Financial Management for IT Services

From the earliest days, ITIL(TM) offered guidance on financial management for IT services. The original book, called ‘Cost Management was one of the 10 core processes covered by the original exams. But, for me, the key concept in there has often been missed. Back in those early days of ITIL, the books were being written by CCTA, at that time a part of HM Treasury. HM stands for ‘Her Majesty’s BTW;  the Treasury controlled – and I mean that word literally – all things do to with UK Government financial policy and procedure. That degree of control meant our cost book got slightly hijacked by clever accountancy folks from mainstream Treasury, and it’s why the original book was a bit complicated and pre-occupied with fancy financial things. 

Accountancy is much more than the cost

That wasn’t altogether a bad thing: it means ideas like ROI, VOI, Deprecation models and lots more got included in some detail in ITSM. It also paved the way for predictive financial aspects like budgeting and even setting up and running an internal chargeback system. Match that up with the simple recording where and why you spend money and technical management mainstream have decision support data. It helps us with things like:

  • cost of components parts of our infrastructure, which suppliers have delivered good value, whose equipment breaks most, and what it costs to repair it – and more
  • making decisions on buying or leasing equipment and repairing or replacing decisions
  • choosing between the top of the range or lower specification options, and the wisdom of accepting longer-term warranties or taking cheaper up-front prices.

Cost underpins our BRM abilities

That’s all good stuff, but it wasn’t the real reason why Cost management – knowing where you spent your money) was considered so important. That real reason generates data to answer key questions that, nowadays, we see popping up in spaces we call ‘Business Relationship Management’ and ‘Service Portfolio’. That is, quite simply:

  • Is the service we are offering worth what it costs us?
  • Should we kill the service, keep it, improve it or what?

Those questions, of course, require two bits of underpinning data:

  • what value does the service deliver?
  • What does it cost?

It is the second one of those that ‘cost management’ was intended to supply, and why the initial emphasis and title related to ‘cost’ not a wide-ranging basket of concepts and techniques that are ‘financial management for IT services’. To get that information about services requires that an organisation knows what they spend on each IT asset, and how much of each asset, each service uses. They are two different things that cost management needs to bring together, and particularly the allocation aspect can be easily misunderstood and over complicated. Despite what ITIL still tells us, understanding and deriving this doesn’t need fancy accountancy knowledge, it’s actually much more like domestic finance.

By way of illustration …

Back in the ITIL V2 days, I wrote an exercise to illustrate this …

Imagine a student apartment, with 6 students sharing the space and the facilities. Some details:

  • 4 bedrooms, 2 double and 2 single
  • the owner collects rent once a month – $600
  • electricity and gas are billed quarterly for the whole apartment
  • the students usually (but not always) eat together
  • there is a washing machine and dryer
  • one student is in the college football team, plays twice a week and practices twice a week and has to wash their dirty kit each time
  • wi-fi is billed monthly.

And so on … the exercise is simple, who pays what? Do you divide the rent 4 ways (per room) or 6 ways (per person) or somewhere in between? Do we try and measure how much power each student uses, or just divide it 6 ways? Do we set up a shared food store, or rotate cooking and buying responsibilities? 

Accurate enough

These questions are not always easy – if you’ve ever had to do it you may remember the ‘discussions’ they can engender. Not totally fun, and it can challenge friendships and relationships, but it’s certainly achievable. You may also recall that the simple trick to getting a result is not to get too hung up on accuracy. It will never be actually precise, it does need to be:

  • simple enough to measure
  • accurately enough to be useful.

Those two simple tests should logically also apply to decide how much of each supporting service (like the network or the service desk) gets allocated as a cost to each service received by the customer. Once we have identified those supporting services, we can allocate our infrastructure components to them, capture the costs we spend on each and determine a mechanism for allocating those costs. That’s cost management.

You don’t necessarily need sophisticated software to do this. A well-integrated service management tool will let you capture and maintain costs against components and then assemble those into costs that will represent supporting services costs. They might automatically do some allocation, but if not, it’s easy to export data to a spreadsheet and get some ‘accurate enough’ figures to help understand what each of your services costs – and get you on the way to measuring real value too. 

I can’t emphasise the ‘enough’ part of ‘accurate enough’. ITSM and their customers need to realise we are sharing a space, like those sensible students sharing the apartment who realise that the purpose is splitting the costs easily and fairly, not with extreme accuracy. If those students don’t get on well enough not to argue over tenths of a cent, then it is not going to be a pleasant place to live anyway, irrespective of what it costs and who pays what. And if the relationship between internal IT supplier and customer generates a need to argue over pennies, then the relationship needs a whole different kind of treatment, financial accuracy won’t help. 

Footnote: If anyone wants that old financial allocation exercise – they are welcome, just ask.

Blog cover by Prasanna