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Newsletter Committee:

Susan Trembly, Editor
Michael Cardinal, Comm Chair
Tess DePalma, Copy Editor
Merily Talalla, Designer

Contributing Editors:
Anil Balla
Wendy Barrington
Robyn McGregor
Madhu More
Laura Sellers
Silvia Siqueira
Cheryl Winters

IT Financial Management and the Service Lifecycle - How the Pieces of the Puzzle Come Together
By: Dean Meyer (NDMA) and Nick Schneider (newScale)

Service catalog, demand management, service management, service costing…. You’re implementing the buzz words, but how do they all come together into a comprehensive system of IT financial governance?

These are all pieces of a bigger puzzle, a set of processes that put IT’s clients in control of what they buy and align IT’s resources to fulfill those sales.

Note the context:  All these pieces make sense when you think of IT as a business within a business, “selling” (whether or not money actually changes hands) well defined products and services to clients throughout the enterprise.  Some products and services are sold to specific business units; others such as ERP are sold to a consortium of clients.  Some sales are products, like application development projects; others are ongoing services.  But they’re all sales.

We’re not necessarily talking about chargebacks.  Think of the IT budget – whether it’s the product of allocations or a simple budget from above – as a “pre-paid” account which is put on deposit at the beginning of the year.  Clients can then use that money as a checkbook to buy IT’s products and services all year long.

IT organizations which have implemented this paradigm quickly find that clients will defend the IT budget, including their allocations, since that budget effectively becomes their checkbook.

To make this market effect work, clients need to understand what we sell and how much our products and services cost. Then, we need to put clients in control of that checkbook – both during the budget negotiation process and all year long as priorities change.

There are three major processes required:

  1. Business planning – establishing a service catalog with costing
  2. Business negotiations – business planning and negotiating the budget, which fills up clients’ checkbooks
  3. Business dynamics – an ongoing customer decision process, called portfolio management or demand management, which empowers clients to decide their priorities and “write checks” (place orders). Also included is IT’s fulfillment, tracking and ongoing service improvement.

The various ITILŪ financial management processes fit within these three major processes.

  1. Business planning encompasses three very important activities.

    a.  Service portfolio:  Establish the portfolio of product and service offerings.   ITILŪ v3’s Service Portfolio Management, a core concept within its Service Strategy book, offers significant perspective on this area.
    b. Service levels: For each service offering, define one or more levels of service quality. ITILŪ v3 expands on its previously offered Service Level Management best practices. 

    c. Pricing:  Establish prices (rates) based on the full cost to shareholders/donors/taxpayers of each item in the catalog.  Full cost includes both direct costs and a fair share of all indirect costs. ITILŪ v3’s Service Valuation activity within the Financial Management process provides general direction while the Full-cost Maturity Model (ISBN 1-892606-25-9) provides detailed guidance.

  2. Secondly, business negotiations consist of a number of discrete activities.

    a. Business planning:  Forecast how much of each item in the catalog you expect to sell to each business unit, and what costs you’ll incur in delivering it.  This business plan leads directly to a budget – but not just the traditional forecast of expense codes per manager (like travel, training, and licenses).  Key to the market approach is a budget that forecasts the costs of proposed product and service sales – a budget for your deliverables.

    b. Budget negotiations:  A process where clients understand what their requests cost, defend their need for IT products and services, and the enterprise determines what it will and won’t buy from IT.

    c. Finalize rates: Based on the output of the budgeting process, final rates are extracted and the price list is finalized.

    d. Publish agreements:  Based on the approved budget, SLAs with rates can be finalized for ongoing services.  The final agreements entitle certain people to order products and services, with a portion of the budget set aside for these ongoing services and commodity products. The remainder of the budget is for projects, to be decided in the third process.
  3. Lastly, business dynamics cover a range of interrelated activities which occur on an ongoing basis throughout the year.

    a. Demand management: Funds reserved for major projects are scrutinized through monthly executive reviews, priorities are determined, and project contracts and agreements are established for the priority projects.  This is equivalent to clients writing “checks” out of that pre-paid account created by the budget. This is the second half of what ITILŪ v3 terms Demand Management.

    b. Take orders within the agreements: Where SLAs were established for ongoing services and commodity products, IT takes orders for individual products and services (subject to the rules, such as who’s entitled to what, established by the business negotiations above).

    c. Fulfill orders: Deliver products and services in a cost efficient and effective fashion. Through the Service Catalog Management and Request Fulfillment disciplines, ITILŪ v3 establishes guidelines around the design and execution of efficient, scalable and transparent receiving and order fulfillment processes.

    d. Billing and Accounting: Invoice for work completed and maintain checkbook balances to drive the portfolio management process described above and feeds the General Ledger accounting system.

    e. Analysis and continual service improvement: Analyze financial and performance data to identify opportunities for service improvements and to guide the next year’s planning cycle. ITILŪ v3 lends considerable guidance in this area in its Continual Service Improvement book.

Clearly IT financial management has a critical role threaded throughout the service lifecycle.  By recognizing and institutionalizing these interrelated processes, an IT organization can do business in a businesslike manner.  It can:

  • communicate service options with cost and performance choices, and deliver periodic performance reporting and reviews
  • describe what it does such that clients understand what they’re getting, including costs and service level expectations
  • compare its costs and service levels to the market to determine what it does well and what it should consider outsourcing
  • limit demand to available resources by giving clients choices through service offerings and service level options with costs, and letting them decide what they’ll buy within a limited checkbook
  • respond more efficiently to changes in demand through the standardization of services

This market-based approach to IT financial management solves many common problems such as clients expecting more than IT has resources to deliver, accusations that you cost too much or that allocations are unfair, and a lack of sufficient funding for infrastructure and innovation.  It also ensures strategic alignment since clients will buy what they most need.
When the various financial and resource governance processes, such as those recommended by ITILŪ, are put in the context of this big picture, they can be designed to fit together as a system and achieve the intended purpose:  a system of governance that puts clients in the driver’s seat and aligns IT resources with their business.

About the Authors:

Dean Meyer is the author of the Full-cost Maturity Model, an industry standard metric of an organization’s ability to plan its business and its costs.  He implements planning, costing, and governance processes.  He also coaches CIOs on organizational, political and leadership issues based on his compelling business-within-a-business paradigm and the common sense built over 35 years in the IT industry. He has been teaching, writing, and consulting since 1968. Dean lives in Ridgefield, CT.

Nick Schneider is the Senior Director of Strategic Services at newScale, Inc. where he leverages his background as an ITILŪ Service Manager, Six Sigma Black Belt and CISA to help bring creative solutions to complex business problems. His experience as a principal spans numerous enterprise ITILŪ implementations. Nick has been leading cross functional teams around the globe for over 15 years and is currently focused on guiding organizations through their service portfolio journeys.

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