One reason for this gap in expected results is that financial models do not effectively push demand and cost decisions to the business users.
Often, they either use outdated cost center systems that allocate the entire IT budget once a year during budget negotiations or a charge-back model to manage costs. Charge-back systems typically generate excessive overhead and are frustrating to users.
In a recent survey, we found that several institutions that adopted sophisticated financial models found these to cause antagonistic relationships between IT and the business. Complexity leads to excessive overhead for the business lines tracking expenditures and invoices.
One company we surveyed offered over 300 services, which confused users. Another company’s business managers complained they would close the books for a month only to be subjected to delayed or changed invoices from the services group—forcing them to revisit their accounting. This complexity makes it more difficult for business lines to make consumption decisions and track profitability.
An Effective Model
Given these challenges, how can services organizations promote the right relationships with their business line customers, while delivering the efficiency gains being demanded? The simplest way is to design a financial operating model that gives the business the controls it needs to manage costs.
Market-oriented financial models that bundle IT systems and services into functions that the users can understand and control help give the business control.
There is no one universal design that will work for all companies, however we have defined several success factors that can make services more readily understood and costs more transparent to the business:
Define services in business terms. Business lines don’t want and don’t understand services that are defined by IT or technical terms. What they want and understand are business solutions to their problems.
Those business solutions may be entirely made up of technical components, but that’s not how you should present them to the business line managers. Use a service catalog to help document and define services in the right way.
Bundling costs underneath these services helps to create and track overall costs and usage patterns and assist in efforts to moderate consumption.
Keep things simple. Three hundred services are too many for a business line to manage. Instead, bundle the things you do into a much smaller number of business solutions.
Bundles simplify matters for the business lines and help to keep the overall number of services at a reasonable level. A service catalog implementation helps to do this. It makes it easier for the business to understand, and drastically limits the overall complexity of the program. It also simplifies the work required to implement a collaborative process between the businesses and the services group.
Budget planning makes more sense when there is a track record of usage and validated cost metrics around services. Finally, not every service has to be charged-back. If the managers can’t manage their usage and the service has little variability, it may just be something that should remain in the service group’s budget.
Deliver financial transparency. Both the business line managers and the regulators need to know where your true costs are going.
Align your costs to your business lines that use them and concentrate on understanding the metrics that determine business line profitability. This not only helps the business lines to understand their levels of profitability, but also helps them to realize the value they are getting from your services group.
A competitive services group should be able to show that they are competitive with other sourcing options in the same field, and that they may not provide the cheapest alternative, but the best overall value for the business lines.
Understanding the cost metrics also allows the IT services group to implement incentives to measure and reward business lines when the control usage and becomes more efficient. The right level of transparency and incentives are the best way for both the business lines and the services group to improve.
Recognize how to deliver change effectively. A program like this can’t be implemented overnight, nor can it exist without support from executive leadership. It is imperative that key leaders in the organization understand and support the change and work to create a business case to build support throughout management.
Finally, don’t expect to change the entire company culture overnight. Instead, make incremental changes that show documented value and use that to build support for the program as a whole
In the end, the best commercial financial models use market forces to drive the business toward more efficient behavior. Yet, the market-oriented model isn’t as simple as implementing charge-backs. Instead, an IT service organization must develop services with their customers in mind and implement them in a way that allows them to manage their consumption and usage.
Giving the business the controls they need to manage the costs means that you are making the system subject to market forces so that clear-cut decisions can be made about efficiency and profitability.
Johan Ashi, Alan Houghton and John Stone are consultants with PA Consulting Group, a global management, systems and technology consulting firm. For further information, please contact Johan Ashi at [email protected].