Technology management

Financial Management

Before

  • Too much “run” spend starves innovation budgets
  • Spend views miss “fully loaded” costs like labor & facilities
  • Business units consume tech like it’s free & unlimited
  • Planning takes too long and is immediately out of date

After

  • Optimise run budget to invest in growth
  • Infra/vendor/application TCO
  • Consumption-based chargeback/show back
  • Dynamic planning (e.g. monthly)

Framework

The Financial Management framework from the Technology Business Management (TBM) Council provides guidance on managing IT finances effectively to drive value, optimise investments, and align IT spending with business priorities. Here’s an expanded overview of the key components of the Financial Management framework:

Cost Transparency

  • Cost Classification: Classify IT costs into meaningful categories such as labor, software, hardware, services, and overhead.
  • Cost Allocation: Allocate costs to business units, departments, projects, and services based on consumption or usage to provide transparency and accountability.
  • Showback/Chargeback: Implement mechanisms to show or charge business units for the IT services and resources they consume to promote cost awareness and responsibility.

Budgeting and Planning

  • Strategic Alignment: Align IT budgeting and planning processes with business objectives, priorities, and strategic initiatives.
  • Budget Allocation: Allocate budget resources based on strategic priorities, risk factors, and value potential to optimise investments and outcomes.
  • Long-term Planning: Develop multi-year IT budgets and financial forecasts to support long-term strategic planning and investment decisions.

Cost Management

  • Cost Optimisation: Identify opportunities to optimise IT costs while maintaining or improving service levels and quality.
  • Cost Reduction: Implement cost reduction initiatives such as rationalisation of applications, consolidation of infrastructure, renegotiation of contracts, and adoption of cost-effective technologies.
  • Cost Control: Establish controls and governance mechanisms to monitor and manage IT costs effectively, including cost tracking, variance analysis, and cost containment measures.

Financial Performance Measurement

  • Key Performance Indicators (KPIs): Define and track financial KPIs to measure IT performance and value delivery, such as IT spend as a percentage of revenue, cost per unit of service, and cost savings achieved.
  • Benchmarking: Compare IT financial performance against industry benchmarks, peer organisations, or historical data to identify areas for improvement and best practices.
  • Financial Reporting: Provide regular and transparent financial reports to stakeholders, executives, and decision-makers to communicate IT financial performance, trends, and insights effectively.

Value Management

  • Value Assessment: Evaluate the value proposition of IT investments and initiatives in terms of their impact on business outcomes, customer satisfaction, and strategic objectives.
  • Business Case Development: Develop robust business cases that quantify the expected benefits, costs, risks, and ROI of IT projects and initiatives.
  • Value Realisation: Monitor and track the realisation of expected benefits and value from IT investments over time to ensure accountability and continuous improvement.

Governance and Compliance

  • Financial Governance: Establish governance structures, policies, and controls to ensure compliance with financial regulations, standards, and internal policies.
  • Financial Risk Management: Identify and mitigate financial risks associated with IT investments, including cost overruns, budget variances, and financial fraud.
  • Audit and Compliance: Conduct regular audits and reviews to assess financial performance, adherence to policies, and compliance with regulatory requirements.

IT Investment Management

  • Portfolio Management: Manage the IT investment portfolio effectively by evaluating, prioritising, and selecting projects and initiatives based on their strategic alignment, value potential, and risk factors.
  • Capital Allocation: Determine the appropriate mix of capital and operational expenditures for IT investments and projects, considering factors such as depreciation, amortisation, and cost recovery.
  • ROI Analysis: Conduct rigorous ROI analysis to evaluate the financial viability and business case justification of IT investments, including both tangible and intangible benefits.

Components

By considering these components within the Financial Management framework, organisations can effectively manage costs, optimise investments, and align IT spending with business priorities to drive value and achieve strategic objectives.

