Ultimate starting guide for IT Financial Management and Cost Optimisation

In the recent years FinOps - Cloud Financial Management discipline, has been an hot topic for many due to the increase of Public Cloud spend as mentioned by Gartner: Public Cloud End-User Spending to Reach Nearly $500 billion in 2022

This raises eyebrows across the C-suite, and definitely it is a good thing for FinOps (which in my view is a great introduction to IT Financial Management).

There are a lot of practices that have been used by vendors/communities in the industry, but the most well-known are:

I am not saying that they are the same as "IT Financial Management", since they add their own flavours to mix such as terminology, KPIs, adoption roadmaps and communities.

I think the first time I read the concept "IT Financial Management" was in ITIL, covering areas such as Budgeting, Accounting and Charging. The main difference between this and the above is that the first covers mostly cost and the others try to focus more on value.

?The 3 different views we have in a typical IT cost to value journey are the following:

• Business - cost of Running the Business and the cost Transforming our Business (new initiatives).
• IT - cost of Projects, Services, Products and Applications
• Finance - cost of Staff, Vendors, Facilities, Hardware, Telecom etc…

?An example for more detailed understanding in how cost conversations turn into value conversations:

1. Business View

Mr. Business - "We are spending 50k per annum in rent for our branch. Additionally, 300k in staff costs per annum (5 people) and IT is currently charging us 500k every year and I don't understand why. We are only using a CRM system and our contract with the vendor is very clear. We have to pay 70k per annum."

?(Calls Mrs. IT… and explains his concern)

2. IT View

Mrs. IT - "Our CRM system is costing the organisation a total of 150k per annum (PA). Please find below the cost structure:"

Mr. Business - "I don't understand what some of those costs are, why do we need them?"

Mrs. IT - "Well, server hosting refers to the infrastructure required to run the CRM system. Although you are using the Application in your laptop (client side), that connects to servers (server side) where all the processing of information and business logic happens,?making sure every Business user is seeing the same information, the application is always available and running smoothly."

Mr. Business - "I guess that I understand some stuff that you said, but how did you arrive to 35k per annum?"

?Mrs. IT - "If you bear with me for 5min, I'll explain you in detail."

For simplification purposes:

• I am excluding multiple cost elements such as staff, licenses, and other infrastructure items etc…
• For Physical and Virtual Servers I'll only mention count instead of CPU/Memory consumption

?Mrs. IT -"We have one maintenance contract with Lenovo for our physical servers - if we have issues with the servers they will support us."

Mrs. IT - "We have allocated those 200 Physical Servers in the following manner:"

Mrs. IT - "Our Infrastructure as a Service (IaaS) platform costs us 450k, below is the break up for the different Clusters/Environments:"

Mrs. IT - "On top of our IaaS platform we can have Virtual Servers. Virtual Servers help increasing IT agility, flexibility and scalability while reducing the cost to operate."

Mr. Business - "You have given me a lot of fancy words and stuff that I don't understand. Can you explain how does that answer my concern?

Mrs. IT - "What I have explained until now, is the basis of the calculation for our IT offerings, now I am going to show you specific to the CRM system".

Business - "Ok, now I understand what each environment does and the calculation of 35k, how did you arrive at the amount of Virtual Servers and by environment?"

Mrs. IT - "This was a collaboration between 3 teams: CRM Platform team, Enterprise Architecture and Business team."

?Mr. Business - "What do you mean? I was never involved in saying I need x amount of Virtual Servers."

Mrs. IT - "Maybe the questions asked at the time were different, maybe you provided information related to the amount of Business users, how many customers do we have, predicted growth of customers, volume of transactions etc… and the IT teams based on your feedback, came up with the technical architecture and translated into the amount of Virtual Servers."

Mr. Business - "I actually sent a lot of stats to the IT teams around our Business performance and forecasted growth. This was done last year and is no longer valid, because of the pandemic we are actually going to miss our growth target, our figures were pretty optimistic at the time."

Mrs. IT - "If that is the case, let's have a catch-up, maybe we can find ways to optimise the usage and free up capacity that can be used by other applications, reducing our charge to you."

Mr. Business - "Sure, let's do that. I get why the CRM system cost us so much (165K), but you are charging me 500k every year, that's more 335k."

Mrs. IT - "Of course, I think we can cover this later, but you as a Business user are supported by IT in many other ways:

1. End user productivity and collaboration services

a) Laptop/Desktop with all the hardware to be productive and technical configured

b) Printer/Scanner to handle documents for customers

c) Store all documents for compliance and legal reasons (up to 10 years)

d) Access to Outlook to send emails and Ms teams to collaborate

2. Connectivity services

a) Access to the corporate network and fast internet connectivity

b) Access from home (Via VPN)

3. Security services

a) Security from all external threads (in your laptop, prevent hacker attacks like phishing, avoid employee/customer data from being stolen, when you access our systems while working from home etc…)

4. Other Business services

a) Access to all required systems in order to do the job (HR system, Service Management, Reports and Dashboards etc…)"

?Mr. Business - "Yes, you are right, we actually use so many things. Thanks for the clarification, maybe we can go through those costs in our next session."

Mrs. IT - "Of course. Let me know when you are free."

3. Finance view

Mr. Finance - "We have are seeing an increase spend in our run costs YoY. From a CapEx perspective our cost will reduce next year, because our Business is slowing down due to the pandemic. IT is always the same, in counter cycle with business trends, it keeps going up. I see that our Vendor spend is now $5M and we have a contract with Lenovo of $1M. Do we still need it for next year?"

Mrs. IT - "Last week I had a very good session with Mr. Business, and we also got to know that business is not so strong. For that contract specifically, I am going to send you the presentation shared with Mr. Business previously."

….. (check previous calculations)

Mr. Finance - "Fine, I understand how that contract is being used. But if you see the table below, we have a lot of free capacity. Surely we can cut costs here."

Mrs. IT - "We always have free capacity for technical and operational reasons. Also, if our business grows a lot and fast, we need to be able to cater to that demand. If you go an procure more physical servers it will take at least 3 months to get them in. Our Business will be disappointed with IT and our customers unhappy.

But since you brought that topic, I had follow-up sessions with our Business and we have identified a couple of Applications (eg. CRM) where we can right size our infrastructure.?Because we are going to reduce the usage, we are going to decommission some legacy servers (they are already fully depreciated) but they are the most expensive items in the Lenovo support contract."

Mr. Finance - "So you are saying that we are going to reduce the cost of our Lenovo contract next year?"

Mrs. IT - "Yes!"

Mr. Finance - "Great news, I am going to inform our management. I am glad we are having visibility into what is happening in IT."

Mr. Finance - "By the way, our Leadership is saying the strategy for the next 3 years is to move all our on-premise infrastructure to the Public Cloud. I am not sure how that is going to impact us, but they are very happy, because costs will go down."

Mrs. IT - "There will be a lot of technical challenges and migration efforts, we also need to modernize our landscape. I am sure we will make it happen, but are you sure they said our costs will go down?"

The End of chapter 1 - To be continued...