IT FINANCIAL SERVICES MANAGEMENT PRESENTED TO: SIR OMMAR HAYAAT. BY MUHAMMAD SUHAIL ASLAM AND SABIR AHMED. MS-IT BIZTEK KARACHI. PAGE 1

Financial Management for an IT Service Organization

Agenda Running Internal Services Organizations like a business Roles of Financial Management for Internal Services Organizations Overview of some leading financial management practices for Internal Service Organizations Recommended Next Steps

Many Internal Service Organizations face similar challenges Placeholder for text of Conclusions, SPAs and others (substitute your own text) External Competition – Customers perceptually benchmark them against External Service Providers, creating external competition and outsourcing pressures. . Operational Effectiveness – They have historically been run as a cost center with management emphasis on sticking to budget, rather than service quality, reliability and cost effectiveness. Now these things matter, and traditional competencies are insufficient. Demand Management – They are funded as a utility to provide lowest-common-denominator, “one size fits all” service. No ability to scale resources to demand. Demand perpetually exceeds supply. P Q S D Unclear Value Proposition – The value they deliver to the business in relation to your costs cannot be demonstrated. Their customers assume the worst. No source line is necessary unless the source is something other than Gartner Research

A partial list of issues / challenges facing Chief Financial Officers. CFO Issues with IT We often hear recurring and disturbing themes from our clients that many CFOs think: IT is a cost to be controlled and reduced. IT investments are high risk, relative to other potential investments. IT projects continually go wrong. Too many business problems seem to have an IT-based solution. IT organizations do not understand their costs, and their ability to conduct financial planning is poor. There are large pockets of “hidden” IT spending Other IT service providers can deliver value and control their costs better than an internal IT organization. IT organizations have no clear idea about their efficiency relative to others and the market. A partial list of issues / challenges facing Chief Financial Officers.

Fundamental Cycle of Tasks When Running Any Business: These Also Apply to Services such as IT Key Issue: How are business principles relevant to the core mission of IT operations? No matter whether the business is in IT, auto-manufacturing or clothing retail, fundamental principles for running a business must be followed and a cycle of tasks must be completed. Start with an external focus on the customer, with all that this implies in identifying customer needs and meeting them with a well-thought-out product portfolio. Business and financial management capabilities must be in place to understand costs and determine the pricing model. Customer-facing sales and marketing techniques are used to condition the market, establish product image and encourage sales. After delivering the first version of the product to the market, the cycle repeats iteratively, each time with an updated understanding of customer requirements. Action Item: Applying these business principles to IT operations can help level the playing field with competing external service providers, and can prove and improve the value that IT delivers to the business. PAGE 6

The Service-Based IT Organizational Framework PAGE 7

Service Fulfillment: Process, People, Structure and Tools Strategic Imperative: Process-based improvements will have the highest return on investment (ROI) and are necessary to build and sustain credibility. Service Fulfillment: Process, People, Structure and Tools How will the IT operations group develop an effective IT operations architecture encompassing the organization, process and tools necessary to deliver on service goals? To implement a service-oriented culture, the internal provider must accept process-based management principles. The basic steps involved are: 1) Define the service portfolio that drives the processes which must be executed. 2) Define the desired process flows (that is, map the steps involved in accomplishing work), irrespective of who will be doing the work or the systems involved. 3) Examine the capabilities and skills required to execute the process flows, obtain them and create the simplest organizational structure possible around the relevant processes. This may involve breaking up organizational silos and replacing them with multidisciplinary teams or instituting a matrixed organization with metrics that encourage teamwork and cross-department collaboration. 4) Implement process automation and decision-support tools to improve process performance. 5) Instrument the process flows so that relative weaknesses can be located and remedied, and outcomes can be quantified. 6) Use the information gleaned from measurement systems to drive and substantiate service-level commitments. 7) Repeat the steps. The service portfolio, the process flows, staffing and measurement should all be fluid and periodically adjusted as business conditions change, as the internal provider gains maturity, and as new insights are found from ongoing collections of competitive information. Action Item: Process changes are inseparable from organizational and automation changes. Work them holistically on a service-by-service basis. PAGE 8

Contrasting Traditional IT vs. Service-Based IT Organizations Client Issue: How does an IT service organization differ from traditional IT? Contrasting Traditional IT vs. Service-Based IT Organizations The differences between a Tradition IT organization and a Service IT organization require vastly different behaviours, not only from IT, but also from its business customers as both groups learn new interaction styles. Today, the word "service" is being applied to virtually every IT context, without any clear understanding of what it actually means. In organizational terms, service-oriented IT is very different from any other service delivery model. Many organizations are leaping into a service-oriented transformation without a clear sense of its scope, risks or rewards. As a result, failure rates are very high and very visible. The differences between traditional IT and service-oriented IT can be summarized in one statement: Traditional IT defines itself as a technology provider and works from the inside out; service-oriented IT defines itself as a service provider and works from the outside in. This technology-centric versus customer-centric culture drives very different attributes. Technology-centric IT organizations operate as cost centers focused on optimizing assets, so from a cultural standpoint they tend to be siloed (that is, aligned around functions, skills or technology platforms); they are cost-focused; they tend to be monopolies and, therefore, not particularly competitive; and they accept their supply constraints as givens. Service-centric IT organizations adapt the external service provider (ESP) delivery model to internal operations. They are, therefore, competitive, usually multi-sourced, process oriented and negotiate with clients to ensure demand is actually funded. These differences require vastly different behaviors, not only from IT, but also from its business customers as both groups learn new interaction styles. Thus, a service-oriented transformation should not be undertaken lightly or with a cavalier attitude about the depth of change required. PAGE 9

