IT managers know it: your company talks cyclically about having to optimise costs. By the second time at the latest, you know that cost optimisation is a euphemism for cost reduction. In difficult economic times, savings may make sense on the surface. However, to expect only cost savings from you is anachronistic. Those who act in this way see IT as a pure cost factor – and miss out on opportunities. Successful companies understand: The age of the IT manufactory is ending – that of the IT service provider with economic responsibility is beginning.
This responsibility is complex. In the course of digitalisation, IT is providing more and more services faster and faster. This means that the demands on internal service provision are also changing. And this is becoming more and more confusing: technologies such as cloud solutions or SaaS can be helpful externally. But one question remains: How much IT will the company provide itself in future?
Successful companies rely on:
- Value analyses for initial investments
- Review of running costs
- Increasing productivity and reinvestment
These actions create a culture of thinking beyond pure savings. Performance and value are at the forefront of their management. Budgets are not costs per se, but first and foremost resources to achieve goals. Every euro of budget has to prove itself and is in competition with each other. Cutting costs is the easy way, but often not the successful way. For the successful way and the question of how budgets are used optimally, they rely on “IT Financial Management” (ITFM) (Gartner) or “Technology Business Management” (TBM) (Forrester).
What is IT Financial Management?
ITFM and TBM: Both terms mean the same thing: using the tried and tested financial management instruments of the CFO and controlling – but transferred to the specific requirements of IT. The process goals include looking at the IT organisation and IT services from a financial perspective and providing a basis for decision-making. This enables IT to plan budgets itself and also monitor them.
How does the CIO become an IT financial manager?
The use of ITFM thus changes the role of the Chief Information Officer (CIO) in particular. Until now, the CIO was primarily a technology manager and translator for the board. The Chief Financial Officer (CFO) and IT controlling monitored him in terms of profitability and supported him in investment decisions. In 2021, it is no longer enough for the CIO to retreat to the question of the right, future-proof technology. This is where IT Financial Management comes in. ITFM transforms the CIO from a pure technology manager into a business leader.
To become a business leader, the CIO must master the following:
- Investment and strategic planning – meeting top management at eye level.
- Asset management – combining technical and commercial IT considerations
- Cost and performance optimisation through benchmarking – becoming the ITFM interpreter
- Determine service catalogue, costs and prices for the business
Four reasons for IT Financial Management
Reason 1: Investments and strategic planning – meeting top management at eye level
Investments are important for strategic planning. Simple questions require complex considerations: What new demands from the business will be placed on IT? Are there new technologies on the market that are an option? What resources will be available? What are the obligations and liabilities under contracts? OPEX as well as CAPEX information is presented in a comprehensible way. From this, it is immediately clear what investments have been made in business operations and business changes. In this way, typical target values of top management can be compared and controlled.
This results in two planning areas for the strategy:
The level of current investment funds required in the planning period to ensure business operations. And: The amount of future investment funds for the expansion of the environment, technological transformation or the introduction of new business services. Here, the distinction between current commitments or CAPEX investments is of particular importance for financing. The company’s IT financial model is developed on this basis. The results must be transparent, unambiguous and comprehensible for the decision-makers in management, the board and the finance department. Transparency creates acceptance. Top management sees: The IT organisation is using funds responsibly for the company’s goals.
Typical results are a shift in investment from business operations to business change. This puts IT management in a position – also with regard to longer-term missions – to make their contribution.
Reason 2: Asset Management – Technical and Commercial
Combine IT view Assets are the linchpin of a technical and commercial IT view. From a commercial point of view, this shows how the company is positioned budget-wise on the IT side. How much capital is tied up? What obligations exist from continuing obligations? From a technical point of view, it becomes clear which technology carriers are in use, where they are located and how the assets are connected. In this way, investments for IT planning and the future security of IT can be prioritised. In addition, good asset management by the CIO is a key competence factor in budget negotiations with the CFO. If, on the other hand, the CIO does not present good asset management, the CIO will always remain the one driven by the CFO. ITFM enables commercial information from new assets to be captured during the year. Expiring assets can be removed from the budget planning at the right time. This makes it possible to provide information on when changes will affect budgets.
Drawing complex asset management from ITSM tools or with outdated Excel wallpapers or figures from ERP third party systems is dangerous. The two worlds are not meant to be united. If the CIO is not able to present the CFO with an analysis of the various asset classes in relation to total expenditure within a few minutes, the CIO should think about change. Because this is where they are invested.
Reason 3: Optimising costs and performance through benchmarking – becoming an ITFM interpreter
IT Financial Management not only enables cost and performance optimisation of IT, but also benchmarking. To optimise costs and performance, it is necessary to classify the areas: by platforms, systems and software.
For cost optimisation, a service overview is mapped. This contains the business services of the services catalogue as well as the cumulative sub-services, such as infrastructure services or licences. These two orders make IT expenditure comparable and more comprehensible for the service recipients.
If the company pursues goals within the framework of IT financial management, such as optimisation efforts and uses benchmarking, the best-practice path described is a good choice. According to this, the costs and additional personnel key figures can be compared with the values collected by central bodies – such as Gartner. Typical metrics for this are IT spend as a percentage of turnover, operations, IT spend under the “Run, Grow, Transform” or OPEX by technology domain.
Benchmarking with comparable or, at first glance, non-comparable companies enables the localisation of one’s own performance and cost performance and reveals possible optimisation potential at a high level.
Reason 4: Determine service catalogue, costs and prices for the business.
ITFM tools are able to present the described views. This allows ad hoc questions on relative costs, platform and application costs, network expenses, storage and other resources to be answered. Successful ITFM bundles this information into essential business services so that all parties involved can ask about the costs at any time. The comparison between different, yet comparable services along a time axis is also part of the
evaluations that IT Financial Management should provide ad hoc. IT thus becomes a content-related and now additional commercial partner for the planning of projects. Changing or transforming the business is not just lip service paid by IT, but a tangible part of the digitalisation of the business. New projects become tangible and directly optimised in terms of cost and performance from IT. The CIO can now also make technology decisions on a commercially comparative basis and include make-or-buy decisions.
The benefits of IT financial management tools
It is important that the tool used prepares and presents the underlying service costs and prices in such a way that they can also be interpreted by non-IT managers. In this way, ITFM takes on a central controlling task and automates evaluations to support decision-making.
As soon as stakeholders understand the business and which parts of a service are cost drivers, intrinsic optimisation processes take effect. IT management can work with the business to optimise services from both a cost and performance perspective, without relinquishing control over strategic technology decisions.
The goal of this process is a service portfolio that shows both the services currently offered and the performance potential they contain. This distinction is of central importance from a cost perspective. Not all costs of an IT organisation run directly into the services provided, but go into procurement, administration and maintenance of core business applications or are simply not attributable. At the same time, capacity potentials remain that are held in reserve but not used by the business. A service portfolio maps these aspects and also contributes to IT risk management, which in turn is in the interest of the business.
In this way, CIOs avoid being continually confronted with decisions made by the CEO or CFO. This process is not very elegant, as IT budgets should be in the CIO’s interest.
IT Financial Software consequently enables the assessment of IT expenditures: Costs are linked in an understandable and therefore tangible way and with deliverables. This makes it clear to business representatives that technologies are needed and that IT contributes value to the business. This makes IT not only a business partner, but also a co-creator. IT Financial Management transforms the CIO from a technology manager to a business leader.