Introduction
- Financial Management is an integrated component of service management
- It provides vital information that management need to ensure efficient and cost-effective service delivery
- Efficient financial management enables the organization to provide a full justification of expenditures and allocate them directly to services.
- An IT organization tries to reduce costs whilst improving its offering
- If implemented correctly, financial management generates meaningful and critical data on performance.
- It is also able to answer importand organization issues, such as :
- Does our differentiation strategy result in higher profits and revenue, reduced costs or increased coverage?
- Which services cost most and why?
- Where are our greatest inefficiencies?
- Financial Management ensures that the costs of IT services are clear (e.g. via the service catalogue) and that the business understand them. The benefits are :
- Improved decision - making
- Speed of change
- Service portfolio management
- Financial compliance and control
- Operational control
- Value capture and creation
Service Valuation
- Main part of service valuation is to determine the value of services at a level the business considers realistic
- It allows the provider to gain insight into which customer interests are served
- Additional goal is improved is improved management of demand and consumption behavior
- ITIL defines two vital value concepts for service valuation:
- –Provisioning value –The actual underlying costs to IT related to provisioning a service including all fulfillment elements, both tangible and intangible. These are costs like:
- Hardware and software license costs
- Annual maintenance costs for hardware and software
- Personnel that work to support or maintain a service
- Paid facilities
- Taxes, capital or interest charges
- Compliance costs
- ITIL defines two vital value concepts for service valuation:
- –Service value potential -The value-adding component based on the customer's perception of value from the service or expected marginal utility and warranty from using the service, in comparison with what is possible using the customer's own assets.
Demand Management
- Demand modeling uses service-oriented financial information with factors of demand and supply in order to model anticipated usage by the business, and provisioning requirements or IT.
Service Portfolio Management
- Financial management provides vital input for service portfolio management
- By applying cost structures to services, companies can compare their service costs with those of other providers
Service Provisioning optimization
- Financial management provides vital input for optimizing the service delivery (Service Provisioning optimization, SPO)
- SPO investigates the financial inputs and constraints of service components or delivery models to determine if alternatives should be explored relating to how a service can be provisioned differently to make it more competitive in terms of cost or quality
Planning Confidence
- One objective of financial management is to ensure proper funding for delivery and consumption of services.
- Planning provides financial translation and qualification of expected future demand to IT services.
- Planning can be split up into three primary areas
- Each area represents financial results that are necessary to ensure continued visibility and service valuation:
- Operation and capital planning (general and fixed asset ledgers)
- Translation of IT expenditures to collectives financial systems as part of the collective planning cycle
- Demand Planning
- Need for use of IT services as describe earlier
- Each area represents financial results that are necessary to ensure continued visibility and service valuation
- Regulatory and environmental planning (compliance)
- Controlled from the business
- Careful planning results in confidence that the financial data and models provide accurate information on the developtment of service demand and offer
Service Investment Analysis
- Financial management provides the shared analytical models and knowledge to assess the expected value and/or return of a given iniative, solution, program or project in a standardized manner
- The objective of service investment analysis is to derive a value indication for the total lifecycle of a service based on:
- The value received
- Costs incurred during the lifecycle of the service
Accounting
- Financial management plays a transitional role between corporate financial systems and service management
- The results of a service-orientated accounting function is that far greater detail and understanding is achieved regarding service provisions and consumption, and the generation of data that feeds directly into the planning process
- Functions and properties are :
- Service recording
- Assignment of a cost entry to the appropriate service
- Cost type
- High-level expenses categories such as hardware, software, labour, administration
- Once the basis for cost administration (e.g. per department, service or customer) is established, cost types are determined for cost entry;
- Number of cost types can vary depending on the organization's size
- Must have a clear and recognizable description, so that costs can be easily allocated
- Functions and properties are :
- Cost types
- Can split up into cost items
- Settlement for each cost item may be established at a later stage
- Cost classification
- Ensure good cost control, it is important to gain insight into the types of costs that occur costs can be split up according to various aspects :
- Capital/operational costs
- Direct/indirect costs
- Fixed/variable costs
- Cost units
Capital/Operational Costs
- Capital costs have to do with the purchase of assets that generally last several years. The expenditure is written down over several years. Only the write-down amount is counted as costs.
