A business case for IT financial management: what, why and how

What is it?

The main purpose of budgeting and planning is to accurately govern spending and investments. Budgeting aims to communicate the anticipated cost and provides a framework for an organization’s financial objectives.

From an IT perspective, the budgeting process ensures that the IT function is allocated sufficient resources to supply the rest of the organization with IT services. The IT budget should cover all IT demands across the organization, and not only the cost of running the IT function. The IT demand can include everything from hardware, software and cybersecurity to personnel and operating costs associated with existing IT systems and applications (Gartner, 2022).

Why is it important?              

The budgeting process is essential for communicating the business value of IT. Inadequate budgets result in IT managers failing to provide a complete picture of the cost allocation to the organization’s management. This is typically a result of cost allocation being based on assumptions and erroneous historical data, rather than data-driven analysis. Relying on assumptions based on high-level historical data increases the probability of resources being allocated incorrectly. Organizations should therefore look for more precise alternatives (Gartner, 2022).

How can IT financial management strengthen budgeting and planning?

An ITFM discipline will provide the organization with the tools needed to improve transparency and show business counterparts where IT resources are allocated, and why they need to be allocated or reallocated and increased or decreased. ITFM provides a granular view of historic and actual costs associated with IT, providing necessary insights for transitioning from high-level assumption-driven budgeting to detailed activity-driven budgeting. This helps increase the accuracy of the budgeting and planning process. Moreover, an ITFM solution enables accurate visualization of actual IT costs — enabling the measurement of planning and forecasting costs based on planned activities rather than historical costs, further increasing precision.

ITFM and the Technology Business Management (TBM) taxonomy enable IT leaders to communicate budget allocation needs to other key stakeholders in a common language. Questions from business leaders such as, “My department will employ 20 additional employees this coming year, how will this affect my IT costs?” can be answered with IT cost projections based on the cost drivers of onboarding additional employees.

Through ITFM, organizations will have the opportunity to change the perception of IT as a cost center to a value contributor. Improving the transparency of IT spending will help with showing both where the current resources are being consumed, and where resource allocation can be shifted to support other needs, without necessarily increasing the IT budget. This approach increases the visibility of IT as a business partner and enables it to suggest how existing and new technology can help the business achieve its goals and prepare for future challenges (Gartner, 2022).
 

What is it?

Service costing is the process of identifying all costs associated with building, supporting and delivering business services to internal and external customers (Stanford, 2022). Consequently, billing and rate management is the process of determining optimal charging frequency (such as monthly recurring charges, one-time charges, and time and materials) and rates depending on the financial objectives of the business unit supplying these services.

For IT organizations, service costing involves defining the IT service portfolio (from a consumer perspective) and the associated costs for each of the services. It includes mechanisms for documenting and governing each service configuration, in addition to recovery rate and billing frequency (LaRocque, n.d.).

Why is it important?              

Organizations developing service rates should use service costing as the starting point for setting rates (Stanford, 2022). In this way, the organization avoids setting arbitrary rates, and charges for the consumption of services are more easily justified to the rest of the business. Additionally, applying rates to specific services provides cost predictability to other business units as they typically are set once or twice per year. Even if there is no plan to charge for services, service costing provides the necessary financial benchmark to identify and act on changes in the service cost structure.

For IT, service costing improves awareness and accountability of the delivery and consumption of the IT service portfolio. Increased visibility into costs enables service rate programs — tying consumption of specific IT services to other business units — clarify the link between business units’ IT usage and their IT bill. Hence, the conversation about IT changes from, “Why IT is so expensive?”, to “What’s the right amount and quality of IT for the business unit?” A mature rate management program of IT services increases predictability for other business units in their planning, helping IT functions become valued business partners for the organization.

How can IT financial management strengthen service costing, billing and rate management?

ITFM introduces an approach to IT service costing which clearly defines the IT service portfolio and reveals the cost structure of delivering these services. Moreover, it aids in addressing the difficulties of managing and maintaining changes in data and allocation models, ensuring a true representation of IT spending and its distribution to the different services.

When the IT function is confident that costs are continuously captured and correctly distributed, meaningful rates for the services can be developed — the ITFM approach allows for charging models (show-back, charge-back, etc.) which in turn provides valuable insight into the consumption of each IT service.