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OneoftheleastunderstoodaspectsofmanaginganITdepartmentisfinancialmanagement.Financialmanagementisthesoundstewardshipofthemonetaryresourcesoftheorganization.Itsupportstheorganizationinplanningandexecutingitsbusinessstrategyandrequiresaconsistentapplicationthroughouttheorganizationtoachievemaximumefficiencyandminimumconflict.Therefore,understandingtheeconomicsoftheorganizationingeneralandInformationTechnologyisamajorsteptowarddevelopingsoundfinancialstrategiestoaccommodatetechnologicaladvancement.Fig.5.1–PositionofFinancialResourcesintheITstackWithinIT,financialmanagementisvisibleinthreemainfunctions:budgeting,costingandcharging.Budgetingistheprocessofpredictingandcontrollingthespendingofmoney.Itconsistsofaperiodicnegotiationcycletosetbudgets(usuallyannual)andtheday-to-daymonitoringofthecurrentbudgets.CostingisthesetofprocessesthatenabletheITorganizationtofullyaccountforthewayitsmoneyisspent.Chargingisthesetofprocessesrequiredtobillthecustomersfortheservicessuppliedtothem.Budgeting,costingandchargingareinterrelatedandinterdependent.Fig.5.2–FinancialprocessesAbudgetistheoverviewofalltheprojectedexpensesandthewaytheywillbepaidfor.Anorganization'sbudgetisthefinancialexpressionofitsstrategyandsoisthepartofthebudgetthatcoverstheITexpensesandincomes.TheITbudgetalsotakesintoaccountotherelementssuchasrisks,thearchitectureoftheITenvironmentandthelifecycleoftheITsystems.Followingawell-definedcostingmodeladetailedfollow-upoftheactualspendingisthenmade,particularlytoidentifycostsbycustomer,byservice,andbyactivity.ThechargingpoliciesensurethatcustomersareawareofthecoststheyimposeonITandtrytoinfluencethecustomerbehavior.Theactualrecoveryofthefullcostsisoptionalinmanyorganizations,howeverthechargingprocessallowsforaformalevaluationoftheITservicesandtoplanforfutureexpendituresforoperationsandinvestments.Ideally,budgeting,costingandchargingfollowtheBestPracticesoftheindustryandtheresultsarecomparedwiththecompetitionandBest-in-classperformers.Forthesakeofclaritywewillstartwithamoredetaileddiscussionofthecostingprocesses. ManaginganITorganization'sfinancialresourcesstartswithknowingtherealcosts.ThecostingprocessesprovidemanagementwithinformationonthecostsofprovidingITservicesthatsupporttheorganization'sbusinessneeds.Thisinformationisneededtomakewell-informeddecisionsensuringthatthereisaproperbalancebetweenthequalityofserviceandexpenditure.Inthisrespect,costinghelpstheorganizationto:·ProvidetopmanagementwithajustificationofITexpendituresandinvestments;·Demonstrateunder-orover-consumptionofserviceinfinancialterms;·MakedecisionsaboutITservicesinalignmentwiththebusiness;·Planandbudgetwithconfidence;·Understandthecostofnottakingadvantageofopportunitiesforchange.CostelementsThemajorCostTypestobetakenintoconsiderationarerelatedtoHardware,Software,HumanResources,AccommodationandExternalServices.ThesecosttypescanbefurtherdividedinCostElements.Typicalcostelementspercosttypeare:CosttypeCostelementsHardwareCPUs,Storage,peripherals,WAN,LAN,Workstations,laptops,PDAs,Consumables,…SoftwareOperatingSystems,Monitoringtools,DatabaseManagementSystems,ApplicationServers,WebServers,MailServers,PackagedApplications,HomemadeApplications,PersonalProductivityTools,Groupware,…HumanResourcesPayrollcosts,Benefits,Re-locationcosts,Expenses,Training,…AccommodationOffices,Furniture,ComputerRooms,StorageAreas,…ExternalServicesSecurityServices,DisasterRecoveryServices,OutsourcingServices,Consultancy,TelecommCharges,…Table5.1–CostTypesandCostElementsCostelementscanfurtherbecategorizedindifferentways:·FixedCosts–thesearethecoststhatarenotdirectlyinfluencedbythebusinessactivitiessuchasrent,salaries,licensefees,maintenancecontracts,etc…·VariableCosts–thesefollowchangesinbusinessactivity.Examplesareconsumables,telecommcharges,feesforcontractors,…ThereisatrendtowardsconvertingfixedcostsintovariablecostsinordertoobtainabetteralignmentofITandBusiness.·DirectCosts–thesecostscanbeallocatedtoaspecificdepartmentorservicelikesomeapplicationsoftware,dedicatedhardware,dedicatedsupportteams,etc…·IndirectCosts–thesecannotbeallocatedtoaspecificdepartmentorservicebutaresharedamongmoredepartmentsorservices.Examplesaremanagement,systemsoftware,servicedesk,network,etc…Itiseasytodemonstratethatacutindirectcostswillaffectthequalityofservicedelivered,butitishardtoprovehowcutstoindirectcostswillaffectservices.Ingeneral,onlyvalue-addedserviceswillbeconsideredasdirectcosts,whileindirectcostswillbetreatedasbusinessoverhead.·CapitalCosts–thesearetypicallythoseapplyingtosubstantialassetsoftheorganization.Itisnotusuallytheactualcostofitemspurchasedduringtheyearthatisincludedinthecalculationofthecostbuttheannualizeddepreciationfortheyear.·OperationalCosts–thesearethecostsresultingfromtheday-to-dayoperationsoftheITdepartmentsuchasstaffcosts,maintenance.Thesearerepeatingpaymentswhoseeffectscanbemeasuredwithinashorttimeframe,typicallylessthanayear.TotalCostofOwnership(TCO)