- Operational costs are costs that occur regularly and are not offset by tangible production assets (e.g. a maintenance contract for hardware, license costs, insurance premiums)
Direct/Indirect Costs
- Direct costsare costs that can be identified specifically and exclusively for an IT service. For instance activities and materials that are associated directly and exclusively with a specific service (e.g. a broadband connection).
- Indirect costs cannot be identified directly for an IT service (e.g. facilities, supporting services and administrative costs).
Fixed/Variable Costs
- Fixed costsare costs that do not vary due to production changes, such as investments in hardware, software and buildings.
- Variable costsare costs that do vary due to production changes, such as hiring external staff.
Cost Units
- The identified unit of consumption that is accounted for a particular service or service asset.
Variable Cost Dynamics (VCD)
- Focuses on analyzing and understanding the multitude of variables that impact service cost, how sensitive those elements are to variability, and the related incremental value changes that results.
- VCD analysis can be used to identify a marginal change is unit cost resulting from adding or subtracting one or more incremental units of a service.
- Examples of variable service cost components are:
- Number and type of users
- Number of software licenses
- Cost/operating footprint of data center
- Delivery mechanisms
- Number and type of resources
- Cost of adding one more storage device
- Costs of adding one more end user license
Activities, methods and techniques
- Service valuation
- During service valuation activities, the following decisions are made:
- Direct costs versus indirect costs
- Can costs be attributed directly to a specific service or are they shared by several services (indirect costs)?
- Labour costs
- Develop a system to calculate the labor costs for a certain service.
- Variable costs
- Include expenditures that are not fixed, but which vary depending on things such as the number of users or the number of running instances.
- Service valuation
- During service valuation activities, the following decisions are made:
- Variable costs
- To predict variable costs, you can use:
- Tiers –identifying price breaks where plateaus occur within a provider so that customers are encouraged to obtain scale efficiencies familiar to the provider.
- Maximum costs –prescribing the cost of service based on the maximum level of variability.
- Average costs –involves setting the cost of the service based on historical averaging of the variability.
- Translation of cost account data to service value
- Only possible once costs are attributed to service.
- Funding model alternatives
- Rolling plan funding
- A constant funding cycle.
- Suitable for a Service Lifecycle for which a funding obligation is incurred at the start of a cycle and continues until changes occur or the lifecycle ends.
- Trigger based plans
- Critical triggers activate a planning for a specific event.
- Change management process, for instance, could act as a trigger for the planning process for all approved changes that have financial consequences.
- Zero based funding
- Funding only the actual costs to deliver an IT service.
- Business Impact Analysis (BIA)
- To identify an organizations most critical business services through an analysis of outage severity translated into a financial value, coupled with operational risk.
- The cost of service outage is a financial value placed on a specific service and is meant to reflect the value of lost productivity and revenue over a specific period of time.
- Key decisions for financial management
- Cost recovery, value center, or accounting center?
- The IT financial cycle starts with funding applied to resources that create output.
- That output is identified as value by the customer, and this in turn induces the funding cycle to begin again.
- IT is typically referred to as a cost center, with funding based only on replenishing actual costs expended to deliver service.
- Key decisions for financial management
- Chargeback: to charge or not to charge?
- A chargeback model for IT can provide accountability and transparency.
- Charging costs increases the customer organization’s awareness of the costs incurred to provide it with information.
- Several chargeback models:
- Notional charging
- Tiered subscription
- Metered usage
- Direct plus
- Fixed or user cost
- Chargeback models
- Notional charging –an accounting method that provides insight into the costs that would be charged for a specific settlement method.
- Tiered subscription –Involves varying levels of warranty and/or utility offered for a service or service bundle, all of which have been priced, with the most appropriate chargeback models applied.
- Metered usage –settling costs on the basis of carefully established consumption units.
- Direct plus–a more simplistic model where costs that can be attributed directly to a service are charged accordingly with some percentage of indirect costs shared amongst it.
- Fixed or user cost –the simplest chargeback model in which the costs are divided on the basis of an agreed denominator, such as the number of users.
- Key decisions for financial management
- Financial management implementation checklists
- A number of example implementation steps for phased implementation could include:
- Plan
- Analyze
- Design
- Implement
- Measure
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