The document discusses the importance of IT financial management in running IT successfully. It outlines key components of the IT financial management lifecycle including planning, budgeting, accounting, chargebacks, spend analysis, and portfolio management. Adopting these practices and using tools to support them can help optimize costs, ensure alignment between IT and business objectives, and deliver value from IT investments.

1. The Importance of IT Financial Management
in Successfully Running IT
David Baker
Chief Architect
Diamond Management & Technology Consultants
david.baker@diamondconsultants.com
November 11, 2008

2. A significant portion of business users concur that IT is a strategic
investment
87% of business leaders concur
that IT plays a major role in the
strategic success of their
business1
77% of CFOs say they regard IT
as a strategic function instead of
as a utility2
1. 2007 Digital IQ study, Diamond Management & Technology Consultants
2. CFO magazine , December 2005
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3. Yet there is growing concern about increasing costs, lack of
IT/Finance alignment, and poor return on IT investments
 Increased demand for new
technologies and complexities has
frequently caused IT costs to grow
faster than other costs
 CIOs in 250 firms across Europe
found that nearly three-quarters of
decisions about innovation
investments are made without full
consideration of the impact on IT1
 60% of CFOs indicated that IT did not
meet their performance expectations2
 45% of CFOs identify the challenge of
obtaining metrics to identify true IT
1. Computer Associates
2. CFO magazine , December 2005
value and cost3
3. Strengthening IT-Finance Collaboration to Drive ROI, Corporate Executive Board, 2007
Page 2

4. Proper financial management has become integral to ensuring IT
achieves the business objectives
IT Financial Management
 . . . is the sound management of
monetary IT resources in support of
organizational goals
 . . . provides the expense, or cost, side
of the equation for making business
decisions regarding changes in the IT
infrastructure, systems, staffing, or
processes
 . . . provides answers for how IT can
help deliver organizational goals and
what IT contributes to shareholder value
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5. Our research and experience indicate IT organizations are
transforming to value-oriented service providers
Common Attributes of a Common Attributes of a
Cost-Focused IT Organization1 Value-Oriented Service Provider1
 Existing IT capacity, skills and  Business strategy and business
cultural appetite determine work priorities determine IT work
selection and prioritization prioritization
 Budget and cost oriented with a  Emphasis on ROI and focus on
focus on variances explanation realizing business benefits
 Implementation plans are typically  Implementation plans driven by a
effort driven e.g. resource and time commitment to deliverables
 Spending concentrated on work  Spending concentrated on work
that is relatively short and perhaps that produces business value
easier to implement regardless of duration and ease
 Cultural aversion to risk and  Willingness to accept and
change aggressively manage reasonable
amounts of risk
1 Based on Diamond’s primary research and experience with large IT organizations across multiple industries
Page 4

6. We’ve identified five barriers restricting companies from making
that transition
Page 5

7. Optimizing your IT financial management process avoids these
barriers and aids your transition to a value-oriented provider
Planning
Annual
Analyzing Budgeting
Ad hoc Portfolio Quarterly
Management
Continuous
Charging Accounting
Monthly Daily/Monthly
Note: cycle is not necessarily completed in a
continual loop since timing can be different
for each component
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8. IT Planning is the annualized activity to determine the IT initiatives,
to support both the business strategies and the IT strategies
 The very first step in planning for IT
spend should be the business
strategy
 Then, IT strategy should be derived
from the business strategy and add
other critical elements that are not
on the business radar
 Demand management is the filter
that considers both strategies and
criticalities to form the desired
portfolio of IT spend for the next 12
months.
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9. Top 10 most important planning pitfalls to avoid
 Management’s assumption that the planning function can be delegated to the planner
 Top management becomes so engrossed in current problems that it spends insufficient time
on long-range planning
 Failure to develop goals suitable as a basis for formulating long-range plans
 Failure to assure necessary involvement in the planning process of key line personnel
 Failure to use plans as standards for measuring managerial performance
 Failure to create a company climate that is congenial and not resistant to planning
 Assuming comprehensive planning is separate from the entire management process
 Injecting so much formality into the system that it restrains creativity
 Failure of top management to review with department heads the long-range plans they
developed
 Top management’s consistently rejecting the formal planning mechanism by making intuitive
decisions which conflict with the formal plans
Source: Pitfalls in Comprehensive Long-Range Planning, G. A. Steiner
Page 8

