The Architect’s Guide to IT Financial Management: Everything You Need to Know
What is IT Financial Management (ITFM)?
The Importance of IT Financial Management for Enterprise Architects
IT Budget Management & Portfolio Architecture
Digital Products Need IT Cost Optimization
Why IT cost optimization is important for maximizing digital product ROI
Common IT cost optimization challenges
Best practices for IT cost optimization
IT cost optimization and digital product development
IT cost optimization and digital product maintenance
IT cost optimization and digital product marketing
Next steps for IT cost optimization
Best Practices for IT Financial Management
What is IT Financial Management (ITFM)?
IT Financial Management (ITFM) is directing expenditures related to Information Technology. Before the days of digital products and digital transformation, the primary focus of ITFM was the IT department. ITFM includes budgeting, forecasting, cost optimization, and financial reporting. The simple goal ensured that the IT department operated within the budget allocated to it while still providing the services and support to the organization.
Failure of Traditional ITFM
Even then, ITFM was often done inadequately. Conventionally an IT department’ was part of the ‘supporting activities’ in an organizations’ value chain. This resulted in a negative feedback loop – supporting activities are managed for efficiency and are expected to reduce costs. Funding priority is focused on the ‘value producing’ activities. Without effective service management and strong ITFM managing IT for cost and efficiency was impossible.
Leaders run their departments to avoid extra spending. But without IT service management and ITFM you end with simple counter-productive cost-cutting. The default finance adage “cut where you can” only looks at isolatable spend. Simplistic financial targets and arbitrary financial decisions lead to service degradation and inefficiency.
In this guide, we are providing an Enterprise Architect’s guide to ITFM. Providing you with n detail, providing you with examples of how to assess IT departments through a financial lens.
ITFM requires collaboration between IT and other departments. By working together, these departments can ensure that the IT department is receiving the funding to meet its objectives while also adhering to the organization’s overall financial goals.
Goals of Successful ITFM
ITFM is the close monitoring of expenditures related to IT. Align the accurate spending report to digital products and IT Services. A successful IT Architecture will provide clear guidance to assets and resources used by your companies distributed IT functions. Then, teams will optimize their spending, which ultimately leads to greater profits.
Optimizing spend is not the same as cutting spend. Optimizing spending requires understanding the impact of IT spend on your organization’s ability to compete and succeed in the market. Optimizing spend requires balancing efficiency, agility, and risk. Optimizing spend requires accounting for every part in your product and service supply chain up to delivery to the customer.
Successful digital products and digital transformation require end-to-end ITFM. No one runs a traditional factory without understanding the cost of production, parts, distribution, and warranty service. Don’t run your digital factory without understanding your digital costs.
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The Importance of IT Financial Management for Enterprise Architects
Efficiency, agility, and risk. Customer experience. Competitive positioning. These are all stakeholder concerns. Every one of these concerns has an aspect of cost. Imagine asking about cost in isolation from agility, customer experience, or risk. You can see where “cut where you can,” simplistic financial targets, and arbitrary financial decisions end - service degradation and inefficiency.
As an architect, IT financial management is essential. The need is not operationally oriented worries like staying within budget and ensuring that your projects are completed on time and within scope. Your need is about driving effective necessary change. You help your stakeholders make hard decisions about the methods, technology, and tools they use. By understanding the implications of different tools, technologies, and methods, stakeholders make informed decisions that align with the organization’s goals.
Throughout this article, we use digital products and IT services. We use these two terms to distinguish something provided to an external customer, and something internal that is part of your digital product or enables other support functions. The distinction between who consumes matters because expectations for efficiency, agility, risk, customer experience and competitive position will drive cost and quality choices.
Your job is to cut through the common IT cost optimization challenges.
IT Budget Management & Portfolio Architecture
One of the critical components of ITFM is budget management. Operationally, effective budget management involves creating a detailed budget that outlines the IT department’s expenses, including hardware, software, and personnel costs. The missing question is what should the budget be?
Recently we worked with an organization undergoing a digital transformation. They were moving from classic call-center service delivery to delivering SaaS products and embedding AI in customer engagement. Product-line specific software development meant hiring shifted from customer service representatives to developers. An early question was, what should the complete IT budget be? It was immediately followed by questions about IT infrastructure operations suitable for 24x7 SaaS. There is a reason the 4th digital transformation lever is ‘IT and Delivery Transformation’. Digital transformation requires a different IT design.
The EA use case of Portfolio architecture involves identifying the necessary projects and initiatives and aligning them with the organization’s overall goals and objectives. This process helps ensure focus on initiatives that provide the most significant value to the organization.
Digital Products Need IT Cost Optimization
Beginner product managers worry about features. Successful product managers worry about cost. Developing, operating, and maintaining digital products is expensive and risky. Cost optimization is critical. ITFM can help architects identify everywhere costs can be reduced without sacrificing product quality.
This goes far beyond simplistic thoughts about using cloud-based services instead of in-house infrastructure. Instead focusing your attention on your digital product return on investment (ROI) is crucial to your business’s success.
Why IT cost optimization is important for maximizing digital product ROI
IT cost optimization involves identifying and implementing strategies that help businesses reduce expenses while maintaining or improving their existing digital products and IT capabilities. By optimizing IT costs, businesses can free up resources to invest in other areas that can drive growth and improve operational efficiency. This is especially important for businesses operating in highly competitive markets, where every dollar can make a significant difference.
One of the key benefits of IT cost optimization is that it can help businesses maximize their ROI on digital products. By minimizing the cost of implementing and maintaining digital products, businesses can increase their profitability and improve their overall financial performance. Additionally, IT cost optimization can help businesses stay competitive by enabling them to invest in new technologies and innovations that can drive growth and improve their market position.