  • Description: Private refers to IT resources and services that are hosted and managed within an organisation's own data centers or infrastructure, typically on-premises.
  • Cost Considerations: Costs associated with private IT infrastructure include hardware procurement, data center maintenance, power and cooling, network infrastructure, and personnel.
  • Financial Management Focus: Financial management of private IT assets involves tracking and optimising capital and operational expenditures, ensuring cost efficiency, and aligning investments with business needs and priorities.
  • Examples: Private servers, storage arrays, networking equipment, data center facilities, and personnel costs for managing on-premises infrastructure.
  • Description: Cloud refers to IT resources and services that are delivered over the internet from third-party providers, enabling on-demand access to scalable and flexible computing resources.
  • Cost Considerations: Cloud costs typically include subscription fees, usage-based pricing, data transfer costs, storage costs, and costs for additional services such as databases, AI/ML, and analytics.
  • Financial Management Focus: Financial management of cloud services involves optimising costs, monitoring usage and spending, right-sizing resources, and leveraging cost-saving opportunities such as reserved instances and volume discounts.
  • Examples: Infrastructure as a Service (IaaS), Platform as a Service (PaaS), Software as a Service (SaaS), cloud storage, cloud-based databases, and cloud-based development tools.
  • Description: Applications refer to software programs or systems that support specific business functions, processes, or user needs within an organisation.
  • Cost Considerations: Application costs include software licenses or subscriptions, development and customisation costs, maintenance and support fees, integration costs, and costs associated with infrastructure and hosting.
  • Financial Management Focus: Financial management of applications involves tracking total cost of ownership (TCO), assessing value delivered, rationalising application portfolios, and optimising investments in application development, maintenance, and support.
  • Examples: Enterprise resource planning (ERP) systems, customer relationship management (CRM) software, business intelligence (BI) tools, custom-developed applications, and industry-specific applications.
  • Description: Vendors refer to external suppliers, partners, or service providers that deliver products, services, or solutions to an organisation.
  • Cost Considerations: Vendor costs include fees for products or services, licensing fees, subscription fees, maintenance and support fees, consulting fees, and costs for additional services such as training and customisation.
  • Financial Management Focus: Financial management of vendors involves vendor selection, contract negotiation, vendor performance management, and vendor relationship management to optimizse value, minimise risks, and ensure compliance with contractual agreements.
  • Examples: Hardware vendors, software vendors, cloud service providers, consulting firms, managed service providers, and outsourcing partners.
  • Description: Business capabilities refer to the core functions, processes, or competencies that enable an organisation to achieve its strategic objectives and deliver value to customers.
  • Cost Considerations: Business capability costs encompass investments in people, processes, technology, and resources required to support and enable key business functions and activities.
  • Financial Management Focus: Financial management of business capabilities involves aligning IT investments with business priorities, assessing the cost-effectiveness and value contribution of IT services and solutions, and optimising resource allocation to support strategic capabilities.
  • Examples: Sales and marketing, product development, customer service, supply chain management, finance and accounting, human resources, and IT management and governance.
  • Description: On-Prem refers to IT resources and services that are hosted and managed on-premises within an organisation's own facilities or data centers.
  • Cost Considerations: On-premises costs include capital expenditures (CapEx) for hardware and infrastructure, operational expenditures (OpEx) for maintenance and support, labor costs for IT personnel, and overhead costs for facilities and utilities.
  • Financial Management Focus: Financial management of on-premises IT assets involves optimising capital investments, controlling operating expenses, assessing total cost of ownership (TCO), and evaluating cost comparisons with cloud alternatives.
  • Examples: Servers, storage systems, networking equipment, data center facilities, and personnel costs for managing and maintaining on-premises infrastructure.

Connecting Technology Investments to Business Value

Organisations need a way to connect technology investments to business value. In other words, organisations need to consider how they can translate the things that money is spent on – cloud bills, data center investments, 3rd party software, and developers – to outcomes that the business cares about.

Allocating Costs Fairly According to Use

To unlock TBM’s biggest benefits, organisations must master the art of allocating costs equitably according to each element’s use and dependence on other elements, and in a manner that’s defensible to those paying the costs. The first step is understanding how services are composed.

Backed by a Standardised Taxonomy for Technology Costs

The complexity and variety of technology architectures mean that every business uses their own terminology or lingo to describe the elements in their purview. This makes it very difficult to adopt best practice allocation methodologies or make efficiency comparisons across industry. That is why in 2014, the TBM Council standardised on a TBM Taxonomy to help take the guesswork out of naming and organising cost structures. The TBM Taxonomy translates from a financial view to a technology view to a business-facing view with terminology that makes sense to each audience.

The TBM Taxonomy makes adoption of TBM much easier, because it settles debates about what to call things or how to group costs together. It also lays the groundwork for vendors to standardise other important tools, such as the allocation model that defines the math for apportioning costs and reporting systems for quickly deriving insights about an organisation’s spend.

Learn more about the TBM Taxonomy

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