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In this tutorial, we would discuss ITIL Financial Management for IT Services Process. ITIL V3 describes Financial Management Process as an integral part of the entire ITSM Lifecycle for managing all the activities involving financial transactions.
In next few minutes, you would learn about the Definition, Objective, Goals, Activities, Roles, and Sub-process of Financial Management - ITIL V3 Process.
What is ITIL Financial Management for IT Services Process?
Financial Management for IT Services is one of the main processes under Service Strategy process module of the ITSM.
The aim of ITIL Financial Management for IT Services process is to provide accurate and cost-effective governance of IT assets and resources used in providing IT Services. This process is also responsible for planning, controlling and recovering costs of providing IT Services.
ITIL Financial Management for IT Services Objective:
The objective of ITIL Financial Management for IT Services is to manage & control the service provider's budgeting, accounting, and charging requirements.
It also provides operational visibility, insight and superior decision-making capabilities to the Service Provider by evaluating & analyzing the financial impact of any activity.
ITIL Financial Management Goals:
According to ITIL V3, Financial Management is responsible for deciding on the appropriate level of funding required to design, develop and deliver services that meet the organizational strategy. It also helps to optimize the cost of IT Services while considering the quality requirement and risk factors.
ITIL V3 Financial Management for IT Services Activities:
According to ITIL v3, Financial Management for IT Services has to perform some major activities throughout the lifecycle, those are as follows:
- Service Valuation: Is also called Business Justification. This is to understand if the service is worth investing/continuing.
- Demand Modeling: In ITSM, Financial Management has to work on demand modeling for managing or influencing demands/supply of Services.
- Portfolio Management: This is to ensure that the service portfolio lists the right services at their right cost.
- Service Provisioning Optimization: This optimizes the time to market and provisioning of any service by allocating proper funding.
- Planning Confidence: Increases the organization's confidence by doing effective Service Valuation & proper financial planning.
- Service Investment Analysis: Cost / Benefit Analysis and recommendations to make critical decisions.
- Budgeting, Accounting & Charging: These are also critical Sub-Process of ITIL Financial Management of IT Services.
- Financial Compliance: Ensures compliance in financial issues & norms.
- Variable Cost Dynamics: It helps analyze and Recommend Fixed Cost or Variable Cost Models.
ITIL Financial Management of IT Services Sub-Process:
ITIL Financial Management for IT Services typically has 3 Major Sub-Process (Budgeting, Accounting, Charging) and quite a few minor sub-processes.
All the sub-processes and their objectives are described below, followed by a diagram showing the ITIL Financial Management Process flow:
1> Budgeting:
The budgeting sub-process is responsible for predicting and controlling the revenue and expenditure within the organization. Budgeting reduces the risk of over-spending by periodic motoring & negotiation on current budget plans.
There are majorly four types of Budgeting, namely Sales & Marketing budget, Production Budget, Administrative Budget, and Cost of Investment Budget.
2> Accounting:
The Accounting sub-process enables the IT organization to track & account for every single way the organization’s fund is utilized or spent. It usually involves accounting systems like ledgers, charts of accounts, journals etc and should be managed by someone trained in accountancy.
Accounting takes account of all kind of costs like Capital Cost, Operational Cost, Direct Cost, Indirect Cost etc, which we have already discussed in Terminology Section.
3> Charging:
Charging is the process required to bill customers for the services provided to them. This requires sound IT accounting practices and systems.
Charging is perhaps the most complex sub-process, and requiring a large investment of resources and a high degree of care to avoid irregularity.
Transparency in charging is an essential requirement for gaining customer confidence. Thus encourages users to do a cost-benefit analysis to avoid expensive activities by choosing a far cheaper alternative, even if that alternative is slightly inconvenient.
4> Financial Management Support:
This sub-process defines the necessary structures for Financial Planning Data and Costs, as well as for the allocation of costs to services.
5> Financial Planning:
Financial Planning determines, allocates, and optimizes the financial resources required over the next planning period.
6> Financial Analysis and Reporting:
Analyzes the breakup of service provisioning cost and the profitability of services. This is an input to the Service Portfolio Management to make proper decisions about making changes to the Service Portfolio.
7> Service Invoicing:
Service invoicing is responsible for issuing invoices or Schedule of charges to the customer for billing purpose.
Important Terminologies & Definitions:
Some important terminologies and definitions that are frequently used in ITIL Financial Management for IT Services Process are given below:
Budget Request:
- A request for a budget, which is typically raised when compelling a Request for Change by any of the Service Management processes.
- An approved Budget Request means that the required financial resources are approved for Change implementation.
Budget Allocation:
- A budget allocated by the Financial Manager to implement a Change. Budget Allocations are done at the time of approving Budget Request.
Cost Data for Service Provisioning:
- The calculated cost for providing a service on deriving from the price a customer is expected to pay for a service.
Financial Analysis:
- It contains information about costs for providing services and provides insight into the profitability of services and customers. It is an important input to the Portfolio Management process.
Capital Costs:
- Any type of purchases that would have a residual value, such as hardware and building infrastructure.
Operational Costs:
- Day-to-day recurring expenses, such as rental fees, monthly electrical invoices, and salaries.
Direct Costs:
- Any costs that are directly attributed to one single or specific service or customer.
- A typical example would be the purchase of a dedicated server that cannot be shared and is needed to host a new application for a specific service or customer.
Indirect Cost Allocation Table:
- A data table used to calculate indirect costs that are shared among multiple services & what are the rules for cost allocation.
Invoice:
- The invoice is the “billing of charges” for the delivery of a service or product.
IT Budget:
- It is the annual financial plan, which describes the expected expenditures and allocates financial resources to the various service management processes within an IT organization.
ITIL Financial Management for IT Services Roles:
Financial Manager:
- This role is the Process Owner of ITIL Financial Management for IT Services Process.
- Financial Manager is responsible for managing an IT service provider's budgeting, accounting, and charging requirements.
- This role also participates in maintaining regulatory compliance, documentation & demand modeling activities.
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