Implications of Financial Management for a Service-Based Organization From To Cost Center “Guaranteed” funding Service is free Real costs of Service is elusive Estimated budgeting and forecasting Internal focus Compete with self and peer organizations “Value Center” “Self-funded” Service is not free Service Delivery Organization has a financial statement Accurate budgeting and forecasting required – costs are known “Client” focus Compete with external service providers PAGE 10

Capabilities Needed to Manage a Service Organization Client Issue: What are the key roles and management capabilities required to run an IT service organization? Capabilities Needed to Manage a Service Organization Current Needed Skills Gap Financial and Business Management Demand Management Process Management Resource Management Capabilities Competitive Analysis * Financial Management * Product Development * Product/Service Bundling * Pricing Strategies Business Development * Relationship Management * Sales * Marketing * Communications * Market Research Strategic Sourcing * Capability Management * Skills Management * Recruitment/Retention * Continuous Development * Compensation/Rewards Process Engineering * Measurement * Quality Assurance IT is increasingly subject to the same performance measures as other areas of the enterprise. This is doubly true when IT adopts a service-oriented delivery model. Enterprises will seek to understand IT activities on a fiscal basis, holding IT accountable for demonstrable results. This increased scrutiny will lead to an unprecedented degree of due diligence around IT effectiveness, efficiency and value — and the benchmark will not be other IT organizations, but external service providers. IT leaders will be involved in delivering strong enterprise financial results and growth, in ensuring the right capability foundation to realize business plans, and in defining which initiatives are right for the enterprise. IT leaders effectively participating in this level of business planning will be able to discuss the viability of initiatives in financial terms; they will have a solid understanding of the business, its markets, products, competition and constraints; and they will shed all traces of parochialism in their recommendations, focusing on business benefits rather than organizational protectionism. They will, in turn, bring these same disciplines to bear in running their own service businesses. IT organizations contemplating a service-oriented transformation must prepare their managers for new work styles, new process orientations and rigorous financial scrutiny or they will see twice the normal turnover in leadership and supervisory positions. Action Item: It is necessary to assess IT leadership business competencies and develop plans and opportunities to address gaps. PAGE 11

The Strategic IT Financial Management Maturity Model Evolution Through Five Stages Stage 1: IM/IT spending is a “black box.” The budget is a single number. Business does not know how the budget is spent. Stage 2: IM/IT spending is a “glass box.” The budget is still a lump sum allocated as the CIO sees fit, but business has some input. Stage 3: IM/IT spending is a simple portfolio. The budget has two goals: Keep the lights on and invest in the business. Stage 4: IM/IT spending is a comprehensive portfolio; IT is viewed as an investment portfolio. Stage 5: IM/IT spending is an enterprise portfolio; IT expenditures are business expenditures. PAGE 12

Run, Grow and Transform - Gartner’s Standard Definition There are 3 basic categories in which IT assets and investments can provide value to the business. Spending Categories & Business Value New Revenue This is IT spending that supports major business transformation. This can be IT replacing traditional business processes, supporting new lines of business, new products and services and new business models. Emphasis: ROI Protecting Revenue and Margin Income Growth Support Revenue Growth IT spending that is dedicated to “grow” the business activity supports organic business growth – this is typically fuelled by increased customer demand. Emphasis: ROI IT on IT Optimization Regulation IT spending to run the business includes the IT support of day-to-day operations – IT on IT improvements are also classified as run. Run the business activities are necessary to keep the core business functions operating. Emphasis: Protect business & efficiency PAGE 13

IT Financial Management Mission and Roles The “Process” of IT Financial Management Source: OCG (http://www.itil.co.uk) PAGE 14

