Month: February 2009

IT Finance Management Framework – Part 2

Understanding how the IT budget process fit into the overall corporate finance is essential to grasp the big picture.  The following figure illustrates how the IT G&A operating budget fits into the over all corporate finance.

it_ga_budget2

IT organization must decide the technique suitable for the budget cycle. To select the best suited techniques the organization must make them self familiar with the available options. Let me list the various widely used technique available to create the IT G&A operating budget.

  • Static Budget – Presents one forecast for a given time frame and does not change for budget cycle
  • Flexible Budget – Budgeted Revenue and cost are adjusted during the budget cycle
  • Incremental budget – Previous year actual are taken as the base line and added or deleted additional cost for current year
  • Zero Based budget – Begins from ground up
  • Top Down budget – Each directors are given a budget task to align to CIO budget target
  • Participatory Budget – Developed as a collaboration with all directors (generally very difficult to make it practical)

There are other budgeting technique like activity based budgeting, Kaizen budgeting and etc. Kaizen  is a type of incremental budget with cost effectiveness target are given to each directors. To make the framework complete, I understand the widely used budgeting technique must be captured and it will eventually.

For this version 0.1, I want to start with zero based budget since I like the concept. It is very practical and gives an opportunity to each director or even senior manager or manager level to challenge every activities and look for some level of business case. Zero based technique can be used if it is top down budget and budget task are given by CIO to each director. Let me start with ZBB.

Zero based budgeting must be done in the manager or team leader level and rolled up to director and CIO level.  It requires the manager or team lead to understand the business and forecast the work required to keep the systems lights on, enhancements and G&A project.

it-finance-mgmt-how-to

The cost for lights on, enhancement and projects are will be incurred by employee, contractor, purchase servie, software cost & hardware cost. Each manager or team lead under each director will forcast for lights on, enhancement and project in terms of employee, contractor, purchase service, software cost and hardware cost.

The training required to perform the forecast will be the starting session of next part of this initial IT Financial Framework.

IT Finance Management Framework – Part 1

There is a need to develop an IT finance management framework and I propose a general framework for a specific organization as a starting point.

Some of you may be wondering why EA & IT strategy person proclaims a need for development of a general IT finance management framework and proposes one for a specific organization type.

To develop practical enterprise architecture and receive value from it, understanding the financial management and integrating to the enterprise architecture is a key. IT Finance management plays a vital role in enterprise architecture analysis. For instance, to identify and report the cost drivers for systems with high maintenance cost in the enterprise, enterprise architects required to generate the list of software systems which has high maintenance cost first. If the enterprise system landscape is not integrated with the IT fiancé management, this of kind of analysis becomes manual, laborious and inaccurate.

Current state of IT Finance Management:

IT Finance management function is performed in non-uniform way across the industry. Lack of a general framework in IT Finance Management leads the IT industry to proliferate inconsistent methodology and creates a challenge to collaborate and share knowledge.

For broader utilization of the framework, the framework development needs collaboration and participation from IT financial analyst across multiple industries. As a starting point, I’m going to propose a general framework to manage IT finance for a specific organization type and welcome critiques from others to improve it.

Organization Type:
The proposed framework is for IT organizations which are business enablers, does not directly generate revenue, does not pay cash directly to payables and perform three major functions.

  • Lights on support to IT systems to enable business
  • Perform Enhancement/Discretionary changes to meet business requirements
  • Execute projects to transform/thrive/sustain the business

Key steps in IT Finance Management:

  • IT Financial Planning
  • IT Budgeting
  • IT Finance Reporting

IT Financial Planning: It is a first step in the ITFM. Financial planning must be aligned to corporate strategy. Corporate strategy provides a road map to reach corporation’s vision and corporate annual plan is a step towards reaching the organization vision. Annual corporate plan is an execution step of corporate strategy. Based on annual corporate plan, IT financial plan is developed by the IT Financial analyst, office of CIO in collaboration with financial controllers (Office of CFO) and office of Chief operating officers. The decisions like, invest in more product development, penetration to a new market segment, expand the presence to new country and etc are made, part of the annual corporate plan. IT financial plan is a high level executive plan to support the annual corporate plan. It will consists of major line items like, improve IT spend on new security projects, change systems to support multiple languages, continue the same level of lights on operation , improve the system reliability and etc. IT Financial plan will be created and will be used as base line to develop the IT budget.

IT Budget: Budgeting is a one of key piece of IT Finance management. Budgeting is a development of  IT organization cost plan for the year. Cost plan answers questions like, What is the total cost IT organization can spend and how they are going to spend. Once the budget is approved by CIO and corporate controlling, then the actual cost are tracked on monthly basis and variance analysis are preformed and reported to the various stakeholders like CIO, controlling office, senior management team, managers and others.

There are three different types of budget for different purposes.