Common IT cost optimization challenges
While the benefits of IT cost optimization are clear, there are several challenges that businesses may face when trying to implement an effective IT cost optimization strategy.
One of the most significant challenges is the complexity of IT systems and infrastructure. Using traditional approaches, the number of components and dependencies make it impossible to identify and implement cost-saving measures without impacting performance or reliability. You need to focus on digital products (external) and IT services (internal) to overcome complexity.
Another common challenge is resistance to change. Many businesses may be hesitant to implement cost-saving measures that require changes to existing IT systems or processes. This can be especially true for businesses that have invested heavily in their IT infrastructure and are reluctant to make changes that could potentially disrupt their operations.
Finally, there is the challenge of balancing cost savings with against efficiency, agility, risk, customer experience and competitive positioning. While reducing IT costs is important, businesses must also ensure that their IT systems and infrastructure continue to meet requirements. The only way to understand the requirements is an architected approach to digital products and IT services.
Best practices for IT cost optimization
Despite these challenges, there are several best practices that businesses can follow to optimize their IT costs and maximize their ROI on digital products. These include:
Embrace cloud-based IT Service thinking
Cloud-based solutions are effective ways to reduce IT costs. We don’t mean buying public cloud services. Your in-house on-premises IT infrastructure must be assembled as a private cloud. Without a cloud-oriented approach, your IT Service portfolio will be a waste of time.
You need to understand the cost to build and maintain your IT services, as well as the incremental costs of consuming services. Best in class, traditional products companies balance the cost of performing manufacturing, distribution and support in-house or through a global supply chain. Bring the same thinking to your digital products.
With a solid IT service model, you can bring the full-spectrum of modern supply chain tools to your stakeholder’s concerns about efficiency, agility, risk, customer experience, and competitive positioning.
Conducting a comprehensive IT cost analysis
Before implementing any cost-saving measures, businesses should conduct a thorough analysis of their IT spending. This should include identifying all IT-related expenses and aligning them to IT Services. A comprehensive IT service portfolio allows you to assess quality and cost of the services. This analysis can help identify areas where they may be overspending and where cost-saving measures can be implemented.
Outsourcing IT Work
Conventionally outsourcing IT work to third-party providers was used to reduce IT costs. Often done without any consideration of impact to agility, risk, customer experience, or competitive positioning. It was simply a “cost cutting” exercise.
Business Architects will need to provide useful advice about IT functions. Our standard business capability assessment will identify capabilities by Competency and Performer. Non-core capabilities are candidates for outsourcing.
Implement Digital Product management
Effective Digital Product management is required for anyone providing SaaS, or SaaS-like, services to their customers. Good digital product management is universally helpful. Even if it is only applied to your IT Service portfolio.
Basic digital product management will identify unused or underutilized services, misalignments in quality and cost. There is a strong alignment between best-practice IT Architecture and basic digital product management.IT cost optimization and digital product development
Effective IT cost optimization is essential for businesses involved in digital product development. Additionally, IT cost optimization can help businesses reduce the time and resources required to develop and deploy digital products, improving time-to-market and reducing product development costs.
IT cost optimization and digital product maintenance
IT cost optimization is also critical for businesses involved in digital product maintenance. By optimizing IT costs, businesses can reduce the time and resources required to maintain digital products, improving performance and reliability while reducing maintenance costs.
IT cost optimization and digital product marketing
Finally, IT cost optimization can also help businesses improve their digital product marketing efforts. By reducing IT costs, businesses can invest more resources in digital marketing, improving their market visibility and increasing their customer acquisition and retention efforts.
Next steps for IT cost optimization
IT cost optimization is a critical practice to maximize your ROI on digital products. While there are several challenges associated with IT cost optimization, ITFM best practices and utilizing the right tools and technologies can help businesses achieve significant cost savings while maintaining or improving your digital products.
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Best Practices for IT Financial Management
Effective ITFM requires a combination of strategy, technology, and process. Here are some best practices to help ensure success:
- Facilitate collaboration between departments: ITFM requires collaboration between digital product developers, the IT department(s) and other support departments within the organization, such as finance, procurement, and operations.
- Establish clear goals and objectives: By establishing clear goals and objectives, IT departments can ensure that they are focused on initiatives that provide the most significant value to the organization.
- Regularly review the IT Services Quality and Costs: IT Service should be reviewed regularly to ensure that the quality and cost are aligned.
IT Financial Management Process
The ITFM process typically involves several steps, including:
- IT Service Management: Maintain model of IT Services with competitive options, quality metrics, cost drivers and actual cost
- Budgeting: Maintain budgets for development, operations, and support of both your customer facing digital products and internal IT services
- Forecasting: Predicting future expenses based on your organization’s goals and objectives
- Cost optimization: Continually improve the cost position of your customer-facing digital products and IT Services. Continually reduce costs without sacrificing quality, agility, risk, customer experience and competitive position
- Financial reporting: Generating reports that provide insight into the digital product and IT Service financial performance. These reports are more valuable than departmental budgets. The only way to continually manage the cost of digital products and IT services is to pull them out and analyze them separately
- Performance management: Monitoring the digital product and IT services performance and making adjustments as needed
Conclusion
IT financial management is essential for digital product owners and traditional IT managers to stay on budget. You can succeed by aligning ITFM to digital products and IT Services. By understanding the basics of financial management, exploring the latest technologies and strategies for cost optimization, and following best practices, architects provide useful advice. With useful advice, stakeholders, digital product owners, and traditional IT managers can make informed decisions. Ultimately ensuring the success of their projects and the organization.
Develop your IT financial management skills with an architecture approach.
