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Service Strategy
Financial Management
GOAL:
To provide cost effective stewardship of the IT assets
and the financial resources used in providing IT services.
Objective
Enterprise value and benefits of Financial Management
The landscape of IT is changing as a strategic business and delivery
models evolve rapidly, product development cycles shrink, and
disposable designer products become ubiquitous.
Much like their business counterparts, IT organizations are
increasingly incorporating Financial Management in the pursuit
of:
Enhanced decision making
Speed of change
Service Portfolio Management
Financial compliance and control
Operational control
Value capture and creation.
Shared imperatives framework: Business and IT
Service Valuation
Service Valuation is used to help the business and the IT Service Provider agree on the value of the IT Service.
Service Valuation
Demand modeling
Poorly managed service demand is a source of cost and risk.
The tight coupling of service demand and capacity
(consumption and production) requires Financial Management
to quantify funding variations resulting from changes in service
demand.
Service Portfolio Management
Financial Management is a key input to Service Portfolio
Management. By understanding cost structures applied in
provisioning of a service, a company can benchmark that
service cost against other providers.
In this way, companies can use IT Financial information,
together with service demand and internal service capability
information, to make beneficial decisions regarding whether a
certain service should be provisioned internally.
Service Provisioning Optimization (SPO)
Financial Management provides key inputs for Service
Provisioning Optimization. SPO examines the
financial inputs and constraints or delivery models to determine
if alternatives should be explored relating to how a service can
be provisioned differently to make it more competitive in terms
of cost or quality.
Planning Confidence
Planning provides financial translation and
qualification of expected future demand for IT
services.
Planning Confidence
Service Investment Analysis
Accounting
Accounting within Financial Management differs from
traditional accounting in that additional category and
characteristics must be defined that enable the identification
and tracking of service-oriented expense or capital items.
Compliance
Compliance relates to the ability to demonstrate that proper
and consistent accounting methods and/or practices are being
employed. This relates to financial asset valuation,
capitalization practices, revenue recognition, access and
security controls etc.
If proper practices are documented and used, compliance can
be easily addressed.
Variable Cost Dynamics
Variable Cost Dynamics (VCD) focuses on analyzing and
understanding the multitude of variables that impact service
cost, how sensitive those elements are to variability, and the
related incremental value changes that result.
Among other benefits, VCD analysis can be used to identify a
marginal change in unit cost resulting from adding or
subtracting one or more incremental units of a service.
Methods, Models, Activities & Techniques
Service Valuation
Service Provisioning Models
& Analysis
Funding Model Alternatives
Business Impact Analysis (BIA)
Funding model alternatives
Funding addresses the financial impacts from changes to current and
future demand for IT services and the way in which IT will retain the
funds to continue operations.
Each model assumes a different perspective, yet rests on the same
financial data, an increased ability to generate the requisite
information translates to increased visibility into service costs and
perceived value.
The model chosen should always take into account and be
appropriate for the chosen should always take into account and be
appropriate for the current business culture and expectations.
Business Impact Analysis (BIA)
A BIA seeks to identify a company’s most critical business
services through analysis of outage severity translated into a
financial value, coupled with operational risk.
This information can help shape and enhance operational
performance by enabling better decision making regarding
prioritization of incident handling, problem management focus,
change and release management operations, project priority
etc.
Return On Investment (ROI)
ROI is a concept for quantifying the value of an
investment. Its use and meaning are not always
precise. When dealing with financial offers, ROI most
likely means Return on Invested Capital (ROIC), a
measure of business performance.
This is not the case with service management, ROI is
used as a measure of the ability to use assets to generate
additional value.
Keep it simple
In the simplest sense, it is the net profile of an investment
divided by the net worth of the assets invested. The
resulting % is applied to either additional top-line revenue
or the elimination of bottom-line cost.
