Process 2: Manage Finances

Figure 4. Manage finances

Activities: Manage Finances

This process includes many traditional financial management activities, such as budgeting, costing models, charge-back models, cost allocations, cost management, and reporting. (Cost accounting and cost recovery, while defined in this process, are performed in Process 3.) IT usually manages its own finances, but occasionally that responsibility lies with corporate finance.

The process also involves preparing and managing an IT budget that reflects the business priorities identified earlier in the process. Most budgets are loosely categorized into three areas:

• Ongoing operations and maintenance spending (non-discretionary spending.
• Project spending (discretionary spending)
• Innovation—a focus on investments in improving the efficiency and effectiveness of ongoing operations and/or improvements to business value

The following table lists the activities involved in this process. These activities include:

• Managing IT finances.
• Creating IT budget.
• Determining maintenance and operations costs.
• Developing innovation and improvement initiatives.
• Determining project costs.
• Establishing value realization awareness across IT.

Table 5. Activities and Considerations for Managing Finances

Activities

Considerations

Manage IT finances

Description:

This is the central activity in the financial management process. During this activity, financial managers define and direct cost modeling and accounting, thereby establishing a financial framework for prioritizing the IT budget.

Key questions:

• How are we going to recover our costs? Do we use a corporate or centralized model? A business unit or decentralized model? A combination of the two?
• What framework will we use to perform cost/benefit analyses on project or investment initiatives?
• Can we measure service usage and/or performance to enable us to reliably and transparently charge our customers?
• Do we understand how the direct, indirect, and overhead costs map to individual services?

Inputs:

• IT service portfolio
  (for more information see Business/IT Alignment SMF)
• Configuration management database
  (for more information see Change and Configuration SMF)
• Upcoming initiatives
• Business cases for new investments
• Direct, indirect, and overhead costs

Outputs:

• IT cost model
• IT costs mapped to services
• Reports on performance and value realization

Best practices:

• Ensure that the IT cost model allows verification of actual service usage.
• Be aware that cost models can drive user behavior. For example, a chargeback model might result in decreased usage.

Create IT budget

Description:

This activity secures funding for ongoing departmental maintenance services as well as for translating strategic IT priorities into funded project initiatives. Typically performed on an annual basis, this is the foundational budgeting activity for every organization.

Key questions:

• What new initiatives are planned for the year, and how much will it cost to deliver them?
• If there are any unfinished initiatives from the previous year, how much will it cost to deliver them? Is it worth completing them? Is the funding for this available?
• What will it cost to maintain and operate existing services and infrastructure? Will these costs increase or decrease over the budgetary cycle?
• How will the new projects affect ongoing costs?

Inputs:

• IT strategic plan (aligns business and IT goals)
• Direct, indirect, and overhead costs for existing services
• Project budgets
• Previous year’s IT budget

Outputs:

• Approved IT budget
• Approved and funded project plans or initiatives

Best practices:

• The budgeting process involves many stakeholders across IT and the business. Requiring an IT strategic plan that aligns business and IT goals helps to reduce stakeholder confusion regarding limited budget. For more information about strategic plans, see the Business/IT Alignment SMF.
• Consider setting the IT budget as a percentage of revenue based on industry benchmarks.

Determine maintenance and operations costs

Description:

These costs relate to the regular and ongoing costs of keeping the IT services running. It includes all costs that would be ongoing even if there were no new projects. Examples of these costs include depreciation, salaries, maintenance fees, consulting costs, and regulatory compliance costs.

Key questions:

• Do we have a clear understanding of how these costs are defined and calculated?
• How are these costs trending over time? Do we know why they are increasing or decreasing? How do these costs relate to our overall IT spending and our overall business revenue?
• How can we reduce these costs?

Inputs:

• Financial data from previous years
• Expected or projected spending on maintenance and operations

Outputs:

• Awareness and communication of ongoing costs
• Maintenance and operations budget
• Improvement initiatives and business justification for them

Best practices:

• Operational frameworks increase IT efficiency and reduce unplanned work. For example, change and configuration management processes help to reduce unplanned outages. For more information and best practices, see the MOF Operations Health Management Review in the Operate Overview.
• Server virtualization, consolidation, and operational automation all reduce costs through more effective use of existing resources, thereby lowering hardware and/or software costs and administrative overhead.

Develop innovation and improvement initiatives

Description:

Improvement activities are ongoing and are not limited to projects. Innovation can take many forms, from organizational structure to newer technologies or simply better ways of getting a job done. Sometimes it is necessary to spend money to save money; IT organizations should allow for a regular budget to fund these initiatives.

Key questions:

• What improvements can we make to our existing infrastructure, processes, or tools?
• What will it cost to make these improvements? What benefit can we expect to derive from these improvements?

Inputs:

• Existing performance and delivery data
• Innovation priorities

Outputs:

• ROI evaluation for the identified initiatives
• Budget and resource allocation for the identified initiatives

Best practice:

• Using a calculation of financial loss associated with risk exposure enables the organization to prioritize funding for upgrades and improvements.

Determine project costs

Description:

Project costs include technologies, hardware, software, and staff, as well as a portion of infrastructure costs that will be dedicated to these new initiatives.

Key questions:

• Do we know the direct, indirect, and overhead costs of delivering these projects?
• Has funding for these projects been approved and allocated?
• How do we measure the benefits that these projects deliver to the business? How do we report on these benefits?

Inputs:

• Approved project plans and business cases
• Project budget estimations

Outputs:

• Budget and resource allocation to deliver these projects
• Project progress reports
• Ongoing ROI tracking and reporting

Best practices:

• Create standard business case evaluation criteria to allow an easy comparison between projects during funding discussions.
• Use continually updated ROI projections to help ensure accountability that ROI is being maintained and that assumptions are built into future budgets.
• Consider centralizing resources by creating a project management office (PMO). PMOs use common resources more efficiently and enable a consistent management and reporting capability for all projects across the IT organization.

Establish value realization awareness across IT

Description:

Everyone in the IT organization should be aware of the impact of IT activities on business value. Value is not limited to projects and initiatives, but extends to daily operations, contracts and vendor relationships, infrastructure improvement, and choices that have environmental ramifications. Thus, IT and the broader organization share an end-to-end perspective of IT services that expresses value in terms of aggregated impact to the business, not just isolated costs.

Key questions:

• Do we understand the entire service delivery chain and the components that make up the service?
• How does this affect the level of support or maintenance that we need to secure from our suppliers and vendors?
• Are there common components that affect multiple critical systems and can we justify the cost of building redundancy and recoverability into the service?
• When faced with the negative financial impact caused by an ineffective service or systems management tool, are we able to convincingly justify the cost of replacing it?
• Energy consumption has an environmental impact. How can we reduce this consumption without affecting the delivery of the service? Does the service really need to constantly consume energy 24 hours a day, 7 days a week?

Inputs:

• Service classification and prioritization
• Service maps and dependencies
• Risk management information

Outputs:

• Operational targets
• Identification of critical infrastructure components
• Operational risk list

Best practice:

• IT and the business should work together to define the technical expectations for a particular service in terms of impact to the business. This will help IT staff to better manage the infrastructure according to business requirements. It will also reduce confusion and contention during service operation and maintenance. Additionally, this increased understanding and awareness will allow IT staff to prioritize improvement and innovation activities and focus on those that can deliver the greatest business value.

This accelerator is part of a larger series of tools and guidance from Solution Accelerators.

Download Get the Microsoft Operations Framework 4.0

Solution Accelerators Notifications Sign up to learn about updates and new releases

Feedback Send us your comments or suggestions