10. Budgeting ensures that correct funding is available for delivery of
IT Services and that those funds are not over-spent
 Limits on capital expenditure
 Limits on operational expenditure
 Limits on variance at any point in
time, between actual and predicted
spend
 Guidelines on how the budget must
be used
 An agreed workload and set of
services to be delivered
 Limits on expenditure outside the
organization or group of
organizations
 Agreements on how to cope with
exceptions.
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11. Budgets may be fine for managing capital in a slow-moving,
hierarchical company, but they have critical flaws in today’s economy
Checklist to
Budgeting Flaws
Improve the Process
 Little help for today’s performance 1.Begin with objectives rather than
drivers (innovation rates, service numbers
levels, quality, and knowledge
sharing don’t lend themselves to 2.Ensure your unit’s objectives align
budget quantification) with the company’s
 Same treatment of all employees 3.Link the budget to performance
– as costs drivers
(talent and involvement are not in 4.Budget by walking around
direct relationship with salary)
5.Keep it out of the file cabinet
 Compartmentalization of
companies into small units 6.Explain the payoffs
(No incentive to look outside of
one’s unit)
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12. Cost Accounting is an inward-looking activity that examines the
actual costs of performing IT activities
 Cost Accounting breaks down
costs associated with particular
activities and assigns them to
projects, customers, or services
 Cost Accounting can also be used
to measure the efficiency of the IT
Department over time in
management of trends and
benchmarks
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13. Overview of Cost Accounting Elements
Asset Management Employee Time Keeping Project Accounting
• Tracks all Computer- • Tracking time across all • Projects must track the
Related Expenses by IT employees assists with actual expenses, by all
specific cost elements, utilization and allocation types of expense, and
according to cost of employee expense compare it to original Cost
management guided / Benefit Analysis
capitalization guidelines • Contractor and established within plan
Outsourcer expenses
• Hardware, software, and must be tracked and • Project Accounting is
data communications attributed to work efforts critical to track variances
often contribute a large to planning estimates
chunk of this cost
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14. Chargebacks allocate the costs of IT services back to the business
units and are optionally based on activity based costing
 Influence business unit behavior
 Rein in spiraling costs
 Enhance transparency
 Some business units consume more
IT resources than others
 IT can demonstrate good
management and effective
accounting of IT resources
 IT chargeback data can provide
valuable insight for budgeting, cost-
benefit analysis, product-costing and
profitability reporting
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15. There are several keys to successfully deploying chargebacks
• Analyze cost drivers
Understand IT • Find ways to convert fixed cost to variable costs (on some timeframe, all costs
are variable)
Costs • Benchmark key processes
• Look for ways to cut costs
“Renaissance”
people to cross the • Business Unit managers accountable for IT costs must understand of IT
Business / IT • IT managers need to understand the business direction
boundary
Promote healthy • Business pushes IT to keep service quality high and costs low
• Business pushes IT to match costs with value to free funds for business priorities
tension between • IT pushes business to question the importance of their IT requests
business units and • IT pushes business to keep focus on changes in demand
IT • IT pushes business to recognize need to leverage IT across Business Units
• IT needs to deliver cost reductions for variable costs when the Business makes
Need to deliver on decisions to reduce service levels or usage
decisions • The Business will need to make service level changes or sunset services to allow
IT to reduce costs
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16. IT Spend Analysis looks inward to examine where IT dollars are
spent and identifies opportunities for future savings
 IT Spend Analysis typically gathers
data from the general ledger and
many other data sources for
analysis purposes
 The spend data is compared to
benchmarks and analyzed for
trends that can result in savings
opportunities
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17. Here are three typical spending gaps with opportunities to reduce
each
A This gap is addressed through

