A business case for IT financial management: what, why and how

What is it?

Accounting reports are periodic statements that present the financial status of an organization at a certain point in time, or over a stated period. These reports contain information about the organization’s transactions and operations, and follow a predetermined set of rules or standards (Bragg, 2022).

From an IT perspective, accounting and reporting typically relate to reporting on the organization’s IT assets and communicating this information to the rest of the organization. Reports include periodical information on IT asset registry (hardware and software), depreciation and amortization of IT assets, and other related IT spending.

Why is it important?              

The IT landscape is becoming more complex, and it is getting increasingly difficult to identify and understand where IT costs are generated. This poses a major challenge for organizations as they risk losing control of their IT expenditures.

Poor IT accounting and reporting reduces cost transparency and increases the difficulty of communicating the value of IT to the rest of the organization. Translating IT costs into a financial and business language is an important step toward a mutual understanding of IT cost and its associated value.

How can IT financial management strengthen accounting and reporting?

The EY teams’ approach to ITFM, allows the implementation of a Technology Business Management (TBM)-based cost model that enables the distribution, allocation and visualization of IT cost in an organization. By combining multiple data sources (such as financial systems, IT asset management systems, configuration management database (CMDB), IT service management (ITSM) systems and HR systems), an ITFM solution will act as a one-stop-shop for all IT financial data.

A purpose-built tool complete with a standardized approach to cost categorization and allocation, ITFM makes it possible to report continuously and improve IT cost transparency. Nurturing the ITFM discipline is therefore an essential part of retaking control over your IT expenditures.

What is it?

The main purpose of budgeting and planning is to accurately govern spending and investments. Budgeting aims to communicate the anticipated cost and provides a framework for an organization’s financial objectives.

From an IT perspective, the budgeting process ensures that the IT function is allocated sufficient resources to supply the rest of the organization with IT services. The IT budget should cover all IT demands across the organization, and not only the cost of running the IT function. The IT demand can include everything from hardware, software and cybersecurity to personnel and operating costs associated with existing IT systems and applications (Gartner, 2022).

Why is it important?              

The budgeting process is essential for communicating the business value of IT. Inadequate budgets result in IT managers failing to provide a complete picture of the cost allocation to the organization’s management. This is typically a result of cost allocation being based on assumptions and erroneous historical data, rather than data-driven analysis. Relying on assumptions based on high-level historical data increases the probability of resources being allocated incorrectly. Organizations should therefore look for more precise alternatives (Gartner, 2022).

How can IT financial management strengthen budgeting and planning?

An ITFM discipline will provide the organization with the tools needed to improve transparency and show business counterparts where IT resources are allocated, and why they need to be allocated or reallocated and increased or decreased. ITFM provides a granular view of historic and actual costs associated with IT, providing necessary insights for transitioning from high-level assumption-driven budgeting to detailed activity-driven budgeting. This helps increase the accuracy of the budgeting and planning process. Moreover, an ITFM solution enables accurate visualization of actual IT costs — enabling the measurement of planning and forecasting costs based on planned activities rather than historical costs, further increasing precision.

ITFM and the Technology Business Management (TBM) taxonomy enable IT leaders to communicate budget allocation needs to other key stakeholders in a common language. Questions from business leaders such as, “My department will employ 20 additional employees this coming year, how will this affect my IT costs?” can be answered with IT cost projections based on the cost drivers of onboarding additional employees.

Through ITFM, organizations will have the opportunity to change the perception of IT as a cost center to a value contributor. Improving the transparency of IT spending will help with showing both where the current resources are being consumed, and where resource allocation can be shifted to support other needs, without necessarily increasing the IT budget. This approach increases the visibility of IT as a business partner and enables it to suggest how existing and new technology can help the business achieve its goals and prepare for future challenges (Gartner, 2022).

What is it?

Risk occurs in every company. Organizations use risk assessments to evaluate potential threats, vulnerabilities and risks associated with running their operations and investing. When risks are identified and evaluated, measurements for reducing or eliminating these risks will typically be initiated.

Risk management in the context of IT can be defined as the business risk associated with the use, ownership, operation, involvement, influence and adoption of IT within an organization. For most organizations, this is considered a component of the organization’s wider risk management process, making it of utmost importance to them. Good risk management within IT provides understanding and helps assess how IT cost trends will affect an organization on a short-term basis, and how it impacts its long-term IT investments.

Why is it important?              

IT risk management is important because it provides the organization with the tools needed to identify and handle potential IT risks. An IT risk management process based on reliable and precise data provides the business with a solid foundation for decision-making. With non-granular or poorly structured data, decision-making is subject to a higher degree of uncertainty as the organization might fail to identify certain risks and threats in the assessment process. From a long-term IT investment perspective, these mistakes can end up being very costly for the organization.

How can IT financial management strengthen risk management?

ITFM matures an organization’s ability to identify and analyze key IT risks early by gaining an understanding of the IT landscape and the associated cost drivers. With this foundation, organizations can reduce the risk of underestimating the IT costs of projects, operations and investments. Moreover, ITFM provides the business with a better overview of the costs incurred from vendor agreements, increasing the predictability of future obligations and enabling cost fluctuations to be identified early. For example, a strong ITFM discipline makes it easier to identify redundant and expensive IT assets, thus reducing the risk of significant costs accruing without the organization's knowledge.

What is it?

Service costing is the process of identifying all costs associated with building, supporting and delivering business services to internal and external customers (Stanford, 2022). Consequently, billing and rate management is the process of determining optimal charging frequency (such as monthly recurring charges, one-time charges, and time and materials) and rates depending on the financial objectives of the business unit supplying these services.

