Despite what you might have heard, managing finances for IT is really very simple. Forget the nonsense you may read about “value centres” and “capex vs opex”. Instead, here is a simple story which will illustrate all you need to know.
Many years ago some of my friends were working in a big project team and I joined them one evening for a team meal. It was good to catch up with a few people that I already knew and make some new acquaintances. We had plenty of good food and drink - but not too much. All was going fine until the end of the evening. The bill had arrived and seemed quite reasonable but then one of the team asked to see a copy of the menu and, suddenly, the mood changed. As you can guess, a few of the team wanted to work out how much they should contribute. It seemed to take ages to get things sorted out, including splitting out shared bottles of wine and communal starters. Many people couldn’t remember exactly what they had ordered and others became agitated as the first attempts to collect funds fell short of the total. A few heated comments were exchanged at one end of the table and many of the team left feeling the exercise had completely spoiled an otherwise enjoyable social occasion.
Settling the IT bill
Financial management for IT can feel very much like this unfortunate team meal. At the end of each accounting period there is a moment of reckoning when the costs that have been accumulating in various IT budget lines have to be allocated somewhere. It is too late to return those under-utilised virtual machines or roll-back the clock on that exciting customer app development which, with hindsight, was never really going to have a big impact on sales. Everything has to be paid for but who should pick up the bill? Tracking everything in meticulous detail is a lot of work and, in the end, may leave everyone dissatisfied and bitter. Some budget holders will suggest simply dividing the bill equally but is that just because they have consumed more than their fair share?
The analogy goes deeper too. If you look very closely you will find that the prices on a restaurant menu are not directly linked to either the costs incurred by the restaurant or what the customers pay. Many costs such as rent and wages are very real but are not visible in the menu. Tips and service charges might not be linked to what the customers consume at all. A group of customers might decide to ignore the menu completely when dividing up a bill, however, the menu does provide a tool for managing expectations all around. In the same way there is rarely a neat alignment between how IT goods and services are acquired and how they are used. Other restaurant processes such as reservations and membership schemes have parallels in the management and financing of IT and, if you enjoy the challenge, you can bring corkage fees, food hygiene and take-away deliveries into the picture too.
A balanced diet for IT financial management
So, what insights should we take from my team meal story? There are many but here are a few lessons which are often ignored in discussions about IT finances.
Compromise and trade-off - However sophisticated, any charge-back or show-back scheme is going to be a compromise. There is no such thing as a “correct” charge but there can be a “reasonable” charge depending upon how an organisation wants to manage decision making and internal cost allocation.
Menus and recipes - There are a range of factors which influence the overall cost of the team meal and these are driven by a blend of decisions. Some of these decisions were taken by the restaurant (e.g. the location) but some depend upon individual choice. For IT services a Bill of Materials provides a recipe and can help you make well informed choices about how to structure IT finances and where to place decisions which drive IT cost.
Weights and measures - At our team meal the waiters took care to track the alcoholic drinks we ordered and these were itemised on the final bill. One of the kitchen staff probably checked deliveries of bread but the waiters didn’t bother to count the number of rolls we took from the bread baskets. For IT services there are likely to be many potential sources of data but avoid the temptation to use all of the data for financial management. In many cases it is just not worth the additional management overhead.
Reservations and group bookings - Our team meal might not have taken place if someone had not made a booking with the restaurant. Some venues will even require a deposit for a large group or a private function room. For IT services the equivalent process is demand management. IT financial plans need to include demand and service consumers have an important part to play in creating and working to demand plans.
Thank you for a wonderful evening
The last lesson to draw from my team meal story is probably the most important. A team meal is a social occasion and satisfaction depends, at least in part, upon the interactions of the team. Similarly, IT finance has a social element and, however elegant, sophisticated and accurate your financial models, the result will be unsatisfactory unless the CIO engages with their peers and other key stakeholders.
What hints and tips do you have to share on managing IT finances? Add a comment or use the Twitter button below to let me know what you think.