technology management
Achieving Total Technology Management
  • Highly recommend that you think of IT as a “business within the business.”
  • All of the elements must work together seamlessly.
  • From the outside, the elements should be transparent.
strategic planning
Strategic Planning

To realize your Vision…

To accomplish your Mission…

To meet your Goals…

To achieve your Objectives…

Execute your Strategies…

strategic planning1
Strategic Planning
  • Formalize the strategic planning process – an annual event.
  • Identify and understand your customers.
  • Include the impacts from their strategic plans.
strategic planning2
Strategic Planning
  • AKA…IT Portfolio Management.
  • Software is available to help.
  • Research new technologies to prepare for customer needs.
  • Understand where you are going and how to get there.
  • Links to Project & Resource Planning and Capital & Operating Budgets.
project planning
Project Planning
  • Build a project team with all the stakeholders represented.
  • Adopt a project planning methodology.
  • Not policies on a shelf… USE IT!
  • Have a tiered policy based on the size of the project or internal (cost reduction) versus external (revenue generating) projects.
project planning1
Project Planning
  • Install software to help manage the process.
  • Review the plan-to-actual results periodically.
  • Revise the plan when necessary.
  • Take corrective action, when required.
  • Links to Strategic Planning, Project Evaluation, and Project Tracking.
resource planning
z/OS

Mid-Range

Servers

Resource Planning
  • Refers to people (project planning), hardware (capacity planning), and facilities.
  • Have resource teams in place.
  • Survey internal and external project plans for impacts.
  • Survey customers for business or volume impacts.
resource planning1
z/OS

Mid-Range

Servers

Resource Planning
  • Have software tools to collect and analyze the data.
  • Have software growth modeling tools available.
  • Keep current on new technologies.
  • Links to Strategic Plan, Capital Budgeting, Procurement, and Asset Management.
project evaluation
Project Evaluation
  • Have an evaluation process – should be a part of your project planning methodology.
  • USE IT!
  • Policy should reflect the handling of internal versus external projects.
  • Prioritize the projects.
project evaluation1
Project Evaluation
  • Have acceptance criteria in place and documented:
    • Hurdle Rate (Cost of Capital).
    • Return on Investment.
    • Net Present Value.
    • Internal Rate of Return.
    • Economic Value Added®.
  • Links to Project Planning, Capital Budgeting, and Project Tracking.
capital budgeting
Capital Budgeting
  • Process must originate with:
    • Project planning.
    • Resource planning.
  • Formalize the process.
  • Results of approved items must link to Operating Budgets and Asset Management processes.
  • Prioritize the projects.
capital budgeting1
Capital Budgeting
  • Have acceptance criteria in place and documented:
    • Hurdle Rate (Cost of Capital).
    • Return on Investment.
    • Net Present Value.
    • Internal Rate of Return.
    • Economic Value Added®.
  • Links to Resource Planning, Procurement, Asset Management, and Operating Budgets.
procurement and contract management
Procurement and Contract Management
  • Group with financial, procurement, negotiation, and legal expertise.
  • Centralized location for all contracts.
  • Available on-line.
  • Identify potential vendors.
  • Includes hardware, software, leases, and purchases.
procurement and contract management1
Procurement and Contract Management
  • Develop Requests for Proposals.
  • Evaluates vendor proposals.
  • Links to Project Planning, Capital Budgeting, Asset Management, and Operating Budgets.
project tracking
Project Tracking
  • Project planning software may not be suited for tracking task time and expenses.
  • Look at separate tracking software that integrates with your planning software.
  • Have a policy in place for who should report:
    • developers only.
    • specific departments.
    • everyone in IT.
project tracking1
Project Tracking
  • Keep track of internal, external, and administrative projects as well as non-productive activities – staff meetings, training, sick, vacation, jury duty, etc.
  • Links to Project Planning, Resource Planning, Expense Reporting, Chargeback, and Product Costing.
asset management
Asset Management
  • For all hardware or software, owned or leased assets, it includes:
    • Justification.
    • Purchase.
    • Deployment.
    • Configuration.
    • Movement.
    • Disposal.
  • Single database with the history of the entire asset life cycle.
asset management1
Asset Management
  • Links to Resource Planning, Capital Budgeting, Procurement, Operating Budgets, Expense Reporting, and Chargeback.
  • In many instances this is the organization’s weakest link…
operating budgets2
Operating Budgets
  • What we all seem to do most of the time…or is that ALL of the time?
  • The first year of the Strategic Plan.
  • The basis for many IT performance metrics.
  • Source of IT praise or criticism.
  • Most deceptive measure.
  • When IT budgets grow at 20% - IT is out of control!
operating budgets3
Operating Budgets
  • IT budgets grow due to:
    • Additional volume for current customer services.
    • Annualized impact of new services added last year.
    • New customer services.
  • Need to change the budget process to “baseline budgeting.”
operating budget1
Operating Budget
  • Everything above the baseline requires a “decision package” submitted, prioritized, and approved.
  • The customer and IT work together as partners.
  • The customer provides the revenue and IT indicates the cost.
operating budgets4
Operating Budgets

