IT Financial Management: Service Categories, Automation, and Transfer Pricing

By Bernd Worlitzer and Fabian Mieloch, Serviceware SE

Ideal financial controlling of IT services, part 2: Categorization of services, decentralization and automation, transfer pricing and SLA management

(This is part two of a three-part blog series dealing with the topic of financial management of IT services. Click here for part one, which discusses the service catalog, TCO, and measuring of consumption.)

4. Breaking down services into different categories/classes

Studies and reports often emphasize the potential savings enabled by IT financial management, but how does this potential come about? One way is via targeted demand management of the business. Based on the service catalog it is possible to divide IT services into various categories. For example, access to a software solution as a business service can be subdivided based on availability: “gold” for 99.5% availability, “silver” for 98% availability and “bronze” for 95% availability. These categories can then be labelled with service levels and prices. Through this process, the IT department is able to control cost drivers (identified thanks to the transparency mentioned in point number 2) and provide the business with specialized and commercial parameters for consumption decisions. Without these parameters, departments often just opt for the highest-possible service level without thinking twice about it. By including the business into these commercial questions, communication happens on eye level leading to higher acceptance of lower service level in different areas of expertise. Additionally, the departments’ responsibility for and consciousness of the used services increases. If a department exclusively buys the “bronze” version of a business service from their own IT and there are temporary system outages, there is a lower level of dissatisfaction since the outages are the result of conscious, informed decisions made by the department.

Furthermore, the entire company profits from the increased efficacy of IT. Expensive IT resources can be controlled purposefully and cost-driving service levels will only be accepted where it is necessary (e.g. for business-critical systems). You will be able to lower costs in the short, middle, and long term while increasing your IT’s competitiveness in the external market – a big win for everyone. According to McKinsey, companies save 5-10% of their IT/shared service costs within the first year and in the long run, they can achieve savings of up to 15-20% per year.

 

(*) Source: Chubak, Kaplan, Kelly (2011): A business-back approach to technology consumption

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5. Decentralized service ordering and volume planning as well as automated authorization workflow

Process automation, standardization, and optimization are central factors of digitization. However, what does an ideal planning process look like? Who is involved, and why? Our experience with our clients’ projects showed that planning processes in the areas of IT and shared services are often handled in a centralized manner without any systematic coordination with the business. There are advantages to that approach, but a lot of potential is lost if the departments have little to no say in the planning process. The reason for not including the entire business is typically that communication between all departments and their representatives is considered difficult and time-consuming. These pain points can be remedied with the help of defined processes and system support. To further emphasize the advantages of including the business in the process, it is also recommendable to utilize a decentralized volume planning that brings each department to analyze their own business services for the following year. If the departments provide unit lists based on these business service analyses, IT will know which components and resources are required.  Preliminary planning can be based on one central suggestion combined with a prognosis supported by key figures, e.g. the pre-year volume demand extrapolated by the development of the number of employees. The people in charge of a given department then receive a benchmark around which they can adjust and report their quantities. This process should be supported by the system, enabling all people responsible to access their data in a planning interface based on their roles and authorizations. The data can then be aggregated and evaluated by (IT) controlling, thereby creating a clearer picture of future cycles while allowing for a more efficient allocation of expensive resources and licenses as well as the systematic reduction of costs.

The operational retrieval of services in the current year – i.e. reorders and cancellations of business services – can be automated using the system via a web shop. This allows for standardization and automation of all downstream processes (authorization review for the inquiring party, authorization by superiors and heads of department, etc.). Furthermore, standardization and automation significantly reduces administrative efforts, since all inquiries are now sent through one central platform.

Because the departments are involved in volume planning from the get-go, responsibility within each department generally increases. Moreover, acceptance towards back payments caused by short-term volume changes for the following year.

Service catalog web shop

6. Transfer Pricing – Automated premium and SLA management for transnational transactions

In the age of globalization, more and more companies act within corporate structures that include a myriad of different corporations scattered across multiple countries and continents. This results in higher tax demands towards transfer pricing when it comes to the billing of services across country and company borders, putting special emphasis on the documentation of these billing processes.

Based on our experience, there are three core elements to this documentation:

  1. Pricing – How was the price calculated? What does the unit cost calculation look like and what addition was used to recharge it?
  2. Settled quantities – Which service quantities were settled and on what basis did they get to these numbers?
  3. Contract – What is the contractual basis for the services delivered for their respective prices und which service levels were applied?

This information needs to be documented in its entirety, on time, and in a comprehensive manner. In the case of a company audit you want to be able to provide all necessary documentation even on issues that lie many years in the past. If you want to achieve this with as little effort as possible, system support is absolutely necessary. By using billing tools you can gain additional advantages: Through the reporting functionality of the system you can assess how unit costs, premiums, and service prices develop over the course of certain periods and what caused them in the first place. Moreover, through the automated acquisition of data the neutrality of documentation can be guaranteed thereby increasing credibility in the auditing process and minimizing the risk of tax-related back payments.

Even outside of transfer pricing, system-supported price management including premiums and discounts for unit costs can gran further substantial advantages. By implementing strategic (political) prices, you can offer business services especially expensive or cheap (subsidized). Consequentially, IT has the opportunity to make particularly complex, tedious, and expensive service successively less attractive and let them phase out and – vice versa – to support the utilization of strategically important technologies. This way, IT gains an additional tool to reach their goal of further standardization and increased efficiency, without losing any acceptance and appreciation from the departments.

 

To be continued!

Then we will cover the following topics:

  1. Automated invoicing
  2. Scenario management and planned/actual comparisons
  3. Reporting