Monday, April 18, 2011

Who Needs IT Financial Management?

Is there a process more discussed, and less implemented, than IT Financial Management? It's almost universally thought of as important, yet too hard or time consuming to do. If it is really that important, shouldn't we be actually DOING it? The reality is that IT Financial Management is that important, but we try way too hard to get it perfect.

IT Financial Management is a necessary part of Service Management, to the point where I'd contend that you aren't doing Service Management without a baseline level of Financial Management. How many IT shops have been asked to cuts costs over the past 2-3 years? Most of us? How many of us have reduced costs in a manner even remotely resembling strategic? How will you even know whether or not your cuts have impacted business outcomes? The reality for many of us is that we are frequently asked to cut (or at least optimize) costs, and we have no means whatsoever to determine whether our cost containment efforts help or hurt the business.

Those of us in the recovery business look at this as an excellent example of the definition of insanity: doing the same thing over and over expecting a different result.

We need to know, even at the most basic level, how much IT costs in relation to the services provided. Tracking costs by service allows us to make much more informed decisions around technlology investments. How much should we spend on accounts payable vs. ecommerce? How much would a new service cost, compared to the projected revenues?

But isn't calculating service costs too difficult? It depends on how detailed you need to get. For basic service costing, a solid estimate based on mutually agreeable assumptions is all you need. This is a process where a CMMI level 3 (or maybe even level 2) is plenty for most organizations. Large enterprises may receive more benefit than the cost of achieving CMMI level 4 or 5, but most of us will never recover the costs involved in trying to get there.

So, my main points are that Financial Management is a critical process that is often skipped, and that it doesn't need to be as hard as we usually make it. I will follow up with a post on a (relatively) simple way to do IT Financial Management.