Gap may be caused by
ineffective procurement utilization and capacity analysis
related to current requirements and
practices such as multiple
vendor contracts
What is
paid for
expected growth. This analysis will
C identify any overcapacity in the
What is
Gap caused by lack of in-
depth knowledge of
infrastructure.
planned application profiles and
B capacity forecasts B This gap is addressed through an

Cost
What is
improved infrastructure growth
used
A Gap caused by system
plan based on expected demand
configuration optimized for
availability & reliability or by
and tightly linked to the capital
What is
required
lack of awareness of planning process
available capacity
Reduction Opportunity C This gap is addressed through

Capacity
contract negotiations, right-sizing
of contracts, and termination of
contracts
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18. The IT Finance cycle is unified by the continuous process of IT
Portfolio Management
 Unifies the management of the
complex world of business
initiatives, technology upgrades,
and overall IT management.
 The combination of practices, tools
and techniques used to measure,
control and increase the return on
individual IT investments as well as
on an aggregate enterprise level
 A portfolio can include any and all
direct and indirect IT projects and
assets, including components such
as infrastructure, outsourcing
contracts and software licenses.
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19. Portfolio Management places projects and assets into categories
for planning and analysis
Implicit
Distinguish Define Measure, Diagnose, Make
IT
categories criteria assess recommend decisions
portfolio
Invest
1 4 1 3 2 3
2 2 1 2 5 1
A 2 3 2 0 0 1 Adjust
4 0 5 0 2 4
1 1 3 0 2 3
0 2 2 2 0 1
Sunset
B
5 3 0 1 2 2
“This huge Different Screens Fact-based Business Faster and
collection assets that insight into language better
of projects judged and match asset- investment
and managed strategic specific decisions
assets…” differently intent performance
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20. Adopting a portfolio approach brings logic, structure and takes
emotion out of spending decisions
Portfolio of
Technology Driven Innovations
investments in IT
assets and (TDIs or OCIs)
projects Option creating
Business unit level
investments with
power to transform
5-10%
of average portfolio
Enterprise level
Focused Business Improvements
(FBIs)
Assets and projects
aimed at incremental
operational gains
20-30%
of average portfolio
Core Business Enablers
(CBEs)
Assets that form the
core IT infrastructure 60-75%
of the organization of average portfolio
Note: Averages based on Diamond client experience.
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21. There are 3rd party frameworks available to help you optimize you
management of IT Finance
Cost Accounting Financial
management
Budgeting
x x
Project Appraisals Cost
Budgeting
Project
investment
Cost
Cost Recovery
accounting recovery
appraisals
Budgeting
x Accounting x
Charging
Value Governance
x Portfolio Management x
Investment Management
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22. Tools are an enabler of many components of the lifecycle;
however, not all components require complex tools
Planning • EA repositories (EA documents, roadmaps and strategy maps)
• The outcomes are inputs to Portfolio Management solutions
Annual
Budgeting • Typically Financial Systems, working documents are usually spreadsheets
• Tracking and reporting tools are commonly spreadsheets
Quarterly
Accounting • Commonly in industry best practice ERP and/or Financial systems
• Output tracked and often reported in spreadsheets
Daily/Monthly
Charging • Can consist of multiple components: hardware tools to manage “usage”,
industry applications to compile information and produce “bill” to business
Monthly customers
Analyzing • Multiple tools leveraged based upon timeline and budget: examples include
spreadsheet, client database tools, or more sophisticated analysis tools –
Ad hoc most are ad-hoc and fed from existing tools
Portfolio Mgmt • For IT Financial Management, probably the most mature in PPM (Project
Portfolio Management) and EPM (Enterprise Portfolio Management) tools;
Continuous many vendors offer multi-functional tools
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23. Key Takeaways
 Financial Management is an important discipline required to transform IT to a
value oriented service provider
 Start with solid planning, use enterprise architecture techniques to ensure
you have the right projects identified
 Create budget categories and budgets, tie them to your Portfolio
Management efforts
 Track your assets, project expenses, and time spent on projects
 Consider using chargebacks to increase transparency of IT service costs
 Monitor your spending, continually check alignment with budget
 Use your planning, budgeting, historical data and monitoring to make
portfolio management decisions (invest, adjust, sunset)
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