IT SERVICES FINANCIAL MANAGEMENT:
The aim of IT Services Financial Management (ITSFM) is to provide an efficient and cost effective management of IT and financial resources in an enterprise. It also helps to extract maximum business value for minimum financial investments.
ITSFM helps to achieve maximum business value by:
- Calculating the Return on Investment (ROI) for the ITSM (IT Service Management) team and thereby helping in important decision-making.
- Financial Forecasting.
- By identifying, managing and controlling all costs incurred, both internally and externally (this can include costs incurred through any contracts with external suppliers). This helps to assess the Total Cost of Ownership which is the sum of the total cost of development and the total cost of supporting it during it’s lifetime.
For any enterprise, it is important to strike the right balance between quality and cost of providing a service.There might be times when customers (or users) might demand close to 100% availability of a service, but it is the ITSFM team who will work out and provide the cost/benefit analysis to the ITSM team, based on which they (the ITSM team) can make a decision.
ITSFM is also responsible to recover the cost of a service /services from those who use them. Though this would primarily be a decision of the higher management, ITSFM can suggest the use of “differential charging” taking into consideration the demand for the service and the cost of providing that service.
ITSFM is concerned with the following functions:
- Budgeting: It deals with forecasting the money required to provide a particular service and tries to secure that money from the business for that purpose. It also monitors and controls the expenditure against the budgeted amounts.
- Accounting: It deals with keeping a track of where the money goes from that budget.
- Charging: deals with recovering the cost of providing a service from a customer or user. The charges for each service that is being provided to a customer should be accurately documented in the SLA (Service Level Agreement).
This is how it works – budgeting would tell you how much money has been allocated to provide a certain type of service. Accounting will tell you how that money is being/has been spent. And charging will tell you how much of the money spent on providing the service is being recovered.
Budgeting and accounting work hand-in-hand to identify and evaluate all the costs incurred to provide a service and how the money is being spent.
Budgeting, accounting and charging have a hierarchical relationship. While ITIL recommends implementation of at least budgeting and accounting, charging is optional. Accounting is required to calculate the ROI (Return on Investment) and Cost/Benefit calculations. These calculations might be necessary whenever new services are introduced or whenever there is a change to an existing service.
Types of costs:
Breaking down and classifying all the costs is crucial to creating a budget. The different types of costs in ITIL are as follows:
- Hardware (like computers, servers, printers, routers, hubs etc.)
- Software (like Operating Systems, proprietary applications, third-party applications etc.)
- People (costs incurred towards salaries and other benefits etc.)
- Accomodation (like offices, utility and storage spaces etc.)
- External Services (these refer to work that might be outsourced like security, development, facilities, disaster recovery, ISP etc.)
- Transfers (costs incurred due to cross charging within the business.
Classification of costs:
According to ITIL, costs must be classified at least into the following two categories:
- Capital costs.
- Operational costs.
Capital costs are usually associated with purchase of fixed assets like land, buildings etc and hardware such as computers, servers etc. They usually increase the value of the company. However, Operational costs are those costs incurred with the day to day running of the company and includes salaries, rents of buildings and other equipment, software licenses etc. Operational costs do not increase the value of the company because they are recurring in nature.
Depreciation: Sometimes it is necessary to track capital purchases which lose their value over a certain period of time. Suppose an item was bought for Rs.100,000 and it was supposed to last three years. It just means that every year it’s value will reduce by one-third of the initial cost of Rs.100,000. This way, at the end of three years this item will have zero value. This is how depreciation is calculated.
Capitalization: This is just the opposite of depreciation. Here, operational costs is sometimes put up as capital costs so that it too can be allowed to depreciate. Let’s say one company spends Rs.100,000 to develop a software. When this software application is ready, it adds Rs.100,000 as value to the company. But if its life span was say, five years, then it will depreciate accordingly and finally, at the end of five years, it will have zero value.
Costs can also be classified as :
- Direct costs.
- Indirect costs.
Direct costs can be attributed directly to a customer or a number of customers. Example: The purchase of a server exclusively for the use of the payroll department.
Indirect costs are those costs that are shared among a group of customers or groups.They cannot be attributed to any single customer or group.
Indirect costs can be of two types:
- Absorbed costs – here it is possible to track usage by different customers or groups.
- Unabsorbed costs – here, it is not possible to track usage by different customers or groups. Example: The Service Desk. Here the total cost of running the Service Desk is distributed among all user groups.
Fixed costs and Variable costs:
Costs can also be classified as:
- Fixed costs – costs remain the same irrespective or usage. Example: cost of a leased line.
- Variable costs – increases or decreases according to usage. Example: cost of telephone usage.
After Budgeting Accounting, comes Charging:
Firstly it is up to the higher management to decide whether or not to charge for a particular service. ITSFM does not decide this.
Sometimes it can be decided that certain services will not be charged at all because of the high costs involved in the charging activities themselves – like invoicing, printing out bills, dispatch and delivery of bills etc.
In other instances, a company can decide to charge back from users just what has been spent to provide a particular service. This is called “zero balance” policy.
There is also a “cost plus” policy where the amount recovered is more than what has been spent on providing the service.
The “cost minus” policy only recovers part of the amount spent on providing a particular service. Now, how much that “part” will be is up to the higher management to decide.
Different approaches to charging:
- A “going rate” approach is based on what departments or groups charge for the same kind of service provided.
- The “market rate” approach is based on what other companies charge for a similar type of service.
- A “fixed price” approach is based on an agreed price with the customer or user group.
ITIL recommends that companies should have a charging policy which is fair, easy to understand and easy to control.