Financial World of Information Technology Conferences August 23-27, 2010 Harrisburg, PA

1. Financial World of Information Technology ConferencesAugust 23-27, 2010 Harrisburg, PA

2. IT Finance Concepts

4. IT Finance and ITIL • “Finance management for IT services is concerned with helping the business to assess whether its IT services are doing the best it can with the money it has.” Source: ITSMF UK, Financial Management

5. IT Finance and ITIL • ITIL places Finance under the Service Delivery section of Service Management along with Service Level Management, Capacity Management, Continuity Management and Availability Management • Functions include: budgeting, tracking, cost benefit analysis, unit costing, cost recovery, and operating like a business unit • Focus on processes, controls, communication, education • Self-assessment available at www.itsmf.com/bestpractice

6. IT Finance vs. Corporate Finance – What’s different? • Few true differences, but IT seems to have one of everything! • Technology carries its own level of mystery and client distrust -Language is key to solving the mystery • Additional dimensions by adding projects, capitalization of software, cost/benefit analysis, portfolios, governance, chargeback • Many Corporate Accounting systems do not support the tracking requirements of IT

7. IT Finance Organization • Driven by each company • Centralized vs. Decentralized • Relationship with Corporate Finance • Size of IT organization • Functions within IT • May include HR and measurements

8. IT Finance Responsibilities • Business Planning • Executive Reporting • Ensure services delivered are within budget • Ensure accuracy of all financial data • Monthly monitoring of use of funds • Prepare/analyze variance reports • Process invoices • Determine accounting codes • Review/negotiate vendor contracts • Recurring Payments • Resolve payment disputes • Resource management including hiring policies and salary administration • Coordinate materials with legal • Approve training requests • Provide guidance and analysis for procurement requests • Asset Management and/or capital tracking and contract files • Cost accounting and chargeback • Project tracking • Balanced Scorecard input • CIO expense management • Financial systems oversight

9. IT Budget and Expense Reporting

10. IT Budgeting Concepts • Focus on the largest categories first – usually salaries and hardware/software • Utilize tools available for managing resources to aid the forecast process • Time tracking, project management , asset management • Bottoms up/tops down • Client consumption

11. The IT Chart of Accounts • One of the most important parts of cost management for IT • Develop to enhance decision making • Key structure for ABC and ABM • What are the most important areas of IT to manage? • Cost types, cost elements, cost units

12. Accounting Terms • Cash • Statutory Accounting • Depreciation • Amortization • Capitalized Lease • SOP • ITIL • ISP • Run Rate • LRIC Long Run incremental Cost • Portfolio • Project • Governance • Regulatory Accounting • Intellectual Property • Tangible Asset • Useful Life • Net Book Value • Baseline • Write Down • Scrap • Prepaid Expense • Sarbanes Oxley • ABC/ABM • Unit Costing • Transfer Pricing • Profit CenterBusiness Center • Cost Center • Chargeback • Memo Billing • Blue Dollars/Green Dollars • Clearing Account • Standard Costs/Standard Rates • Cost/Price/Volume Variance • Fixed & Variable Costs • Business Value Assessment/Cost Benefit Analysis

13. IT Managerial Reporting and Cost Accounting Concepts

14. Managing Finance – Forecasting • Run rates, trend lines and magic eight balls • Understand what your real cost drivers are • Sort out the clutter and deal with the facts • Make the right friends - use the tools available to operations managers • Clients and project managers will never hit the target as closely as a good trend line

15. IT Budget Cycle • April – begin Planning for future year(s) • Corporate guidelines (high-level) issued • May IT begins planning by Project • Interface with Client • June/July Project Lists 85% complete for major work efforts • August Projects reviewed by Portfolio Management or Governance Board • August/September Corporate Assumptions delivered

16. IT Budget Cycle • October Governance Boards rule on Project Lists • Corporate headcount targets handed down • Capital budgets due • Chargeback rates due • Forecasts for volumes due • Revise project lists • November Strategic Planning Documents delivered at executive levels, detail budgets submitted to Corporate Finance for roll up. • December Budgets reduced at high levels – returned to IT for rework - Revise Project lists • January spending begins, project budgets not yet in balance • February/March project budgets near authorized levels

17. Financial Planning • Budgeting and Controlling • Types of budgeting… • Imposed • Participative

18. Financial Planning • Pros and cons… • Imposed. It is easy. Lack of buy-in by subordinates. • Participative. Involves everyone. VERY iterative. Usually results in a “high” budget.

19. Operating Budgets • What we all seem to do most of the time…all of the time. • The first year of the Strategic Plan. • The basis for most IT performance metrics. • Source of IT praise or criticism. • Most deceptive measure. • When IT budgets grow at 20% - IT is out of control!

20. Operating Budgets • IT budgets grow due to: • Additional volume for current customer services. • Annualized impact of new services added last year. • New customer services. • Need to change the budget process to “baseline budgeting.”

21. Operating Budget • Everything above the baseline requires a “decision package” submitted, prioritized, and approved. • The customer and IT work together as partners. • The customer provides the revenue and IT indicates the cost.