Tactical Benefits
While a service can be directly linked and justified
through specific business imperatives, few companies
can readily identify the financial return for the specific
aspects of service management. It is often an investment
that companies must make in advance of any return.
Terms
Business Case
A decision support and planning tool that projects the
likely consequences of a business action. The
consequences can take on qualitative and quantitative
dimensions. A financial analysis, for example, is
frequently central to a good business case.
Business Objectives
The structure of a Business Case varies from organization
to organization. What they all have in common is a
detailed set of business impact or benefits.
Business impact is in turn linked to business objectives.
A business objective is the reason for considering a service
management initiative in the first place.
Business Impact
While most of the Business Case argument relies on cost
analysis, there is much more a service management
initiative than financials.
The scope of possible non-financial business impacts is
summarized as:
Pre-program ROI
The term capital budgeting is used to describe how
managers plan significant outlays on projects that have
long-term implications.
A service management initiative may sometimes require
capital budgeting.
Capital budgeting
Capital Budgeting is the commitment of funds now in
order to receive a return in the future in the form of
additional cash inflows or reduced cost outflows.
Capital budgeting decisions fall into two broad categories:
Screening Decisions
Preference Decisions.
Screening Decisions (NPV)
An investment typically occurs early while returns do not
occur until some time later. Therefore, the time value of
money, or discounted cash flows, should be accounted
for.
There are two approaches to making capital budgeting
decisions using discounted cash flows:
Net Present Value (NPV)
Internal Rate of Return (IRR)
What is an organization’s discount rate?
A companies cost of capital is typically considered the
minimum required rate of return.
This is the average rate of return the company must pay
to its long-term shareholders or creditors for use of their
funds.
Therefore, the cost of capital serves as a minimum
screening device.
Other methods
There are other methods for making capital budgeting
decisions e.g.
Pay-back
Simple Rate of Return.
However, Pay-back is not a true measure of the
profitability of an investment and Simple Rate of Return
does not consider the time value of money.
Intangible benefits
Process improvement and automation are common
examples of difficult-to-estimate cash flows. The up-front
tangible costs are easy to estimate.
The intangible benefits, such as lessened risk, greater
reliability, quality and speed are much more difficult to
estimate. They are very real in impact but still challenging
in cash flows.
Preference Decisions (IRR)
There are often many opportunities that pass the
screening process. The bad news is not all can be acted
on. Financial or resource constraints may preclude
investing in every opportunity.
Preference decisions, sometimes called rationing or
ranking decisions, must be made. The competing
alternatives are ranked.
Post-program ROI
Without proof of value, executives may cease further
investment. Therefore, if a service management initiative
is initiated with prior ROI analysis, it is recommended that
analysis be conducted at an appropriate time after.
Program objectives should be clear as they serve to
guide the depth and scope of the ROI analysis.
Data Collection
The collection of data is vital for a valid and quantifiable
ROI results. There are two periods in which to collect
data; Pre – Implementation and Post – Implementation.
Program objectives should guide the source and nature
of data points e.g.
Metrics for quality of service
Costs for service transactions
Questionnaire for customer satisfaction.
Isolate the effects
By this stage, the results of the service management
program are becoming evident. By isolating the effects,
there should be little doubt that the results should be
attributed to the program.
There are many techniques available e.g.
Forecast Analysis
Impact estimates
Control group.
Data to monetary conversion
To calculate ROI, it is essential to convert the impact data to
monetary values. Only then can those values be compared to
program costs. The challenge is in assigning a value to each
unit of data. The technique applied will vary and will often
depend on the nature of the data:
A quality measure is assigned or calculated and reported as a standard value.
Staff reductions or efficiency improvements are reported as a standard value.
Improvements in business performance are reported as a standard value.
Internal and external experts are used to established the value of a measure.
Determine program costs
This requires tracking all the related costs of the ITIL
program. It can include:
The planning, design and implementation costs. These are pro-rated over the expected life of the program.
The technology acquisition costs
The education expenses.