What’s Holding up ‘True’ IT Financial Management?

As 2009 draws to a close, one cannot help think that it has been a year of ‘what should have been’ for the IT Infrastructure Library (ITIL) discipline of IT financial management (and in many respects for its ITIL v3 Service Strategy sibling Service Portfolio Management). This is not only an analyst-observed opinion, IT Service Management (ITSM) tool vendors are also reporting reluctance on the part of customers to invest in this ITIL discipline at what should be the ideal time to increase the level of IT financial control.

The downturn in the economy has impacted us all in many ways and IT operations are no exception. The financial crisis has not only affected what IT has had to spend on business-as-usual activities, but has also started to increase the focus on what IT costs and what it ultimately delivers to the organisation. Ovum has no doubt that in 2010 CIOs will continue to be faced with many of the same challenges that dogged them in 2009: reducing IT costs and wastage, providing IT governance-mandated visibility and assurance, and demonstrating business value and IT’s level of business alignment or integration.

Ovum appreciates that for some organisations, IT financial management is not an issue, particularly if the IT function is subsumed within the finance function and is therefore subject to greater financial scrutiny because of its organisational position. For others, however, the art (or science) of finance is still a foreign language, with IT people not really ‘understanding’ finance in the same way that finance people often don’t understand HR, or HR people don’t understand marketing. Most, if not all, IT organisations budget (even if it is only ‘last year plus or minus x%’) and account for IT expenditure, but how many understand IT service costing, ‘getting under the skin’ of IT services to determine the resources they consume and how cost drivers impact the overall cost of service provision?

Taking a step back from IT, the parent company would never survive without an appreciation of the cost of products and services including the cost drivers, the fixed and variable costs, direct and indirect costs, margins, and supply and demand (yes, it is a foreign language). So why should IT, which has long espoused the idea of running itself like a business, be any different, particularly when the days of the ‘internal IT monopoly’ are long gone?

The earliest barrier to IT financial management (other than being oblivious of, or uneducated in, the need to do it) was the enabling technology. However, in recent years most ITSM vendors have added or beefed up existing products in this area. So what’s holding up the deeper adoption of this long-standing ITIL discipline?

In Ovum’s opinion, a common barrier is the lack of understanding of finance as a discipline within IT because of both the ‘language’ issues and the comprehension of the ‘detail’ of accounting practices in a larger sense. An IT function might be fortunate enough to have a financially gifted team member, but it is more likely to need to embed a finance person within the team or utilise a finance person with a good grasp of IT operations within the finance function. Either way, it is imperative that IT and finance work hand-in-hand to address the issue of IT service costing.

Beyond this, however, Ovum considers there to be a reticence within IT to start to unearth the true costs of IT service provision. For some services the cost of provision will be seen as disproportionate to the business’s perceived value of what they deliver in terms of business value. However, as with most changes, there will be pain en route to the desired future state. ITSM vendors are reporting that the US is seeing a rise in corporate demand for IT chargeback capabilities and the required understanding of what IT services cost, so how long until this trend is replicated in Europe? In Ovum’s opinion, it is often better to provide answers, however embarrassing they might be, before others start to ask awkward questions.

Originally published on www.ovumkc.com

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