For IT organizations, service costing involves defining the IT service portfolio (from a consumer perspective) and the associated costs for each of the services. It includes mechanisms for documenting and governing each service configuration, in addition to recovery rate and billing frequency (LaRocque, n.d.).

Why is it important?              

Organizations developing service rates should use service costing as the starting point for setting rates (Stanford, 2022). In this way, the organization avoids setting arbitrary rates, and charges for the consumption of services are more easily justified to the rest of the business. Additionally, applying rates to specific services provides cost predictability to other business units as they typically are set once or twice per year. Even if there is no plan to charge for services, service costing provides the necessary financial benchmark to identify and act on changes in the service cost structure.

For IT, service costing improves awareness and accountability of the delivery and consumption of the IT service portfolio. Increased visibility into costs enables service rate programs — tying consumption of specific IT services to other business units — clarify the link between business units’ IT usage and their IT bill. Hence, the conversation about IT changes from, “Why IT is so expensive?”, to “What’s the right amount and quality of IT for the business unit?” A mature rate management program of IT services increases predictability for other business units in their planning, helping IT functions become valued business partners for the organization.

How can IT financial management strengthen service costing, billing and rate management?

ITFM introduces an approach to IT service costing which clearly defines the IT service portfolio and reveals the cost structure of delivering these services. Moreover, it aids in addressing the difficulties of managing and maintaining changes in data and allocation models, ensuring a true representation of IT spending and its distribution to the different services.

When the IT function is confident that costs are continuously captured and correctly distributed, meaningful rates for the services can be developed — the ITFM approach allows for charging models (show-back, charge-back, etc.) which in turn provides valuable insight into the consumption of each IT service.

What is it?

Investment analysis is the evaluation of current and future investments in assets with a defined life cycle and their impact on business performance (P&L). In the context of IT, investment analysis involves informed decisions on investing or divesting IT assets based on tradeoffs between business criteria, such as strategic vs. technical fit.

Any piece of information, software or hardware utilized in business operations throughout an organization is considered a technology asset ("What is IT Asset Management (ITAM)?", 2022). IT asset management is therefore the management of intangible and tangible technology assets throughout their life cycle (Asset Management Council, n.d).

Why is it important?              

Organizations need the ability to communicate investment or divestment cases in terms of future benefits, costs and risks to gain confidence in their decisions and demonstrate credibility in recommendations made to stakeholders. To align IT investments with the business, processes and tools need to be in place for accurately determining the impact of technology investments on the business’ P&L. Moreover, these enable businesses to compare and benchmark technology investment options. 

If these processes and tools are not in place, the value and cost of the investments are difficult to predict. A typical example of this is how the inability to accurately assess the operational costs of running new technology investments leads to higher than anticipated IT costs, hampering the long-term ability of an organization to continue investing in growth.

Assets play a key role in achieving business objectives. Asset management enables the organization to account for all its assets, keep track of depreciation and amortization rates, and identify and manage shadow assets (CFI, 2022). IT asset management ensures efficient and effective use of IT resources by reducing asset waste, extending asset life and avoiding costly, unnecessary upgrades of technology assets ("What is IT Asset Management (ITAM)?", 2022).

How can IT financial management strengthen investment analysis, funding and asset management?

ITFM provides organizations with insights into the input factors and resources needed to operate and deliver IT services. Organizations can therefore move away from basing IT investment decisions on high-level assumptions with limited insights into the cost structure. Instead, companies can gain an understanding of how cost drivers impact current and potential IT investments or divestments and can build, communicate and execute business cases backed by data.

Sophisticated ITFM tools accurately map and record all IT assets, extracting data from asset management tools. This approach provides an accurate account of technology asset life cycle costs and assists in identifying and addressing associated risks (Gartner, 2022). All IT investments are accounted for with their contribution to the overall performance of the business.

What is it?

Cost optimization is the discipline of continuously reducing operating expenses (spending and costs) without compromising on growth (Gartner, 2022). Within an IT context, cost optimization has to do with an organization’s ability to correctly identify and classify IT OpEx, reduce waste, avoid redundant systems, and explain the drivers for IT spending while supporting the organization with initiatives for growth.

Why is it important?              

With a strategic approach to cost optimization, businesses can make more informed decisions on budgeting and spending while investing for growth (Cost Optimization Guide | Gartner.com, n.d.).

Most of the IT spending lies in “run-the-business” costs (TBM Council). Businesses are often overly focused on costs associated with IT projects and “change-the-business” IT investments and overlook the associated OpEx once the projects or assets (applications, systems, other infrastructure, etc.) are in operation. As new projects are implemented and assets are acquired, other IT services, applications and infrastructure become outdated or redundant while still requiring costly upkeep.

Cost optimization prevents IT from being hindered by growing “run-the-business” costs leading to reduced resources for “change-the-business” projects and investments. This signals to other business functions that IT has control over its costs and can demonstrate flexibility in contributing to innovation and supporting business growth.

How can IT financial management strengthen cost optimization?

Practitioners of ITFM have the capability of transitioning their understanding of IT services, applications and infrastructure costs from a high-level, top-down perspective to a bottom-up, detailed perspective. With this insight, organizations gain the ability to identify and evaluate associated operating expenditures and reveal redundant IT assets (unused, duplicate or shadow assets) systematically and periodically. Cost optimization opportunities and efforts are accounted for, freeing up resources for investments in “grow- and change-the-business” initiatives.