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Case example 9: Service Portfolio optimization

One of the world’s largest financial companies invests in opening its own OEM-certified desktop repair centres. Due diligence reveals that its scale enables it to offer these services at a lower cost than the market.

The firm regularly benchmark s its internal costs of providing desktop support, desktop repair and desktop provisioning, and compares these with the prices of Type II and Type III providers. On discovering a service that can no longer be offered at a cost ‘below market’, or a new service that can be provisioned internally because of benefits from the scale advantage, the firm adjusts accordingly.

The recurring financial approach to Service Portfolio results in the continual improvement of service cost structures, and measurably enhances the competitive position of the company.

This concept is no different from that of traditional businesses aligning their market-facing service and product portfolios to their core capabilities. It is a prudent strategy to exit a business (service) line that is not as profitable or cost-effective, or does not deliver the requisite combination of quality and value relative to alternatives. Many IT organizations, however, refrain from identifying service-oriented costs and making them visible to the enterprise. The result over time is a portfolio of services with ineffective cost structures and decrease in the customer’s perception of value and satisfaction. Service portfolio management is further elaborated in Section 5.3.

5.1.2.4 Service provisioning optimization

Financial Management provides key inputs for Service Provisioning Optimization (SPO). SPO examines the financial inputs and constraints of service components or delivery model s to determine if alternatives should be explored relating to how a service can be provisioned differently to make it more competitive in terms of cost or quality.

A typical candidate for this type of examination includes services that have been identified for removal from the Service Portfolio because they can no longer be provisioned efficiently relative to other providers or service alternatives, or because they experience declining usage due to factors such as obsolescence. In this example, Financial Management would provide critical input to the enterprise regarding existing service cost structures, and assist with the financial analysis of alternative delivery methods, service mix, financing structures and so on. It would also serve to determine or validate whether a service provisioning alternative would reduce an organization ’s service cost structure or enhance service value. It is this financial analysis of service components, constraints and value that is at the heart of Financial Management’s interaction with Service Provisioning Optimization.

5.1.2.5 Planning confidence

One goal of Financial Management is to ensure proper funding for the delivery and consumption of services. Planning provides financial translation and qualification of expected future demand for IT Services. Financial Management Planning departs from historical IT planning by focusing on demand and supply variance s resulting from business strategy, capacity inputs and forecasting, rather than traditional individual line item expenditures or business cost accounts. As with planning for any other business organization, input should be collected from all areas of the IT organization and the business.

Planning can be categorized into three main areas, each representing financial results that are required for continued visibility and service valuation :

 Operating and Capital (general and fixed asset ledgers)

 Demand (need and use of IT service s – discussed earlier in this chapter)

 Regulatory and Environmental ( compliance ).

Operating and Capitalplanning processes are common and fairly standardized, and involve the translation of IT expenditures into corporate financial system s as part of the corporate planning cycle. Beyond this, the importance of this process is in communicating expected changes in the funding of IT Service s for consideration by other business domains. The impact of IT Services on capital planning is largely underestimated, but is of interest to tax and fixed asset departments if the status of an IT asset changes.

Regulatory and Environmental-related planning should get its triggers from within the business . However, FM should apply the proper financial inputs to the related services value, whether cost based or value based. For example:

Case example 10: Regulatory and Environmental planning impacts

At a consumer products corporation, it was determined that all server s older than three years should be replaced. Plan s were properly communicated and, when the time came, a business case was prepared. Adequate justification was provided to substantiate the replacement need, and the related ROI based on the required expenditure barely fitted within acceptable corporate thresholds.

Towards the end of the implementation, it was realized that local governmental regulations and the company’s desired practice of environmental stewardship required special disposal of the old equipment since the casings contained measurable amounts of lead. The cost to remove and properly dispose of the equipment was substantial enough to negatively impact the ROI calculation of the project , and pushed it beyond acceptable tolerance. If the project team had correctly recognized the true costs of replacement, requisite funding would have been identified and included in the planning mechanism.

In this example, ignoring the impact of equipment disposal when building the business case resulted in an overstatement of the benefits of replacement and consequently required adjustments to the funding model .

Confidence is the notion that financial inputs and models for service demand and supply represent statistically significant measures of accuracy. Data confidence is important for two reasons: 1) the critical role data plays in achieving the objective s of Financial Management, and 2) the possibility of erroneous data undermining decision making.

Since Financial Management performs unique financial translation and qualification function s, there is an obligation to ensure that the confidence level of planning data and information is high. Questions about its accuracy will undermine its perceived value. It is therefore important to follow good security practices for access and rights management so that information quality is not compromised. Planning confidence is ultimately a combination of service-oriented demand modelling translated into measurable financial requirement s with a high degree of statistical accuracy. The financial requirements act as inputs to critical business decision making.

5.1.2.6 Service investment analysis

Financial Management provides the shared analytical model s and knowledge used throughout an enterprise in order to assess the expected value and/or return of a given initiative, solution, programme or project in a standardized fashion. It sets the threshold s that guide the organization in determining what level of analytical sophistication is to be applied to various projects based on size, scope , resource s, cost and related parameters.