SS

The objective of service investment analysis is to derive a value indication for the total lifecycle of a service based on 1) the value received, and 2) costs incurred during the lifecycle of the service. Section 5.1.3, on ‘Methods, models, activities and techniques’, discusses a number of concepts and methods for exploiting IT investment analysis to improve capital expenditure and IT Operations processes.

Assumptions about the service are a key component of analysing investments. The granularity of assumptions used in investment analysis can have significant impact on the outcome of the analysis. For example, a service obtained via an instantly self-deployable packaged software solution residing on a single desktop and requiring little user support will have a different investment profile than a service obtained through custom development , global customer interaction and other resources that go into creating, deploying and supporting an enterprise solution with multiple language users. In Service Investment Analysis, it is best to lean toward the use of an exhaustive inventory of assumptions rather than a limited set of high-level inputs, in order to generate a more realistic and accurate view of the investment being made.

5.1.2.7 Accounting

Accounting within Financial Management differs from traditional accounting in that additional category and characteristics must be defined that enable the identification and tracking of service-oriented expense or capital item s.

Financial Management plays a translational role between corporate financial system s and service management. The result of a service -oriented accounting function is that far greater detail and understanding is achieved regarding service provisioning and consumption, and the generation of data that feeds directly into the planning process . The functions and accounting characteristics that come into play are discussed below:

 Service recording – the assignment of a cost entry to the appropriate service. Depending on how services are defined, and the granularity of the definitions, there may be additional sub-service components.

 Cost Type s – these are higher level expenses categories such as hardware, software, labour, administration, etc. These attributes assist with reporting and analysing demand and usage of services and their components in commonly used financial terms.

 Cost classifications – there are also classifications within services that designate the end purpose of the cost. These include classifications such as:

 Capital/ operational – this classification addresses different accounting methodologies that are required by the business and regulatory agencies.

 Direct/indirect – this designation determines whether a cost will be assigned directly or indirectly to a consumer or service.

 Direct cost s are charged directly to a service since it is the only consumer of the expense.

 Indirect or ‘shared’ costs are allocated across multiple services since each service may consume a portion of the expense.

 Fixed/variable – this segregation of costs is based on contractual commitments of time or price. The strategic issue around this classification is that the business should seek to optimize fixed service costs and minimize the variable in order to maximize predictability and stability.

 Cost Units – A Cost Unit is the identified unit of consumption that is accounted for a particular service or service asset .

As accounting processes and practices mature toward a service orientation, more evidence is created that substantiates the existence and performance of the IT organization. The information available by translating cost account data into service account information dramatically changes the dynamics and visibility of service management , enabling a higher level of service strategy development and execution.

5.1.2.8 Compliance

Compliance relates to the ability to demonstrate that proper and consistent accounting methods and/or practices are being employed. This relates to financial asset valuation, capitalization practices, revenue recognition, access and security controls etc. If proper practices are documented and known, compliance can be easily addressed. It becomes imperative then to address responsibility for being aware of regulatory and environmental risk s that can affect the service operation and the customer’s business.

Over the past decade a number of important regulatory and standards-related issues and opportunities have been introduced that impact Financial Management. Certain legislation has had enormous impact on financial audit and compliance activities. The public demand for accurate, meaningful data regarding the value of a company’s transaction s and assets places greater pressure on Financial Management. There are wide variations in the impact of such legislation that should be considered. Public frameworks such as COBIT and the advice and consent of public accountants and auditors are valuable to service management.

The implementation of public frameworks and standards such as COBIT, ISO/IEC 20000 , Basel II, and other industry specific regulation may appear to be pure costs with no tangible benefits. However, regulatory compliance tends to improve data security and quality processes, creating a greater need for understanding the costs of compliance. Service s provisioned to one industry at a certain price may not necessarily be provisioned at the same price to a different industry segment. There are instances where the cost of compliance has been large enough to have an impact on the pricing of a service.

5.1.2.9 Variable Cost Dynamics

Variable Cost Dynamics (VCD) focuses on analysing and understanding the multitude of variables that impact service cost, how sensitive those elements are to variability, and the related incremental value changes that result. Among other benefits, VCD analysis can be used to identify a marginal change in unit cost resulting from adding or subtracting one or more incremental units of a service. Such an analysis is helpful when applied toward the analysis of expected impacts from event s such as acquisitions, divestitures, changes to the Service Portfolio or service provisioning alternatives etc.

This element of service value can be daunting since the number and type of variable elements can range dramatically depending on the type of service being analysed. The sensitivity analytics component of Variable Cost Dynamics is also a complex analytical tool because of the number and types of assumptions and scenarios that are often made around variable cost components. Below is a very brief list of possible variable service cost components that could be included in such an analysis:

 Number and type of user s

 Number of software licences

 Cost/operating footprint of data centre

 Delivery mechanisms

 Number and type of resource s

 The cost of adding one more storage device

 The cost of adding one more end- user licence.

The analysis of Variable Cost Dynamics often follows a line of thinking similar to market space s, covered elsewhere in this publication. The key value derived from this body of knowledge focuses on more precisely determining what fixed and variable cost structures are linked to a service, and how they alter based on change (either incremental or monumental), what the service landscape should look like as a result, how a service should be designed and provisioned, and what value should be placed on a service.