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Tag Archives: IT Financial Management

IT’s Case for Service Catalogs: Why do you need one?

by Les Viszlai

I’m surprised by how often I come across IT organizations that still aren’t fully persuaded of the value of using service catalogs. There is a lot of conversation around the value to the Business but I would like to jump in and outline the advantages of service catalogs from an IT Organization’s perspective.

First and foremost, service catalogs defend IT spending and budgets.

Without a service catalog, IT owns the generic technology line items that keep other parts of the business running. It’s not unusual for the software, hardware, and external IT services used by finance, marketing, sales and everyone else to get lumped together and tracked within IT’s budget. This bundling makes the IT Department’s spend look like a massive cost center compared to other departments within the business.  This then suggests that IT is overspending and ripe for an across-the-board cuts.

Under the generic model, finance teams looking to cut business costs by a target amount across the board start with IT.   To add insult to injury, I have found that IT departments are normally understaffed compared to other departments within the business and often underpaid based on industry benchmarks.

Moving to a full services catalog model changes that game. A successful service catalog defines all of the various offerings individually provided by IT to the business and aligns the software, hardware, and external IT services components needed to provide each of these offerings.  The services catalog should also clearly communicate the costs and service-level agreements associated with each service, giving IT the ability to show-back or charge-back the other departments.  This isn’t as monolithic a task as it may sound.

How does a service catalog make life better for IT?

Service CatalogLet me give you an example of how this changes behavior.   A company I was involved with in the past was running a number of different CRM products as a result of company acquisitions over time.  We kicked off a project that justifies the consolidation of the various CRM tools for both cost and efficiency (see my blog on ROI for tips on building such a business case).

Consolidation projects usually transition various users off of the legacy CRM tool onto the new consolidated centralized tool. Inadvertently a core group of users (usually tied to the original acquisition) resist the migration for some good and some bad reasons.  The net result is that our IT team is stuck supporting two tools.  The difference now with a defined Service Catalog is that IT can clearly charge the hold outs for both CRM product services. The corporate sanctioned CRM tool and the legacy CRM tool can be clearly tied to the holdout business unit.   In addition, IT is now in a position to defend the costs related to this and any additional Service Catalog items now tied to the end user or department that uses the service.

Now, let’s fast forward to budget time.  The CFO asks IT to reduce costs by 15%. Where before the dialog might be framed around reducing head count on the networking team, it can now be about which services in the service catalog the company wants to go without.

From a purely selfish point of view, that insulates IT from demands that are all-but impossible to satisfy. It gives the organization the ability to clearly signal when proposed cuts will damage the business. Additionally, the business also benefits, because they have now a less opaque window into their IT spending and its impact on, and interconnection with, their business functions.

Benefits for both IT and the Business

When we look at the broader case for service catalogs from the business perspective, that interconnection goes deeper.

On-Demand Access and Reliability

Service catalogs, of course, allow us to move to a model where end users click on a service they need and then just click once more whenever they need it again. Even at the end of the quarter, or when there’s some looming deadline, those end users always have the extra resources they need available without having to wait. So they’re gaining reliability, especially during times when IT resources traditionally got bottlenecked.

Speed

This model also opens the window for IT to add additional automation to any service. Say your SLA for providing an FTP-based service for file uploads and downloads is three days. With automation in place, you may be able to speed that up to hours, if not minutes. What’s more, you can offer this service as soon as the initial automation is complete and then keep fine tuning it by adding new tools, capabilities, and resources as they’re developed.

Efficiency

Standardizing clients, logging, auditing, and security, and adding system-relevant restrictions based on user profiles, restricts on-demand access so you only get service requests from people with a valid reason to ask for them. This saves IT money and time.

More Growth Potential

That automation and simplification story hints at the other major win for IT here. With a much more streamlined process enabled by its service catalog, IT has more resources available to manage growth more efficiently than it would have been able to under the old model.

Improving Business and IT Alignment

At the core, what both IT and the business are gaining when they adopt a service catalog is better alignment to needs.

When you have a common language and supporting data to communicate with the business the conversations around budgets fundamentally change.  Whereas before IT might have just presented a shopping list for approval, they can now say to the business, for example: “We’re creating ten times more FTP sites than we anticipated and they have to stay around three times longer. We’re out of storage, though. So, we need storage for the FTP site service.”

Similarly, the business can explain to IT that it needs IT’s four day process for creating an FTP site to be reduced to four hours. And because IT thinks in terms of services, it can easily budget out the resources it will take to make that happen.

Both conversations are now about the substance of the services that IT offers. Framed that way, they’re likely to be much more productive for each side – helping IT make good decisions about where to place its resources and allowing the business to understand how they can positively impact the services they are getting from IT.

Breaking Down Silos

When IT sets out to deliver a new service, like the simple FTP examples above, it’s very likely to involve people from a number of areas – in this case, networking, storage, and servers. In the past, everything and everyone was siloed. The network guy would work on the job then hand it over the hill to the server gal, who would hand it over the hill to the storage guy. With the new model, that behavior is broken down, because the network, storage, and server people are collaborating and sharing IP, all aligned to this one service, not their own specific technology silo.