22. The Forecast Period Covered is Typically 3-5 YearsThe Shelf Life of Most IT Budgets is Typically 15 Minutes

23. IT Cost Accounting Concepts • Services – services– services – It’s all about the services • You can’t usage bill what you can’t count, • You can’t say you are competitive if you can’t identify the costs • Corporate accounting systems may not support the IT needs for detail • Services and Cost are not organizationally driven • Prices and costs are not necessarily the same thing

24. Activity Based Rates • Concept which requires pricing of each service identified in a service delivery chain • Outgrowth of ITIL Service Management • Heavily tied to “self-service” for clients

25. Activity Based Rates Example • IT has set up a self-service Web site to all the client to order email service. Client may specify functions desired such as Email account, number of days of back-up, size of email account, date email account will be delivered, whether a calendar is also required, whether email can be accessed remotely, etc. • At each point the client makes a decision, a pricing decision is applied.

26. Activity Based Rates • Complexity level of cost accounting information grows with each new service identified • Cost to track costs (time entry, expense coding) grows enormously • Accuracy tends to decline as allocations increase • Accounting processes tend to collapse under their own weight

27. Design of an Activity Based Costing System • Process value analysis • Identifying activity centers • Tracing costs to activity centers • Selecting cost drivers

28. Process Value Analysis(Analysis of the Activities Performed) • Flowchart each step of the process. • Analyze activities to determine if it is value-added or non-value-added. • Reduce or eliminate non-value-added activities. • Through continuous use of this tool, ABC gives way to activity-based management.

29. Benefits of Activity-based Costing • More accurate product costs. • Increased number of cost pools. • Changes the basis of assigning costs. • Improves management perception of overhead by tracing the costs to products.

30. Limitations of Activity-based Costing • The necessity of making arbitrary allocations based on volumes. • High management costs associated with multiple activity centers and cost drivers.

31. Activity-based Costing& Service Industries • A larger proportion of costs in service industries tend to be facility-level costs that cannot be traced to a particular service. • It is more difficult to capture activity data in service companies since the activities are human tasks that cannot be easily recorded.

32. Activity-based Costing(ABC) for IT • With this basis we can discuss activity-based costing in the IT environment. • Don’t view IT as one big overhead item, separate IT into cost pools. • Cost pools group costs that respond to the same cost driver: • CPU, disk, tape, print, programming, etc,

33. The ABC Application Process • Identify and classify IT activities. • Determine appropriate cost drivers. • Estimate costs for each cost driver (divide IT budget into pools). • Estimate amounts of cost drivers (utilization). • Determine the rate for each cost driver (resource cost).

34. Questions…

35. IT Asset Management –The Key to Financial Management

36. Dilbert on Consultant Speak

37. IT Asset Management (ITAM) • Is a total life-cycle strategy for optimum acquisition, installation, operation, and maintenance. • Asset management links availability, capacity, and operating and maintenance costs to business objectives.

38. IT Asset Management is: • The discipline of managing: Finances Contracts Usage of IT Assets

39. What it means – • Throughout the asset’s lifecycle • Maintain an optimal balance between business service requirements: • Total costs • Budget predictability • Contractual and regulatory compliance

40. IT Asset Management Activities • The management of: Asset Inventory Software licenses Vendors Procurement Leases Warranties Cost accounting Retirement and disposal.

41. What are IT Assets? • Computer Hardware • Enterprise Servers (Mainframes) • Distributed Servers • Storage Devices • Printing Resources • Desktop / Portable Resources • Network attached devices • Local devices

42. What are IT Assets? • Telecommunications Hardware • Network • Hubs, Routers, Bridges, Switches • Voice • PBX, VoIP Resources • Shared Voice/Data Resources • Mobile Devices • BlackBerry, Palm, Treo, etc.

43. What are IT Assets? • Software • Operating Systems / Sub-System • Application • Purchased • Developed • Database • Performance Management • Diagnostic • Utilities

44. Capital / Expensed Assets • Capitalized Assets • Purchased Resources • Leased Resources

45. Exploring the Asset Lifecycle • Call to the Customer Care Center (Help Desk) • Trouble report • Service request • Request for new service • Customers current configuration or service profile • Is asset under warranty? • What is customers service level (24x7, time & materials) Change Management / Help Desk

46. Procurement Management Contract Management Exploring the Asset Lifecycle • Repair • Dispatch technician • Create work order • Purchase replacement or new resource • Warranty replacement? • Disposal or retirement of old resource? • Procurement? Change Management / Help Desk

47. Procurement Management Contract Management Exploring the Asset Lifecycle • Repair • Billable time to customer Change Management / Help Desk • Purchase • Capital or expense Cost and Charge Management ERP System

48. Procurement Management Contract Management Exploring the Asset Lifecycle • Moves, adds, or changes to resources • Changes in • Configuration • Location • Ownership Change Management / Help Desk Cost and Charge Management ERP System

49. Procurement Management Contract Management Additional IT Finance Interactions • Chargeback • Asset based • Service based Change Management / Help Desk Cost and Charge Management ERP System

50. Procurement Management Contract Management Additional IT Finance Interactions • Planning & Budgeting • Capital budgeting • Revenue budgeting • Expense budgeting Change Management / Help Desk Planning and Budgeting Cost and Charge Management ERP System