  • Capital Budget – Lays out a plan for investment like plant installation, product development and provides a principle for investment life cycle steps like depreciation, amortization. Generally it is managed by a generalized group for the entire company. It is one of the functions under controlling organization under the CFO.
  • Cash Budget – It is a predication of expected cash balances the organization will experience during the forecast period. Cash budget depends on operating and capital budget. It also evaluates if the corporation has sufficient liquidity (like cash in hand, credit) available to meet the expected cash disbursements. It is part of the management accounting. The cash flow and fund flow of the corporation depends on the cash budget.
  • Operating Budget – It is a plan to reflect the daily operating expenses and depreciation. Typically the operating budget is developed annually.

For the organization selected, IT budget will be an operating budget. The major functions performed by the organization are lights on, enhancement and projects. It is so tempting to categorize all the cost under these categories in the highest level. It will become difficult to analyze different perspective of the IT cost structure like by hardware, provider etc.

Cost Categorization:

  • Employee – (On roll employees)
  • Contractors – (includes purchased service, consultants and etc)
  • Sourcing Providers – (in source, out source, multi source and etc for a specific service)
  • Software recurring fee – (includes software maintenance fee, service fee and etc)
  • Hardware recurring fee – (includes all servers, mainframe, disks, network, hardware maintenance fee and etc)
  • Others – (It is a catch all category includes like travel, training, depreciation, office & admin, rent, telephone, stationary, depreciation, rent)

The categorization is not a clean separation. As needed, the items in each category can be shifted between the category.

Direct cost vs indirect cost, project cost vs lights on cost are various categorization of cost structure. Those cost categorization  are just allocation issue. Once the cost are captured in the above categories, then the various other perspective can be easily created. I will demonstrate it specifically how to capture and how to report it.
Any line item in general & administration (G&A) spend in the IT organization should come under in one of the above category. This does not include the capital budget. Any capital project under taking or any new capital software purchase will not be included under IT G&A budget. That will come under capital budget. The scope of the framework at this point is to focus on G&A only. Once the framework is matured for G&A, capital budget can be added at the later stage. However, the capital budget will feed the depreciation value to the G&A.

Let us say the IT organization has the budget of $100. CIO has 4 directors reporting to him and there is a small set of staff in the office of CIO who directly support the CIO in the strategy, architecture, IT financement and etc. Let me show the end result of the budget and walk through the steps involved in the framework. After the budget cycles are complete the budget of IT organization of $100 will look like as given in the figure.

it-finance-mgmt

Let me walk through in part #2 what technique should be followed and each and every steps to develop an IT budget for the $100.

Career Advises

I mentioned it before in a previous blog posting that I grew up considering Bill Gates as my hero. I never met him. But sometime back, I wondered, what kind of advise he would have provided me, had I met him.

There could be lot more people wondering the same and he might have answered the question generally somewhere.

My exploration started and encountered a book called “100 Most popular Scientists for Yound Adults – Biographical sketches and professional paths” by Kendall Haven and Donna Clark. ISBN: 1-56308-674-3. It is a compilation of popular scientists short biography and their advices. William Gates was in that list and his advises are:

William Gates – Invented Disk Operating System (DOS) and Microsoft Windows computer operating systems. Founded Microsoft Corporation.

Bill Gates would advise you to pursue studies that include mechanical engineering, chemistry, and physics classes in addition to computer science and electrical engineering. Gates would also say that the computer field is driven by consumer needs. The best ideas are those that fill the most basic needs. Develop not just programming skills, but also the ability to recognize needs and create new ideas.

Erwin Schrodinger is not in the list and it is a disappointment for me. The book contains advices from my other heroes and here is the summary.

Steve Wozniak – Invented the Apple II computer and Co-founded Apple Computer Corporation.
If you are considering a career in computer technology, Steve Wozniak would advise you not to specialize too soon. Spread yourself over several disciplines. You must have a foundation in the basics – math, physics, material science, electrical engineering – but don’t be afraid to study anything else that interest you. Search for new ways to combine departments and disciplines to your advantage. And never think that it’s all been done already. People probably thought that way in Rome thousands of years ago. There will always be new inventions simply because there’s a need inside us to express our creativity and inventiveness.

Albert Einstein – Awarded the Nobel Prize for Physics, 1921
Practice and develop your mental powers: dream, imagine, and wonder. Take the time to let your mind wander through a problem. Einstein believed that learning is the servant of imagination, and that curiosity and inquiry are the foundation of learning. He also would advise you to get used to teaching yourself. Investigate, read, probe through the areas that stir your passions. University classes are valuable but can never be custom designed for your specific needs as can you own studies.

Richard P. Feynman – Awarded the Nobel Prize for Physics, 1965
A cornerstone of Richard Feynman’s belief was that each scientist was responsible to question and challenge theory. No field can develop without rigorous, constant challenge to its hypotheses and assumptions. Above all else, he would advise students to first ground themselves in math and logic. Master all forms of math and their orderly application because mathematics is the language of science. Also learn the skills of reasoning, logic, and analysis. They will guide your questioning. Begin serious studies with physics, thermodynamics, and chemistry before advancing to particle physics and nuclear physics. Finally, open your mind to unexpected sources and ideas. All the world is a science textbook and the ideas you need could be lurking around any street corner, not just in textbooks, science journals, and labs.

