An Overview of IT Financial Management
Eric J. Feldman
What is IT Financial Management?
Ask the question “What is IT Financial Management” and you may find a few similar definitions. I like the authoritative description from Forrester Research: “The processes and tools necessary to provide IT leaders with the key capabilities to effectively account for, manage, and analyze IT costs and communicate their value to the business.”
IT Financial Management (ITFM) has its roots in the timesharing of IBM mainframe systems from the 1960s and 1970s. Often used by universities, timesharing made it possible for individuals and organizations to use a computer without owning one. This dramatically lowered the cost of providing computing capability by allowing many users to interact concurrently with a single computer and charging them “rent” for access.
IT organizations today go far beyond the management of a single computer system. There are often hundreds of IT services, data centers, enterprise software, devices, services, and communications systems. Globally, we spend a lot on IT – estimated to total $3.7 trillion in 2020 according to one leading analyst firm. Modern ITFM processes and tools are used to calculate the cost of delivering these IT services and track their usage throughout the enterprise.
ITFM goes beyond answering the question “How much does your organization spend on IT?” More importantly, it attempts to answer the question “Where and how are we spending on IT?” The answers are not as obvious as it seems. Here is a real example. Some years ago, I was working with a large financial services firm, and their CIO told me that they were spending $160 million per year on one type of IT system. Their problem was that between $16 and $20 million of that total they could not attribute to any department or specific usage. They knew exactly how much in total they were spending, but they could not determine why they were spending it.
Understanding how IT expenditures are made, why the money is being spent, and by whom is the reason why every enterprise needs IT Financial Management.
Is ITFM about IT, or Finance, or Both?
Sometimes, there is confusion between ITFM and other enterprise functions. While ITFM is similar to accounting and Enterprise Resource Planning (ERP), it is actually more closely aligned with IT processes such as IT Service Management (ITSM). Many of you know something about ITIL, also known as the Information Technology Infrastructure Library. ITIL is a set of detailed practices for ITSM that focuses on aligning IT services with the needs of business. It is sometimes overlooked that there has been an IT Financial Management set of best practices in the ITIL framework since ITIL V2, released in the year 2000.
ITFM processes start with the service definition. Every company offers both business and IT services through a multitude of internal providers. These include the IT department, human resources, facilities, marketing, finance, and others that all offer services to other departments that consume these services. The service could be to deliver a product, perform a task, start and complete a process, and many other functions.
In a nutshell, ITFM is about calculating the cost of providing a service, measuring the usage of consuming that service in financial terms, and communicating this information to appropriate stakeholders.
And knowing where IT is spending helps business leaders make better decisions, and ultimately reduce costs. Leading analyst firms estimate that an ITFM solution can help save up to 10% of IT costs, an important benefit, especially when cost reduction targets are part of the business planning cycle. And for a company with a multi-million dollar IT spend, ITFM processes and tools can save millions.
How do I Begin my ITFM Journey?
For a small company with a few dozen people and a handful of services, service cost and usage can most likely be calculated in a spreadsheet. Many small businesses and organizations that employ ITFM processes do exactly this.
For an enterprise with hundreds or thousands of people and countless services from the various internal providers, calculating service cost and consumption would be almost an impossible undertaking without a solution built specifically for the task.
If you are in that latter category and are looking to take that first step towards researching an ITFM solution, you might be facing what seems like a daunting task.
So how do you determine what ITFM solution is right for you?
For a vendor agnostic look at the best practices in choosing an ITFM vendor, why not check out our White Paper “Selecting an ITFM Vendor.” Written in conjunction with our partner Thavron Solutions, this guide is an unbiased look at all the steps to choose an ITFM vendor and their timeframes.
This white paper is designed to help you understand what you need to know about yourself and your organization, and how to engage vendors to help ensure that you end up with the best fitting solution for your organization.
Be sure to check out “Selecting an ITFM Vendor” today!