No one expects an IT Manager to spend three weeks in courses and come out an Accountant.  What we do expect is that IT Managers know why Financial Management is important to managing IT, to understand the basic concepts of Accounting and Financial Management, and to see how it can be applied to improve what we do.

In ITIL®, we discuss the idea of services as a way to create value for customers and users.  We articulate services in business terms that allow them to relate value to the services they receive.  This gives the business a better understanding of what IT provides and how it is used by the business.  Demonstrating the value IT provides is a necessary component of IT Service Management, but it is not sufficient.  There is still a missing element.

The missing element is the cost of providing value.  ITIL® v3 introduces the term Value Capture to our lexicon.  This term is used to articulate explicitly what was mostly implicit in ITIL® v2.  In order to remain viable, the IT department must capture value back from the customer sufficient to operate the service at both the agreed level of Utility and the agreed level of Warranty.

When IT departments fail to capture value, it’s usually Warranty that is removed from the equation to make up the difference.  In other words, if IT doesn’t receive enough funding to meet the agreed service levels, the very visible aspects of Utility are maintained while the hidden risks inherent in Warranty are increased.  The business thinks it is saving money by not fully funding IT, but what is really happening is that the business has chosen, perhaps unknowingly, to increase its risk exposure by some undefined amount.

One of the most important aspects of Financial Management for IT Service Management is the ability to cost justify services.  This requires that IT be able to produce a service breakdown structure.  In other words, IT must be able to map out every element of the service from the most basic component of infrastructure sub-services all the way up to the customer facing service, and account for the costs of each element.  This is no small feat, but it is something that Accounting does all the time.  They call it cost-of-goods-sold in manufacturing and cost-of-sales in the service industry.

There are many reasons for calculating cost-of-sales, but the most important is profitability.  If you are running a service business and your cost-of-sales is greater than what you charge for your services then you will only be in business until your credit runs dry.  In order to stay in business over time, cost-of-sales must equal what you charge for your services (revenue) plus the cost of any investment capital.  If revenue goes below this total, then your investors will seek other opportunities for their money.  If revenue goes below cost-of-sales, then you will have to put cash into the business to continue operating.  This is Economics and Accounting 101.

For a department within a larger organization, cost-of-sales must equal your budget or something gives.  Since you can’t go out of business, Warranty is usually the first thing to go.  IT Managers are not expected to be accountants, but you are expected to work with accounting in constructive and productive ways, both to validate IT’s existence and to drive value creation for the business.

Financial Management is an indispensable tool to any business organization, and the more IT management matures into a business-within-a-business the more important Financial Management becomes.  If you want to mature your IT organization, take an accountant to lunch.

About the Author:

 
Ron is a dynamic IT Management Speaker, a widely respected ITSM Author, a sought-after ITIL® Trainer, and an ITIL® Master Certified Consultant.
 

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