IT Financial Management: The Managed Services Way

The IT financial management process (ITFM) is a key capability for both the IT department and the office of the CIO, as it helps to maximize efficiency of IT budgets and return on investments through a two-pronged strategy. It not only helps establish cost transparency in terms of how much the organization is spending / or plan to spend across key IT categories, but also drives adoption of show-backs and chargebacks by co-relating IT spends with consumption. Recent surveys show that the ITFM is a top priority for leading CIOs as they implement initiatives around strategic planning, IT cost optimization and spend transformation (“run the business” to “change the business”) initiatives.

An efficient ITFM process can drive positive outcomes across key levers such as moving operational spends to transformative spends, focusing on business centric high impact initiatives, tracking related procurement led initiatives (and ensuring that timely interventions can be made) in driving down unit cost of IT.

Nearly 75% of global CIOs plans to reshape IT spends and underlying levers of IT resources in 2024 and look forward to leveraging best in class ITFM capabilities.

Our experience suggests that there are four key challenges in achieving an effective IT finance management capability, which exist in large organizations.

1. Poor source data quality

Typically, source data can have quality issues across dimensions such as accuracy, completeness, consistency, integrity, and currency. This is driven through some of the root causes including overlapping data sets across multiple source systems and high degree of manual interventions required in updating source data. Quality of insights driven by ITFM capability will be directly proportional to the quality of source data fed.

2. Limited definition of IT finance management organization and governance

An IT finance management capability thrives on a matrix structure which helps integrate business and IT functions together into a structured decision process. Traditionally, IT finance management organizations are designed as siloed functions with limited clarity of roles, responsibilities, and the governance framework around key decision-making processes such as annual IT planning, budgeting, IT spend variance management, quarterly reporting, and respective stakeholders to be involved.

3. Non uniform understanding of key IT metrics

Typically, large organizations have non-uniform understanding of key metrics and how they come together to communicate outcomes. For example, an organization may recognize IT consumption only when they originate from select business units, belong to select cost centers, and belong to select IT categories. Stakeholders from various business units / central organization may not have a similar understanding of this outcome and may calculate IT consumption differently. This generates a gap in terms of expectations and outcomes thereby leading to a lot of friction between ITFM office and business functions, which ultimately delays decision making.

4. Sub optimal ongoing process compliance

Traditionally, business functions have a lot of influence in terms of how IT budgets are allocated and how IT spends are monitored on an ongoing basis. Even though ITFM processes and governance is established, there are deviations from the established process to facilitate unexpected spending. This impacts long term sustainability and trust of defined ITFM capability.

~40% CIOs have implemented the standard ITFM solution, and are now shifting their discussion from IT cost to value delivered by IT

One of the primary approaches to achieve an efficient IT finance management practice is to adopt a managed services construct in planning and delivery of IT finance management capability.

A managed services construct helps in executing core internal IT financial management processes for the organization, which includes enabling budgeting exercise, reporting IT spend, configuring and provisioning various reports, identifying related contractual implications (with vendors), tracking consumption by various business units, and enabling show back / charge back mechanisms.  There are three themes in a managed services construct which can alleviate identified challenges.

1. Ongoing data quality remediation: Discovering data outliers and reporting gaps on an ongoing basis, in addition to enabling immediate and medium-term fixes will help alleviate source data quality issues.
2. ITFM processes standardization: Analyzing the current state ITFM processes and improvising handshakes / controls on an ongoing basis will help firm up ITFM credibility and overtime. It will also evangelize right understanding in terms of metrics, tracking and reporting IT spend and related charge backs.
3. Ongoing compliance: Collaborating with various stakeholders (right from steering committee to execution teams) will ensure ongoing compliance on IT budget / spend decisions and drive the right mindset changes within the organization.

Conclusion

There are five critical success factors which will ensure successful adoption and operations of a managed services construct.

1. Top-down support to ensure adoption

The adoption of ITFM framework requires support from key stakeholders. This needs to be a business sponsored initiative to drive adoption by various business units. Most of the time, the primary impediment is that ITFM initiative is seen as IT sponsored.

2. Capability uplift on TBM and IT financial management

The organization must have required understanding and capabilities to execute ITFM initiatives. A holistic approach needs to be adopted in equipping the team with the required skills so that operations can be sustained on an ongoing basis along with a proper appreciation of the value delivered.

3. Aligned service definitions, costing and chargeback practices as per TBM

Standard TBM practices need to be followed across the IT organization. This will help align all stakeholder to have a common understanding of the approach to arrive at a fully loaded cost of IT. For this to happen, the IT services within the organization need to be clearly defined, along with a clear mapping to IT towers and IT cost pools.

4. Collaborative ways of working between ITFM, IT and business, and the right structure for ITFM office

The effective collaboration of these three key stakeholders will ensure efficiency and effectiveness of ITFM capability. A mandate for ITFM capability needs to be clearly set and communicated. Accountabilities across front and back-office operations need to be aligned across all stakeholders for all key ITFM processes/

5. Source data readiness and identified workarounds as a stop gap mechanism

While all the data required across IT costs, IT assets and consumption may not exist (at least in the form expected), there should be a clear plan to bridge the data gaps, either through an assumption driven approach or through manual reconciliations or a combination of both. Post that, continuous improvement plans will help in enriching the source data and processes around it.