Furthermore, by moving to a services model, IT is now aligning those various siloed resources in a way that enables knowledge transfer and increases overall efficiency and speed of delivery, and very likely lowers costs too.

Overall, the services model offers a route for IT to give business what it needs, but on terms that don’t compromise performance. Supported by the productive dialogue with IT that the model enables, the business can stay agile and scale up to meet demand, all while getting the most bang from its IT buck. That leads to growth, which IT, under this model, will be ready to support. Which of course is a good thing for everyone.

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Les Viszlai is a strategist with VMware Advisory Services and is based in Atlanta.

Is Your IT Financial Model Fit for ITaaS and the Cloud?

Harris_SeanBy Sean Harris

IT as a Service (ITaaS) and Cloud Computing (Public, Private & Hybrid) are radically different approaches to delivering IT, from traditional IT delivery models, that require new operating models, processes, procedures and organisations to unlock their true value. While the technology enables this change, it does not deliver it.

Measuring the Business Value of IT as a Service

A question I hear often from customers is, “How do I measure and demonstrate the value of ITaaS and Cloud Computing?”  For many organisations, the model for measurement of value (the return) and cost (the investment), as well as the metrics that have context in an ITaaS delivery model, are unclear.  For example, most (surprisingly not every) customer I deal with can articulate the price of a server, but that metric has no context in an ITaaS delivery model.

Link IT Cost to ValueI have talked before on this very blog about the importance for IT in this new digital era to be able to link the investments in IT and the costs of running IT to the gains in business efficiency and true business value. This will link your business services, the margins and revenues they generate and the benefits they deliver to customers and the business as a whole to IT costs and investments. This is one step. The other side of this equation is how to represent, measure and track the cost of delivery of the IT services that underpin the business services, then present them in a form that has context in terms of the consumption of the business services that are delivered.

Have you mapped your business services to IT services in terms of dependency and consumption?

Have you mapped IT spend to IT services and IT service consumption?

What about your organisation and procedures? How do you account for IT internally?

The Project-Based Approach

Most of the organisations I speak to have a project based approach to IT spend allocations. There are variations in the model from one organisation to the next, but the basic model is the same. In this approach:

  • Funds for new developments are assigned to projects based on a business plan or other form of justification.
  • The project is responsible funding the work to design and develop (within the organisations governance structure) the business and IT services needed to support the new deployment.
  • The project is also typically responsible for funding the acquisition of the assets needed to run these services (although the actual purchase may be made elsewhere) – these typically include infrastructure, software licenses, etc.
  • In most cases the project will also fund the first year (or part year) of the operational costs. At this point responsibility for the operation is passed to a service delivery or operations team who are responsible for funding the on-going operational aspects. This may or may not include a commitment or ownership of tech refresh, upgrades and updates.

What is included can vary drastically. Rarely is there any on going monitoring of the costs mapping to revenues and margins. When it comes to tech refresh, in many cases, it is treated as a change to the running infrastructure and so needs an assigned project to fund that refresh. This leads to tech refresh competing with innovations for a single source of funds.

The Problem with Project-Based Accounting

Just for a second, imagine a car company offering a deal where you (the consumer) pay the cost of the car, the first years service, tax, insurance and fuel and then after that you pay NOTHING (no fuel, no insurance, no tax, no service). Would that not lead you to believe that after year one the car is free?

While the business as whole sees the whole cost of IT, no line of business or business service has visibility of the impact it is having on the operational cost of IT. It is also extremely hard, if not impossible, to track if a business service is still operating profitably, as any results are inaccurate and process of calculation is fragmented.

Surely this needs to change significantly if any IT organisation is to seriously consider moving to an ITaaS (or cloud) delivery model? Is it actually possible to deliver the benefits associated with ITaaS delivery without this change in organisation and procedure?

Applying a service-based costing approach can seem intimidating at first, but it is essential to achieving value from your ITaaS transformation and gets much easier with expert help.  If you are approaching this transformation, contact our Accelerate Advisory Services team at VMware who, along with the Operations Transformation Services team, provides advice and guidance to customers around constructing an operating model, organisation, process, governance and financial management approach that supports an ITaaS delivery model for IT.

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Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom.

From CIO to CEO: Financing your ITaaS Organization with Charge-back

Jason StevensonBy Jason Stevenson

In my latest CIO to CEO blogs, we discussed How to RUN and ORGANIZE an Information Technology as a Service (ITaaS) Provider. In this blog, we will discuss how to FINANCE an ITaaS Provider.

One of the loftiest goals as an ITaaS Provider is the ability to charge-back, or at least show-back cost of services. It can also be daunting to do so in a fair manner for all customers.

Leonardo da Vinci said “Simplicity is the ultimate sophistication” and Albert Einstein said “If you can’t explain it simply, you don’t understand it well enough.” In this blog I’ll walk through a quickly executable IT cost model to calculate Total Cost of Ownership (TCO), using mostly tools and data we already have, to establish a price that is:

  • Simple
  • Accurate
  • Equitable
  • Scalable
  • Agile

STEP 1: Establish Labor Costs

Bob worked 40 hours this week. 16 hours in support of services including day-to-day operations, online training every other day, and daily staff meetings. 24 hours were spent working on a migration for Project 2. All employees had a holiday the first Monday of this particular month. As it happens, none of our employees took any leave for the rest of the month. Out-of-office equals $0 cost and is excluded. The reason for this will become more evident when we discuss burdened rates.

