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Financial Management for IT

Services

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Goal – Primary Objective

• To provide cost-effective stewardship


(management) of (ALL) the IT assets
and financial resources used in Services

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Why Financial Management

• Identify the actual cost of services provided


• Provide accurate and vital financial information to
assist in decision making
• Make Customers aware of what services actually cost
TCO
• Assist in the assessment and management of
changes
• Help influence customer behaviour
• Positioning for charging

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Concepts
• Accounting and Budgeting (mandatory)
- Understand costs involved in providing a
service
- Prediction of future costs
- monitor actual against predicted costs
- Account for monetary spend over given period
• Charging (optional)
- Recovery of service costs from Customer
- Operate IT Division as a business unit if
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required
IT Financial Cycle
Business IT Cost Analysis
Requirements IT Operational Plan Charges
(inc. Budgets) (Accounting)

Financial Targets

Costing Models

Charging Policies

Feedback of proposed charges to business (effects behaviour)

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Cost Model
The Cost Model will consist of
COST ELEMENTS

COST TYPE COST CATEGORISATION


• Transfer (Cross Charges)
• Hardware Capital OR Operational
• External Services
• Software Direct OR Indirect
• People
• Accommodation Fixed OR Variable

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Key elements in determining the
cost of a service
• INDIRECT COSTS – NOT directly attributable but
shared.

• ABSORBED OVERHEADS – Total cost of indirect


materials and expenses that are NOT passed onto
the customer.

• UNABSORBED OVERHEADS – Total cost of Indirect


materials; wages; expenses that are apportioned
and added to the cost of each service.

• DIRECT COST – Directly attributable.


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Charging
• Based against Organisational policy on IT
- overhead / break even / profit centre
• Prices should be simple, understandable, fair and realistic
• Charging mechanism to support policy

Cost: Price=cost

Cost plus: Price=cost +/-X%

Going rate: Price is comparable with other internal groups (internal X charge rate)

Market rate: Price matches that charged by external suppliers (open market price)

Fixed Price: Set price is agreed for a set period based on anticipated usage

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Benefits

• Reduced long term costs


• Increased confidence in managing budgets
• Accurate cost information
• More efficient use of IT
• Ensuring funds are available to provide service
• Enables the recovery of costs
• Influences customer behaviour
• Allows comparison with alternative providers

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Fin

Exam Tips
• ABC of Finance
Accounting (MAN)
Budgeting (MAN)
Charging (OPT)
• You must have a cost model before you can charge
• Charging shows Total Cost of Ownership
• THE SPA – Cost Types
• Overhead or indirect cost total cost of indirect materials
wages and expenses.
• Direct cost can be traced in full to a product or service,
cost centre or department e.g. Wages
• Indirect Cost cannot be traced directly in full to product or
service, cost centre or department because it has been
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apportioned.
Exam Questions
• Without a good Accounting System you cannot:

• Know the full cost of services provided


• Judge the efficiency of Problem Management
• Recover costs related to usage, should you wish

Which of the above is true?


A 1,2 & 3
B 1 & 3 only
C 1 & 2 only
Note! The question is asking you is 2 or 3 correct as 1 appears
in all answers and must be correct.
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Exam Questions
• Consider the following statements:

• Customers should always be invoiced for the IT


services they use
• The only reason services are charged for is to make
customers aware of the costs involved in using those
services

A Both
B Only 1
C Neither
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Exam Questions
• Which of the following is NOT the concern of IT Financial
Management?

A Telephone charges
B Invoicing
C Differential Charging (High and Low Tariffs) – Demand
Management Method used in CAPACITY MANAGEMENT
D Reviewing IT service quality

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Exam Questions
• Which of the following statements on IT Financial Management is
correct?

A An IT Financial Manager identifies the costs incurred by IT and


might propose prices for the services supplied
B In order to set up Budgeting and Accounting, SLA’s and OLA’s
need to have been agreed
C It is only possible to be cost conscious if the customer is charged
for services (hinting at TCO)
D IT Financial Management must agree charges with the
customer before establishing a Cost Model (Cost Model comes
before charging)

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