Graphical Example:

operating budgets5
Operating Budgets
  • Links to Strategic Planning, Resource Planning, Capital Budgeting, Procurement, Project Tracking, Asset Management, Expense Reporting, Activity-based Costing, and Chargeback…

…EVERYTHING

expense reporting
Expense Reporting
  • Get cost center expense reports in the hands of the managers making decisions.
  • Detail information, if necessary, add accounts.
  • Educate technical managers on finances – what cost is, who to call for help.
  • NO paper – online / web-based reporting.
  • Links to Budgeting, Project Tracking, and Asset Management.
activity based costing
Activity-based Costing
  • Cost allocation method.
  • Four-step approach:
    • Process value analysis.
    • Identifying activity centers.
    • Tracing costs to activity centers.
    • Selecting cost drivers.
  • Links to Budgeting, Asset Management, and Product Costing.
activity based costing1
Consume

Activities

Resources

Measured by

Measured by

Drive

Cost Drivers

Costs

Activity-based Costing
  • Cost Drivers:
  • The activity consumes resources; therefore, the cost driver is assumed to consume (cause) costs.
chargeback
Chargeback
  • Best practices chargeback characteristics:
    • Equitable.
    • Repeatable and accurate.
    • Understandable.
    • Controllable or predictable.
    • Economical.
  • Use activity-based costing methods.
  • Identify expensive activities.
  • Data is easy and inexpensive to gather.
chargeback1
Chargeback
  • Have a solid philosophy:
    • Understand when to charge.
    • Know what to charge.
    • Decide how to charge.
    • Identify who to charge.
    • Establish how much to charge.
  • Will change organizational behavior.

Drive the correct CORPORATE behavior…

chargeback2
Chargeback
  • Links to:
    • Project Tracking.
    • Asset Management.
    • Resource Planning.
    • Budgeting.
    • Activity-based Costing.
    • Product Costing.
    • Service Pricing.
    • Benchmarking.
    • Balanced Scorecard.
product costing
Product Costing
  • Develop technical rates.
  • Capture utilization by product (application).
  • Products become activity centers.
  • Identify cost drivers – accounts or transactions.
  • Links to Budgeting, ABC, Chargeback, and Service Pricing.
product costing1
Product

Utilization

Product

Cost

Business

Unit Cost

Resource

Rates

Business

Volume

Product Costing
  • Monitor/forecast product volumes.
  • Develop product rates.
service pricing
Service Pricing
  • Establish Service Level Agreements.
  • Look at costs for providing the levels of service.
  • Build cost into rates for billing.
service pricing1
Service Pricing
  • Consider an investment strategy.
  • Price services, rather than cost-based rates.
  • Provide funds for future investment.
  • Links to Budgeting, ABC, Product Costing, Chargeback, and Balanced Scorecard.
benchmarking
Benchmarking
  • Evaluate IT processes with other organizations and internally over time.
  • Strive for cost effectiveness, quality, and improvement.
  • Internal process, pair with others, or third party.
  • Links to everything…
benchmarking1
Benchmarking
  • Identify processes.
  • Build a team.
  • Look at options.
  • Collect the data.
  • Analyze (normalize) the data.
  • Evaluate the results.
  • Implement changes.
  • Do it again.
balanced scorecard
Balanced Scorecard
  • A tool to measure the overall health of an organization.
  • Provides:
    • Link to goals and objectives.
    • Structured, limited number of metrics.
    • Translation from strategy to operations.
balanced scorecard1
Balanced Scorecard
  • Metrics in financial and non-financial terms.
  • Perspectives:
    • Financial.
    • Internal processes.
    • Human.
    • Customer.
  • Links to EVERYTHING!
dashboard
Dashboard
  • Highly summarized information.
  • Color coded – Green, Yellow, Red.
  • Give management a quick view of critical activities.

Links to everything…

slide99
Benchmarking

Activity-Based

Costing

Expense

Reporting

Project

Evaluation

Capital

Budgeting

Procurement

& Contracts

Balanced

Scorecard

Dashboard

Service

Pricing

Product

Pricing

Chargeback

Project

Tracking

Operating

Budgets

Asset

Management

Project

Planning

Strategic

Planning

Resource

Planning

slide100
Benchmarking

Balanced

Scorecard

Activity-Based

Costing

Expense

Reporting

Project

Evaluation

Capital

Budgeting

Procurement

& Contracts

Total

Technology

Management

Service

Pricing

Product

Pricing

Chargeback

Project

Tracking

Operating

Budgets

Asset

Management

Project

Planning

Strategic

Planning

Resource

Planning

summary
Summary
  • Total Technology Management is taking all of the annual, quarterly, monthly, and daily tasks and having them work together seamlessly.
  • Must understand all the elements.
  • All the elements must integrate smoothly.
  • A holistic approach.
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