IT Financial Management Mission and Roles The “Roles” of IT Financial Management TCO is a powerful tool that is used to identify opportunities for better managing the IT environment. Some analysis, such as that needed to make an outsourcing decision, is impossible without understanding internal cost structures — including hidden costs. Enterprises that fail to account for all costs will also fail to see IT costs increase beyond sustainable and justifiable levels, and will make poor IT management decisions. There are many job tasks and competencies associated with IT financial management that vary from organization to organization. Not all IT financial managers are involved in all the activities discussed in this research. However, many IT financial managers perform the majority of these tasks. The main job functions of IT financial managers can be grouped into the following categories. Financial Planning The financial planning aspects of IT financial management may include: IT budget development Capital planning Break-even and ROI analysis for projects and initiatives Project prioritization Financial Management The financial management aspects of IT financial management may include: Development and implementation of service pricing and chargeback models Contract management Procurement Asset management IT cost reduction Financial Analysis The financial analysis aspects of IT financial management may include: Post-implementation auditing of projects Financial modeling and what-if analysis Activity-based costing IT cost trend analysis Measurement The measurement aspects of IT financial management may include: IT cost benchmarking and unit cost analysis IT value measurement (for example, the development of key performance indicators and balanced scorecards) Key Issue: What is TCO, and why is it important? Enterprises make IT decisions every day. As an enterprise's level of investment in IT increases as a percentage of revenue and business becomes more "technology-defined," these decisions become more critical. A decision that is made without performing a cost/benefit analysis increases the risk of failure. TCO represents the entire cost of the current infrastructure. Decisions made without understanding existing costs are more likely to: 1) be suboptimized, 2) shift costs from one area to another, and 3) lead to underestimated resource allocations and a failure to realize the anticipated benefits. The goal of the IS organization is to provide the proper tools for the efficient and effective use of IT. This means managing the tools that are in place (the legacy environment) for optimal efficiency and effectiveness, and also continually introducing innovative new technology when it better serves the needs of the business. TCO is a key tool, but it is only a tool. Source: How to Define IT Financial Management Competencies and Roles PAGE 15

Frameworks for Tracking IT Costs: You’ll Need More Than One Client Issue: How will organizations track and manage IT costs in the future? Virtually every IT organization prepares or lives with an IT budget. This budget most likely groups IT expenses in major cost “buckets,” such as hardware, software, telecommunications and staffing. This traditional view of IT costs provides very limited visibility when it comes time to make strategic decisions. For this reason, complementary ways of looking at IT costs are gaining ground. One such method is activity-based costing (ABC). With ABC, all costs associated with a particular activity are tracked. For example, an ABC view of disaster recovery would consider all costs (hardware, software, staff, consultants, etc.) associated with this activity. An ABC view is extremely useful for several reasons. First, it allows IT managers to compare the costs of their common IT services with those of external services providers. It also provides a way for IT and business managers to see which activities (or departments) are costing the most from an IT perspective. Many organizations do some kind of ABC today. Not so widespread is the process-based view of IT costs. With this method, all costs associated with a specific business process are tracked together. For example, a business may choose to look at all IT (or business) costs associated with the launch of a new product. The process-based view – like ABC – is useful for external benchmarking. It also allows the business to see where its resources are going in a very specific way. PAGE 16

TCO Is More Than Just Costs Definition TCO is the holistic view of IT costs and issues across enterprise boundaries over time. Bill Kirwin, Gartner Five Key Elements to Gartner TCO Downtime Hardware and Software Operations Administration End-User Operations Influencing factors Company specifications (industry, size $, region, end-user type) Asset Base (type, size, age, etc.) IT Environment Complexity (end user, hardware & software) IT Best Practices Deployment PAGE 17

What Is the Point of Doing TCO? TCO is a powerful tool that is used to identify opportunities for better managing the IT environment. Some analysis, such as that needed to make an outsourcing decision, is impossible without understanding internal cost structures — including hidden costs. Enterprises that fail to account for all costs will also fail to see IT costs increase beyond sustainable and justifiable levels, and will make poor IT management decisions. What Is the Point of Doing TCO? Establish a basis for understanding the economic aspects of IT assets and their use. Better understanding of how IT investments support — or don't support — enterprise business goals and processes. Gain objective information on costs and savings opportunities in "right-sizing," internal resource allocation and alternate service delivery options. Identify and implement strategies for improving operations and performance. Gain comparative, competitive data against other world-class organizations. Understand key metrics and measurements needed to better run IS operations and provide value back to the enterprise. Key Issue: What is TCO, and why is it important? Enterprises make IT decisions every day. As an enterprise's level of investment in IT increases as a percentage of revenue and business becomes more "technology-defined," these decisions become more critical. A decision that is made without performing a cost/benefit analysis increases the risk of failure. TCO represents the entire cost of the current infrastructure. Decisions made without understanding existing costs are more likely to: 1) be suboptimized, 2) shift costs from one area to another, and 3) lead to underestimated resource allocations and a failure to realize the anticipated benefits. The goal of the IS organization is to provide the proper tools for the efficient and effective use of IT. This means managing the tools that are in place (the legacy environment) for optimal efficiency and effectiveness, and also continually introducing innovative new technology when it better serves the needs of the business. TCO is a key tool, but it is only a tool. PAGE 18

Action Plan Work with the Service Delivery Organization to define services in business value terms, specifying: What the services are, How they're bundled or packaged, and What benefits they deliver Establish a Baseline of Current Spending – Distinguishing between: Costs to run the operations (“Keeping the Lights On”) Projects (Discretionary Investment) Establish Total Costs for Services Keeping this separate from funding Help to manage Demand - Communicate results and resources consumed Breaking the culture of ‘free services’ PAGE 19