Category: IT Financial Management

IT Waste Management..

hmm.. Do you know what is being wasted in your IT organization?

Nirvana (the highest level of maturity) is not reality in IT organization. It is a stretch goal. There are always room for improvement in any IT organization.

Some time back, a set of projects were perceived as a high business value projects and in last few months the business climate or economical climate might have changed and the project could be in the brink of extinction.

Some time back, a set of skills was perceived as a core competency for the future organization and due to the recent merger or acquisition or economical situation, the business strategy changed and hence the IT strategy. The core competency developed few years ago is not core any more in the current environment.

Some time back, a set of tools bought to enable efficiency with in the organization is not really working out due to various reasons..

What ever the situations may be, the past investment made in technology, people, process may not be currently required with in the organization.

IT Waste Management must be part of IT finance management group and IT finance manager/director is responsible for IT waste management function.

IT Waste Management Process:

Trigger:
Change in business strategy, IT strategy,executive leadership (end up by changing the IT strategy) or  merger, acquisition

  1. Clearly understand the current direction of company
  2. Clearly understand the change in direction due to the trigger
  3. Identify the gaps
  4. Assess the impact of directional change in terms of
    • Vendor Contract  – Hardware/software/Purchase service/Professional service
    • Intellectual  capital loss (work with HR and IT senior management )
    • System landscape  (work with Architecture team)
  5. Identify the retirement plan or reusable plan for all IT assets. Multiple teams like architecture, HR, procurement all need to work together to develop the above plans.
  6. Execute the plan. Realize and monitor the benefits
  7. Report the sun downed systems to IT controlling as IT impairment assessment. The IT intangible assets which are in the books can be adjusted and would bring tax benefits to the company.

The systems which are sun downed or retired in the process must be reported to IT controlling as a IT asset impairment assessment to reflect the new IT intangible asset value in the books. It would bring tax saving to the company.

The above steps are part of IT waste management process and must be performed every 3-6 months in every IT organization.  It will bring operational and cost efficiency to any IT organization.

IT Finance Management Framework – Part 3

Typically, the organization structure is,  managers, project managers & senior manager will be reporting to director in an IT organization. Directors will have a functional responsibilities like sales & marketing, customer service, finance and etc.  Managers and senior managers are responsible for the managing the project, lights on and enhancement. For a zero based budgeting, managers of each application area will be required to come up with forecast. The skills required for each managers to come up with forecast are given below.

  • Understanding of over all business process
  • Understanding of their respective business  strategy and their current annual business plan. For ex. if a manager supports call center systems, then that manager must understand customer and service business area’s plan for that year.
  • Understanding of external market condition
  • Understanding of work load in their area in the past and correlation with business strategy and its annual business plan
  • Understanding of technological obsolescence and flexibility of their systems
  • Trend analysis

The above skills will be used to develop the forecast for keep the lights on, discretionary and projects spend for their respective systems, infrastructure, shared service.

it-finance-structure

Each manager will have set of systems to support. Logical group of the system are assigned to an internal order number. Each internal order number will have a set of systems. The light on, discretionary and project spends are allocated for each internal order number.

Only the department level cost center and general ledger (GL) number level cost will be submitted to the controlling office and eventually in to the enterprise financial systems like SAP or Oracle Financials.   The cash budget will have line items only  GL level (like employee, contractor, and etc) , director level consolidation of GLs and department level consolidation of GLs.  The rest of classification like lights on , enhancement, internal order number and etc are just allocation within the ITM budget for better understanding and reporting.

This step completes the creation of budget for the IT organization. The next step is to track the actual and report to stakeholders. The next part will focus on tracking the actual cost and reporting it to the various stakeholders.

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.

How much functional knowledge required for a CIO ?

Slowly IT (Information Technology) is becoming BT (Business technology). Traditionally the CIO of an organization (the core business is not IT) is a leader with strong technical background who understands the technology, systems, IT processes and have a less functional knowledge comparing to the IT knowledge.

Due to the role and function of IT changing rapidly, I predict that trend is going to change so quickly. In the near future, the companies are going to look for an extensive functional knowledge as a requirement for CIO. With increasing success of SaaS, ASP models, the hard core IT function (SAN, NAS, Network architecture, load balancers, SSL accelerators and etc) are not required to be directly performed by IT organization. It will be done by service providers and it is requirements by an IT organization to better manage the SLA, vendor relationship. Since the IT function is to enable and drive business (IT is not a service provider to the matured innovation organization) the functional knowledge is extensively required for a CIO to make the right decision. It is not going to be nice to have competencies of a CIO.

