An Overview of Financial Management of IT Services

An Overview of Financial Management of IT Services

Financial management for IT services consists of financial models and practices which enable us to calculate the value of the services. It includes the core concepts such as funding, accounting, and budgeting. Funding refers to the sourcing and allocation of money for specific purposes such as design, transition, operation, and improvement of IT services.

Funding can be of 2 types; external and internal. External funding comes from the revenue received from selling IT services to external customers, and Internal funding comes from selling IT services to business units within the IT service provider’s organization.

Purpose of financial management for IT services

The purposes of financial management for IT services are as follows:

  • To provide operational visibility, insight and superior decision-making capabilities to the organization.

  • To make sure that the IT service provider does not commit to a service which they are not able to deliver.

  • To get the appropriate level of funding for the design, development, and delivery of IT services which are required to support the service strategy.

  • To identify the perfect balance between service cost and quality, supply, and demand.

Objectives of financial management for IT services

There are several objectives of financial management for IT services. Some of them are:

  • Defining and maintaining a framework in order to:

    • Secure the funding to manage the provision of services

    • Identify, manage and communicate the cost of providing services

    • Recover the costs incurred for providing a service.

  • To evaluate the financial impact caused by newly implemented or changed strategies.

  • To execute financial policies and practices which are specific to enterprises and IT service providers.

  • To account for the expenditure in the development, delivery, and support of services.

  • To forecast the financial requirements of the service provider.

Principles of financial management for IT services

The overall financial management policies and practices of an organization are applied in a tightly aligned manner across all their departments. This usually creates another level of financial management process which is specific to the department’s governance requirements. At the same time, it continues to conform to the overall financial management process of the organization.

The following terminology distinctions are used by ITIL to recognize multiple levels of financial processes:

Levels of Financial Processes

  • Financial Management: A generic use of the term for the purpose of managing finances.

  • Enterprise Financial Management: It refers to the overall financial management process of the organization as used by the financial department.

  • Financial Management for IT services: It refers to the specific way in which the IT service provider has applied the process.

Scope of financial management for IT services

Usually, a specifically dedicated department within the IT service provider owns financial management for IT Services. They typically report directly to the Chief Information Officer (CIO) or the Chief Financial Officer (CFO).

There are 3 core aspects of financial management, each of which has an annual planning cycle and a monthly operation monitoring and reporting cycle.

  1. Accounting: It consists of the mechanisms by which the IT service provider accounts to the organization for the money spent.

  2. Budgeting: It involves prediction and controlling of the service provider’s income and expenditure which are achieved through periodic negotiation cycles. During this period, budgets are set annually, and actual financial performance against these budgets is reported on a monthly basis.

  3. Charging: It involves the IT service provider billing its customers for the service provided.

Value of financial management for IT services

Financial management for IT services enables and enhances the ability of the service provider to make decisions, making them more agile and effective. At the same time, it ensures that they are financially compliant and have robust control.

Service providers invest in financial management to make sure that their business is conducted in a manner which is financially responsible, which allows the organization to operate within the legal limits and in the absence of penalties for non-compliance.

This results in increased accuracy in planning and forecasting and a better understanding of the actual costs and value of each IT service.

Process activities of financial management for IT services

The process activities for financial management of IT services include accounting, budgeting and charging (ABC).

process activities of financial management

  1. Accounting

    • The process of accounting allows an IT organization to account for its expenditures.

    • It tracks the income from IT services against the actual costs of delivery, comparing the actual costs with budgets and managing any variance.

    • An accounting process which is efficient will increase IT service provision and define the areas where costs can be saved, and financial efficiency can be increased.

    • The cost elements used for accounting are:

      • Capital Costs: It is the cost of making a purchase which will become a financial asset.

        Ex: Purchase of a server

      • Operational Costs: It is the cost of running a service which includes the use of electricity, employee salary, etc.

        Ex: Cost to keep the server running

      • Direct Costs: These are the costs which can be applied directly to a particular service or customer.

        Ex: Purchase of a server to be used for a particular service.

      • Indirect Costs: These are the costs which cannot be allocated to a particular service or customer directly.

        Ex: Software license for a server which runs several applications.

      • Fixed Costs: These are the costs that don’t change with the usage of IT services or in the short-term.

        Ex: An annual lease contract

      • Variable Costs: The costs which vary in the short term in accordance with the service usage are variable costs.

        Ex: Energy utilized to run servers

  2. Budgeting

    • Budgeting is a process which plans the income and expenditure of money in a company.

    • The activity involves predicting and controlling the spreading of money including:

      • Analysis of prior budgets

      • Assessment of plans

      • Cost and income estimation

      • Producing budgets

    • Based on this information, measures are taken to implement corrections to keep the budget on track.

  3. Charging

    • This is an activity where payment is needed for the services which are delivered.

    • Services are charged for depending on the type of service provider in question.

    • Charging is optional for internal providers depending on the overall financial policies of the enterprise.

    • For external service providers, charging is compulsory as is the only way by which the service provider makes a profit.

    • Charging encompasses the following

      • Charging policies

      • Chargeable items

      • Pricing

      • Billing

Challenges faced by financial management for IT services

The challenges faced by financial management for IT services are:

  • To shift focus from cost optimization to cost reduction.

  • Financial reporting can focus too heavily on the cost of infrastructure and applications rather than the total cost of the services.

  • The difficulties are involved in introducing internal charging for IT services as it will require a change in culture, the way in which IT service success is measured and the way in which value is articulated.

  • The chart of accounts for financial management for IT services needs to be suitable and applicable to the requirements of an IT provider and not just conformant with the overall policies of financial management.

Risks of financial management for IT services

The risks taken by during financial management of IT services are:

  • A lack of access to staff that is sufficiently skilled and qualified to understand the world of an IT service provider and the world of cost accounting.

  • Exposure to penalties for not complying with legislative and regulatory requirements.

  • The possibility of making ill-informed decisions due to a lack of dedicated financial management for IT service resources.

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