Dennis Gabor – Awarded Nobel Prize for Physics, 1971 and invented holography.
If you are considering a career in physics, Dennis Gabor would advise you to consider adding mechanical, electrical, and chemical engineering classes to your physics curriculum. Engineering approaches offer practical perspectives to the complex and theoretical problems of physics.  Engineering courses also create a problem-solving orientation that is invaluable in the world of physics.

Max Planck – Awarded Nobel Prize for Physics, 1918
Max Planck’s primary advice to anyone planning a physics career is to master mathematics. Math is the language of science. If math is not your servant and ally, it will always to your enemy. During undergraduate studies gain a basic understanding of all fields of physics and related fields such as thermodynamics. Specialize in graduate school and commit yourself to staying with that field. It may take decades of struggle to arrive at a point where you can know what questions to ask, recognize the answers once you find them, or begin to understand the answers. Understanding math and being persistent now will produce understanding and advancement later.

Werner Heisenberg – Awarded Nobel Prize for Physics – 1932
Werner Heisenberg believed that any study of physics should start with mathematics. Math is the language of science and any scientist should be completely familiar with the concepts and techniques of this language. Heisenberg often advised students to seek out and study under the masters in their particular field. Masters are those who have created the last step in the path of scientific progress. The next step will be taken by those who learned from those taking the current step. Finally, study, study, study. It takes considerable work to reach the forefront of any scientific field. Yet that effort is mandatory for those who expect to achieve.

Niels Bohr – Awarded Nobel Price for Physics, 1922
His Advice: Start by gaining a solid understanding of math and classical physics methods. Then seek out the researchers at the forefront of the specialties that interest you most. Apply to those schools and find ways to study under the current leaders of your field, the ones breaking new and revolutionary ground. Volunteer if you must, but work with the leaders. Sign for their classes. Attend all their lectures. Work with them until your own ideas and questions are begging to be investigated.

Max Born – Awarded Nobel Prize for Physics, 1954
Every successful science career must begin with a full mastery of math. That foundation will allow you to understand and decipher the implications and relationship of all other fields. Born said during several speeches late in his life, “I always consider my knowledge of mathematics to be one of my greatest assets.” Max Born advised to resist the urge to specialize during their undergraduate studies. Instead, generalize. Study all the fields you can. Questions and studies will often lead your across field boundaries.

Paul Dirac – Awarded Nobel Prize for Physics ,1933 (shared with Schrodinger)
Paul Dirac was a shy loner and reticent to advise others. Still, he consistently acknowledged the value of his study in engineering, both electrical and mechanical, before he turned to the study of hard sciences. Engineering trained him to be practical and pragmatic and to approach complex problems in a straightforward, step-by-step manner.

Wolfgang Pauli – Awarded Nobel Prize for Physics, 1945
Wolfgang Pauli tried to never offer advice to others, believing that each person and career was unique. However, he advocated several principles that he would advice any student to incorporate into his or her early studies and careers. Demand precision and exactness in your won work and in that of others. These are habits that you must teach yourself early in a science career. Study mathematics carefully and learn from its precision and rigor. The value of your science and your science reputation will be measured by the care with which you perform both analyzes and computations.

Intalio BPMS

I had a dream . The dream was to map out all business processes in an organization, develop the run time from the process map, validate the function of the new run time and sun down all existing systems. It was a dream few years ago. I challenge myself, it is not a dream any more and we, as an industry,  are moving towards it. We may not be there today to make it real but we are in the path of it.

Information technology is slowing becoming business technology and technology will become a black box managed by set of providers. Business technology management team will manage only set of  providers but not technology in near future.

Phase #1 of the dream:

  • Select a cost effective BPMS software
  • Utilize internal & external resources to map out the processes using the BPMS
  • Host it in the cost effective platform as a service (Cloud computing)
  • Leverage the centralized business process map to simulate/emulate any new business ideas
  • Validate the new business ideas for strong business case
  • Develop the application from the process map and launch it in PaaS (Platform as a service) like Google apps.

 The first step of the phase #1 is to select the cost effective BPMS software. I do not need to amplify why it needs to be cost effective and economical option. Due to the global economical crisis, most of the organization is on the lights on mode, and minimum budget allocated for any discretionary spend for this year. Economical and cost effective alternatives are not differentiators in the competitive environment, it is a survival ingredient.

When I explored the cost effective BPMS software, Intalio, the open source BPMS is in top of the list. Intalio also integrates with Google Apps and salesforce.com.

The question is, what is the total cost of ownership for Intalio installation in an enterprise. More to come on the findings..