For example, for an Oil & Gas company, the CIO MUST clearly understand how OIL & GAS function generally work and it will be required that CIO must have worked in that sector as a Business Director or business senior manager.

How much functional knowledge required for a CIO?
Significant business functional knowledge is REQUIRED for future CIO to run the IT shop.

To test my theory, let us take Toyota Financial. As I understand (as per their web site), they are looking to fill the CIO position. Toyota financial organization goal is to support the consumer (who buys Toyota and Lexus product) by providing financial products like loan, lease, insurance and etc and dealers by providing financial products like floor plan, whole sale and etc.

As per my theory (or speculation), the new CIO will have an extensive business knowledge in the financial lending industry (like mortgage, auto loan, banks, etc). Let us wait for press release and verify my speculation.

IT Investment Management

When IT is a cost center to enable and support a core business (like financial services, credit card, etc) the investment decision with in IT requires a clear plan from the office of CIO and the plan is to align to the IT strategy. Investment management plan provides a guidelines to the senior management team of the IT organization to make the decision on projects, technology , people and process. Without the investment management plan, the organization investment and expenditure may not directly support the IT strategy.

Generally IT budget has the following category. Some of the categories are expenditure not investment.

  • Projects
  • Maintenance & Enhancement
  • Lights on
  • Technology
  • Hosting
  • Internal IT special projects (innovation or cost optimization)

Projects, technology and internal IT special projects are considered as investment and other categorize are expenditure. IT investment management is a structure and governance for the projects, technology and internal IT special projects.

Projects

Projects are major initiative an organization under take for that year to meet the organization goal. The project selection for each year will under go an internal process. The executive team will be part of the process and other key stakeholder (ideally from all the business process area) will participate to select and prioritize the projects and budget for those projects.

The projects for each year of an organization should be decided based on the current state of the organization and immediate requirements. In this market condition most of the industry segment (may be not oil & gas companies) are looking for the cost efficiency to sustain and continue the operation. For example, the financial industry (like Citi) are looking for funding to run their business. Looking for external investors like Abu Dhabi or Dubai etc and also they may look for innovative ways to bundle the securities to mobilize more funding or look for only a best customers to improve their securitization standards. The projects for this year for Citi will be more focused on this line of business. IT department will adjust their priorities and take this projects to support & enable Citi’s business. The IT projects are driven by the business team based on the current immediate needs. Strategic projects which may not fetch immediate benefits to the organization will be in the list and it will be prioritized accordingly.

Maintenance & Enhancement

Minor changes to the existing systems but a project. It is fine tuning the existing systems to continue to support and enable the core businesses. In few cases, regulatory requirements also will come under maintenance & enhancement IT budget bucket. This expenditure generally can not be avoided.

Lights on

This bucket is for keeping the system running to support and enable the core business. It is a regular maintenance like ensuring the log files are rotated, database back ups are taken, systems are regularly monitored etc. Some of the maintenance and enhancement may come under lights on. This expenditure can not be avoided.

Technology

Technology priority matrix (a different perspective of technology road map) is a list of technology and its priority to the company. For example, for financial service company the top most priority is to secure the systems to protect the consumer data.

An example of technology priority matrix:

  1. Security Technologies
  2. Business Intelligence
  3. Business Process management
  4. Enterprise systems
  5. Infrastructure technologiesAll the technological investment will be made based on technology priority matrix.

Hosting

It is a fixed cost for the running all the systems. It includes hardware, software, network, software license, desktop, system monitoring, mainframe, web environment. Every organization has a hosting cost and it generally it is a majority of the IT cost. It is slowly going to become a commodity and IT organization will not focus primarily on the hosting and focus on the business value augmentation.

IT special projects

Most of the organization does not have the IT special project bucket within their IT investment management plan. The purpose of this category to have funding to drive innovation, cost optimization (hosting provider evaluation), sourcing advisory, application portfolio assessment and etc. The special project priority matrix is created in collaboration with the senior and executive management of IT based on the IT strategy and direction. For an example, a special projects priority matrix is given below

  1. Innovation
  2. Cost optimization
  3. Organization alignment


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