The Link between IT Financial Management, Performance Management & Business Success

By Tom Schroeder, Director International Business

Although IT is accepted as core pillar of every modern business, IT services are often evaluated based on the total cost charged versus perceived value delivered. The result is, in many cases, the undefeatable perception that IT is too expensive since the value is a matter of individual perspectives and not clearly articulated. Many CIOs complain about the lack of understanding and the related pressure which drives IT into a reactive position.

The consequence is that the line of IT spends more time to desperately justify expenses and provide transparency than driving projects for competitive advantages – a vicious circle.

Especially in Europe, politicians and business stakeholders complain about the tremendous gap of digital services and connected opportunities for citizens. Individual regulatory requirements, which differ by member-state, need to be married with pan-European business models. This is why the European Commission accelerates the initiative “Digital Single Market” to make the EU’s single market fit for the digital age 1. Among many factors, it is clear that the above mentioned behaviour contributes significantly to a limited motion of this stream.

 

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With the expected expansion of digital devices and services, new approaches for controlling the costs and the performance of IT are necessary. A current, rapidly growing market segment is called “IT Financial Management”. Promises of an IT Financial Management initiative are manifold, but Gartner has identified four ITFM tool purchase drivers representing a unique set of needs and best practices: Optimization, Transparency, IT demand management, and Compliance. Gartner points out that “the desire for a well architected ITFM program is growing in importance and urgency for many organizations, as they work to increase their level of financial transparency – both within IT and to the rest of the enterprise — to quantify the value of IT to the business” 2. And I agree, if you are disconnecting the financial control and performance management of your IT environment from business objectives, reducing it to imprecise annual budget rounds, you’ll end up in a cost-trap. But ITFM is not just technology: In addition, it requires local knowledge in legal, finance, and tax fields to establish a proper cost model according to the applied regulations. So a diligent process development is absolutely mandatory for lasting success.

From Transparency to Control of Demand to Cost Savings

Today everyone is advertising ‘cost savings’. In my recent position within a large Security Software company, we somehow found somewhere a link to cost savings for our clients to be sure that their project was relevant for the business. Of course, stakes were high and related premiums for risk reduction were justified, but could you save run-costs and make the business your friend with security software? Now think about controlling the financials of your services. Assume you know all costs related to a specific service (e.g. workstation for a new hire). This consists of various items: hardware, depreciation, setup-costs (which depends on salaries, time, one-time fees), software (e.g. infrastructure software without obvious value), assigned overhead costs (e.g. management) – the list is long. Considering the total costs and the average of requests for this service per fiscal year, you will be able to calculate the unit-costs for ‘one request’ of the service. Good to know, but not the trick. It is not about justification. According to a McKinsey study, service-based costing can save up to 10% of run-costs, but not only because IT knows the details and can benchmark individual components for price reductions. Due to the fact that this transparency leads to a fair charge for the service and can be explained precisely, the business will review the consumption and the necessity more accurately. In turn, IT will adapt the change of demand by reducing related resources. This elevated transparency therewith leads to a change in demand behaviour which subsequently leads to cost savings – apart from secondary objectives like a more general appreciation by the business. The consulting firm Strategic Services Consulting (SSC) confirms “use internal service-charging as strategic mean to control demand and therewith cost drivers which are otherwise out of control for the shared service itself” 3

Ask yourself the question: Is an investment for software, processes, and consulting worth a 20 times larger cost reduction of overall costs within the first year? So a large amount left for overdue change projects plus a visible reduction of costs? I think the business case is clear. This is why I decided to help clients with IT Financial Management rather than the next best, best of breed security software product. If you don’t get this right, you will remain stuck in the cost trap without the headroom for digitalizing your IT and business services soon.

 

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Author: Tom Schroeder

Tom is Director International Business at PMCS.helpLine Software Group. He loves controversy discussions about IT financial management challenges with companies in Sweden, Denmark, Norway and Finland since he is convinced that the European perspective really makes a difference. Tom has more than 15 years of experience in multiple IT key domains with different global IT vendors.

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Sources:

1: https://ec.europa.eu/priorities/digital-single-market_en

2: Gartner, February 2016, “Know the Why Before you an ITFM Tool”, Robert Naegle & Jim McGittigan

3: McKinsey, 2011, “A business-back approach to technology consumption”, Chubak, Kaplan, Kelly

4: SSC, 2016, „Shared Service Center – Der Weg aus der Kostenfalle“, Dr. Daniel Stock & Dr. Florian Meister