IT Cost Model

Highlighted in blue, each project is associated with a service. It is important to note Project 2 is associated with Service B. The cost of Project 2 is derived from our employees’ wage and a rate of 1.5. The wage is multiplied by this rate to equal a burdened rate. Burdened rates reflect wages plus benefits and fee if any. Bob worked 24 hours on the Project 2’s migration in Week 2 per our example and contributed to Project 2’s cost of $5,724.00 this month.

Highlighted in orange, Bob worked 16 hours in support of services in Week 2 per our example. Tickets (requests, incidents, problems, changes, etc.) are associated with each service. Out of the 112 total tickets this month, 30 were related to Service B or approximately 27%. Using the number of tickets per each service and total labor for service gives us the cost of service. In this case, $17,172.00 * (30/112) = $4,599.64 for Service B this month.

Highlighted in green, the total cost of Service B labor for this month is $10,323.64 by adding $4,599.64 for project labor and $5,724.00 for service labor from our previous calculations. Our service organization must recover $36,252.00 this month for just labor.

IT Cost ModelIT Cost ModelIT Cost Model

STEP 2: Distribute Operational Expense

Services may require operational expenditures (OPEX) like: leases, utilities, maintenance, etc.; some of which may be indirect and need to be fairly distributed across services based on relative service size. By dividing subscribers of a service by the total number of subscribers we arrive at a fair percentage of monthly operational expenses for Service B of 28%. Indirect operational expenses for Service B are calculated fairly by $18,000.00 * (250/900) = $5,000.00.

Some expenditures are so large that the expense cannot be recognized at one point in time and need to be amortized (for example building a new data center). Depending on your model, this expense may be captured as either a project expense or an operational expense. In keeping our model simple, amortization should be used sparingly. When absolutely necessary, it should be used consistently by establishing a concise policy like “All expenses over $500,000 will be amortized (spread) over 36 months.” In our example, no expenses exceeded half-a-million-dollars and so amortization does not apply. However, if we had an Expense E of $1,750,000 for our new data build-out it would be recognized as $1,750,000 / 36 = $46,611.11.

CEO5

STEP 3: Calculate Total Cost of Ownership

Projects may require capital expenditures (CAPEX) beyond labor like: material procurements, suppliers of personnel, etc. plus travel. Project costs are often direct and simply added with project labor for total project cost. We can distribute these costs as well if needed. Total Cost of Ownership for Service B rises to $18,323.64 by adding capital expenses of $3,000.00 to our previous operational expenses and labor. Assuming our other services and projects require only labor, our service organization must recover $44,252.00 this month to remain solvent. Dividing Service B’s total cost by 250 subscribers gives us a cost of $73.29 per subscriber per month.

CEO6

STEP 4: Establish Charge-back

Our previously mentioned 250 subscribers of Service B is spread over four service customers (departments in this example) as 100 + 100 + 25 + 25 = 250. A fee of 7% which is the difference between our cost and our price. Recovery from each customer of their fair share of services. Department A has 100 subscribers of Service B; which equates to 100 * ($73.29 *107%) = $7,842.03. 107% is a representation of 100% of the cost plus 7% fee. Our previous Total Cost of Ownership of $44,252.00 is now a price of $47,349.64, allowing our service organization to not just be solvent but also profitable to enable research, development, improvement, etc. of services.

IT Cost Model

If the culture of your organization does not allow for your IT department to charge customers for service the same principles can still be applied. Remove the fee (7% in our example) and communicate the same information as Service Consumption Report rather than an invoice to provide show-back to your customers. Though they may not be paying for services you can still influence their behavior by giving them comparative analysis against their peers.

The following table summarizes charge-back using an IT Cost and Price Model.

IT Cost Model

In my next blog post we will explore tips for how to ensure, as the new “CEO” or your IT department, that your transition to an agile, innovative, and profitable service provider is a successful one.

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Jason Stevenson is a Transformation Consultant with VMware.

Establishing Cost Transparency and Changing Your Relationship with the Customer

Today’s IT organizations need a clear picture of what each service costs to facilitate strategic conversations with their customer, the business. This is the only way to continue innovating while operating within budget and competing with the growing prevalence of shadow IT.

To explore some of the most common use cases addressed by IT Financial Management (ITFM), join two of VMware’s most experienced ITFM consultants for this on-demand webinar as they discuss the business issues, solutions, challenges and benefits of a service costing system.

In this webinar, Michael Fiterman, Senior Consultant for vRealize Business, and Brendan O’Connor, Senior Technical Consultant for vRealize Business, will walk you through:

  • Cost transparency:
    • What is real cost transparency?
    • How can it be achieved, and what are the immediate benefits?
  • Customer intimacy:
    • How can we change the conversation with IT consumers?
    • How will it change our business?